When Is a Trustee Not a Trustee (in the Context of Real Estate Businesses Held in Trust, for Purposes of the Net Investment Income Tax)?

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By Sandra D. Glazier

Lipson, Neilson, Cole, Seltzer & Garin, P.C., Bloomfield
Hills, MI

At the March 20, 2014 meeting of the Bloomberg BNA Advisory
Board for Estates, Gifts and Trusts, Michael S. Jackson and Jared
S. Szychter of Grant Thornton presented a draft paper entitled
"Don't Be Passive! Is Your Trust-Owned Business Subject to the
3.8% Tax?
" During the discussion, a question was posed with
regard to whether Michigan's statutes were sufficiently analogous
to the Uniform Trust Code such that the analysis and arguments made
in Frank Aragona Trust v. Commissioner (premised upon
Michigan statutes cited) could be utilized in UTC states. This BBNA
Insight analyzes only those statutory cites that were utilized to
support the contention in the taxpayer's brief that "a trustee
always wears the `hat' of trustee even if they are working as an
employee for a trust."1 During the
Advisory Board meeting, I referenced that while Michigan touts
itself as a UPC and UTC state, when Michigan enacted these
"uniform" codes, it modified them in a myriad of ways. As a result,
one must engage in an analysis of each Michigan code section and
correlating UPC or UTC provision in order to determine if a cite to
a Michigan provision might represent appropriate authority in a UPC
or UTC state.

After reviewing the correlating statutory provisions cited by
the Petitioner in Frank Aragona Trust (the
"Taxpayer"), I believe that this case should have value in any UTC
state, as the state statutory law relied upon by taxpayer has
correlating provisions found in the UTC, UPC and/or UPIA. In
furtherance of this conclusion, this memo represents an analysis of
the cited statutory provisions.

For background, the reader is directed to Jared Szychter and
Michael Jackson's upcoming article on the application of the Net
Investment Income Tax as it explains the issues far better than
this paragraph. In short, the authors asserted that (premised upon
the positions taken in Frank Aragona Trust), a fiduciary
of a trust or estate might by analogy assert non-application of the
new 3.8% Net Investment Income Tax, under §1411, if the fiduciary
can establish that the trust or estate materially participates in
the activity generating trade or business income. In Frank
Aragona Trust
, Taxpayer argued that a fiduciary never takes
off the fiduciary "hat" and continues to act as a fiduciary, even
when formally retained as an employee of a business or acting as
one of the owners of a business. Therefore, under a taxpayer's
view, activities by a fiduciary while serving as an employee or
acting as a business stakeholder should count towards meeting a
material participation requirement.

In Frank Aragona Trust, the Taxpayer cited four
Michigan statutes in support of its position that "All Employee's
Work Counts Toward the Trust's Material Participation." Some of the
statutes cited are part of Michigan Estates and Protected
Individuals Code ("EPIC"), as opposed to Michigan's Trust Code
("MTC").

First, Taxpayer cited to MCL §700.1104(e) of EPIC to demonstrate
that the definition of a "fiduciary" includes a "trustee." MCL
§700.1104(e) provides that:(e) "Fiduciary" includes, but is not
limited to, a personal representative, guardian, conservator,
trustee, plenary guardian, partial guardian, and successor
fiduciary.

UPC §1-201(15) is sufficiently analogous to MCL §700.1104(e) in
that it provides a " `[f]iduciary' includes a personal
representative, guardian, conservator, and trustee."

Taxpayer next cites MCL §700.1212(1) of EPIC. MCL §700.1212
provides as follows:(1) A fiduciary stands in a position of
confidence and trust with respect to each heir, devisee,
beneficiary, protected individual, or ward for whom the person is a
fiduciary. A fiduciary shall observe the standard of care described
in section 7803 and shall discharge all of the duties and
obligations of a confidential and fiduciary relationship, including
the duties of undivided loyalty; impartiality between heirs,
devisees, and beneficiaries; care and prudence in actions; and
segregation of assets held in the fiduciary capacity. With respect
to investments, a fiduciary shall conform to the Michigan prudent
investor rule.

While there does not appear to be an identical single provision
in the UPC or UTC, a combination of sections should have the same
result.

Section 801 of the UTC provides that:Upon acceptance of a
trusteeship, the trustee shall administer the trust in good faith,
in accordance with its terms and purposes and the interests of the
beneficiaries, and in accordance with this [Code].

Section 802 of the UTC provides that: "[a] trustee shall
administer the trust solely in the interests of the
beneficiaries."

Section 803 of the UTC provides that:If a trust has two or more
beneficiaries, the trustee shall act impartially in investing,
managing, and distributing the trust property, giving due regard to
the beneficiaries' respective interests.

Section 815 of the UTC provides that a Trustee's "exercise of a
power is subject to the fiduciary duties prescribed by this
[article]."

The descriptive preamble to the UTC indicates that the UTC
"provides for fiduciary obligations of a trustee, except for those
contained in the Uniform Prudent Investor Act." Therefore, the
requirements that a Trustee comport with the Uniform Prudent
Investor Act (unless overridden by the terms of the instrument)
appear to be present whether one is administering a Trust under the
EPIC, MTC or UTC.

While not specifically cited, embedded in MCL §700.1212(1) is a
reference to MCL §700.3803. This statute represents Michigan's
creditors' claims statute of limitations relative to presentation
of claims against a decedent's estate. While not identical to the
UPC, with regard to the duties of the fiduciary, Michigan's statute
is based upon the 2004 UPC §3-803 and is sufficiently
analogous.

It is also important to note that Michigan's Prudent Investor
Act is sufficiently analogous to the Uniform Prudent Investor Act
as to provide a statutory analogy with regard to the issues being
analyzed in the Frank Aragona Trust Tax Court
proceedings.

EPIC is cited by Taxpayer as it relates to the lynch-pin
obligation of a fiduciary, that of loyalty. MCL §700.1506 provides
that "[a] fiduciary shall invest and manage fiduciary assets solely
in the interest of the beneficiaries." This is perhaps the most
characteristic rule of trust law, and the Reporter's Commentary to
this section states that it came to EPIC via adoption of §5 of
UPIA. UPC §802(a) provides that: "[a] trustee shall administer the
trust solely in the interests of the beneficiaries." It does not
appear that the language is too dissimilar and, therefore, one
should be able to analogize to Michigan law in any UTC state for
this proposition.

It may be important to note that the MTC was enacted by the
Michigan legislature in 2009, and became effective April 1, 2010
(which was after the 2006 tax assessment being litigated in
Frank Aragona Trust). Because the MTC purports to
codify pre-MTC Michigan law, Taxpayer in part relies upon and cites
to MCL §700.7802(6). MCL §700.7802(6) provides as follows:(6) In
voting shares of stock or in exercising powers of control over
similar interests in other forms of enterprise, the trustee shall
act in the best interests of the trust beneficiaries. If the trust
is the sole owner of a corporation or other form of enterprise, the
trustee shall elect or appoint directors or other managers to
manage the corporation or enterprise in the best interests of the
trust beneficiaries.

The correlating section of the 2004 UTC is §802(g), which
provides:(g) In voting shares of stock or in exercising powers of
control over similar interests in other forms of enterprise, the
trustee shall act in the best interests of the beneficiaries. If
the trust is the sole owner of a corporation or other form of
enterprise, the trustee shall elect or appoint directors or other
managers who will manage the corporation or enterprise in the best
interests of the beneficiaries.

The variance of "to manage" as opposed to "will manage" would
not appear to create sufficient discrepancy between the MTC and the
UTC as to make them non-analogous.

It may also be important to note that MCL §700.1512 imposed the
obligations of the Michigan Prudent Investor Act on all fiduciary
estates, including those which existed on or after the act's
effective date, but only governs a decision or action that occurred
after that date.

In conclusion, while there is no specific correlating statutory
provision in the UPC or UTC to MCL §700.1212(1), all other
statutory references relied on by the Taxpayer with regard to the
arguments address in this memo have correlating UTC, UPC and/or
UPIA provisions. Therefore, the analysis of Frank Aragona
Trust
 contained in Jared Szychter and Michael Jackson's
article on the "Application of the Net Investment Income Tax" is
pertinent to the evaluation of such issues in other jurisdictions
(particularly those which have adopted the UTC, UPC and UPIA).

For more information, in the Tax Management Portfolios, see
Shaviro, 549 T.M.
, Passive Loss Rules, and Acker, 852
T.M.
, Income Taxation of Trusts and Estates,  and in
Tax Practice Series, see ¶2980, Passive Loss Rules, and ¶6120,
Estate and Trust Income Taxation - General Rules.

 


 

  1 It may, however, be important to note that
Taxpayer recites that at least one of the Trustees held no other
ownership interest in the entity.