Real estate activities are normally considered passive activities subject to passive loss limitations, unless a taxpayer qualifies for the real estate professional exception. To meet this exception, 1) more than one-half of the taxpayer’s personal services must be in real-property activities in which the taxpayer materially participates, and 2) these real-property personal services must be more than 750 hours.

The IRS has taken the hard stance that trusts cannot qualify for this exception, because “personal services” are defined to be “work performed by an individual in connection with a trade or business (Treas. Reg. § 1.469-9(b)(4)). Since trusts are not individuals, the IRS argues, trusts cannot perform personal services.

In Frank Aragona Trust, the Tax Court disagreed with the IRS’ position. The court noted that a “trust” is an arrangement by which trustees take title to property to protect or conserve it for beneficiaries. Since trustees are individuals, their work on real-property activities that satisfy their fiduciary duties should be considered personal services for purposes of the real estate professional exception.

Frank Aragona Trust was a residuary trust that owned real estate activities directly and indirectly through entities in which it owned a majority interest. The trust had six trustees. Three of the trustees were at once beneficiaries and employees of a wholly-owned LLC. Two of the trustees were beneficiaries who attended monthly trustee board meetings. And the final trustee was an independent trustee who helped with day-to-day operations. The Tax Court held that both the trustees’ activities as trustees and their activities as employees counted towards the trust meeting the real estate professional exception. In so doing, the court noted that “trustees are not relieved of their duties of loyalty to beneficiaries by conducting activities through a corporation wholly owned by the trust.” Therefore, the trustees’ work as employees and as trustees counted as personal services and helped the trust meet the real estate professional exception and deduct its losses.