## Facts

- A testamentary trust created in 1956 owned and operated a roughly 15,000-acre cattle ranch with oil and gas interests.
- Benjamin J. Fortson, Jr. served as trustee (since 1984) and oversaw trust assets, including ranch budgets, financial reporting, major operating decisions, asset transactions, banking relationships, and supervision of trust employees and service providers.
- The trust employed a full-time ranch manager who ran day-to-day ranch operations, managed livestock production and pasture conservation, and supervised other ranch employees.
- The ranch maintained substantial cattle operations, with approximately 4,700 head in 1994 and 3,300 head in 1995.
- For 1994 and 1995, the trust reported significant ranching losses and deducted approximately $856,518 (1994) and $796,687 (1995).
- The IRS issued a deficiency notice disallowing the deductions as passive activity losses under I.R.C. § 469, asserting the trust did not materially participate.

## Issues

1. For purposes of I.R.C. § 469, whether a trust’s material participation in a trade or business is determined only by the trustee’s personal activities.
2. Alternatively, whether material participation may be established by considering the combined activities of the trust’s fiduciaries, employees, and agents conducting the trust’s business.

## Decision

- The court granted summary judgment for the trust and denied the government’s motion for partial summary judgment.
- The court held the trust materially participated in the ranching activity for 1994 and 1995.
- The court rejected a trustee-only test and concluded a trust may satisfy § 469’s material participation requirement through those who conduct the trust’s business, including employees and agents.
- As a result, the ranching losses were treated as non-passive and deductible, supporting the trust’s refund claim.

## Legal Principles

- Under I.R.C. § 469, passive activity loss limits apply when the taxpayer does not materially participate in the activity.
- Because a trust is the taxpayer and acts through human actors, material participation is assessed by the activities undertaken on the trust’s behalf in operating the business.
- A trust’s material participation is not confined to the trustee’s day-to-day operational labor; the work of employees and agents running the enterprise may be counted.
- Material participation turns on whether participation in the operations is regular, continuous, and substantial, evaluated in light of the overall conduct of the business for the trust.

## Conclusion

The court held that a trust can meet § 469’s material participation requirement through the aggregate efforts of its trustee, employees, and agents who operate the trust’s business, and therefore the trust’s ranching losses for 1994 and 1995 were non-passive and deductible.


Mattie K. Carter Tr. v. United States, 256 F. Supp. 2d 536 (N.D. Tex. 2003)