The Carter Trust Case

800 Words4 Pages
Yes, Richie can deduct this loss on his Schedule E given the material participation rules of §469. Internal Revenue Code §469 applies to individuals (including partners and S corporation shareholders), trusts, estates, and personal-service corporations. It defines a passive activity as the conduct of any business in which the taxpayer does not materially participate, which means participating regularly, continuously, and substantially. A taxpayer materially participates in an activity if he or she works on a regular, continuous and substantial basis in operations (IRC § 469(h)(1)). If a taxpayer does not materially participate, losses are passive, which means they generally are not deductible in the absence of passive income. Material participation…show more content…
CARTER TRUST v. UNITED STATES, 256 F Supp 2d 536 (Tex. 2003). The Mattie K. Carter Trust was established in 1956 under the will of Mattie K. Carter. Benjamin Fortson, the trustee since 1984, manages its assets, including the Carter Ranch, which the trust has operated since 1956. The ranch covers some 15,000 acres and includes cattle-ranching as well as oil and gas interests. At the time in question the Carter Trust employed a full-time ranch manager and other employees who performed essentially all the activities on the ranch. Fortson also devoted a substantial amount of time and attention to ranch activities. The Carter Trust claimed deductions for losses it incurred in connection with the ranch operations for 1994 and 1995 of $856,518 and $796,687. In April 1999 the IRS issued a deficiency notice disallowing the deductions because of section 469’s passive activity rules. The Carter Trust paid the disputed tax in full plus interest and made a timely refund claim, which the IRS denied. The trust then sued for a refund in district court. The court found the IRS’s contention that the trust’s participation in the ranch operations should be measured by referring to the trustee’s activities had no support within the plain meaning of the statute. The court said this position was arbitrary and subverted common sense and, in the absence of case law or regulations, the IRS should not create ambiguity where there was none. The court held it undisputed that the Carter Trust, not its trustee, was the taxpayer. The trust’s participation in the ranch operations entailed an assessment of the activities of those who labored on the ranch, or otherwise conducted ranch business on the trust’s behalf. Their collective activities during the times in question were regular, continuous and substantial enough to constitute material participation. The court concluded the losses the Carter Trust had sustained were not passive within the meaning of section 469.
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