Tech. Adv. Memo. 201317010 (Jan. 18, 2013)

(two trusts each owned an interest in an S corporation with the balance of the interests in the S corporation owned by taxpayer; S corporation owned another corporation which was a qualified S subsidiary which the individual was the president and was directly involved in daily operations; trusts had income from their interests in the S corporation; individual, spouse, children and grandchildren are beneficiaries of trusts and taxpayer was special trustee of trusts and controlled all decisions regarding disposition of S corporation stock and voting of that stock; taxpayer not able to distinguish between time spent conducting business as corporate president and time spent as special trustee; IRS took position that trusts did not materially participate in S corporation business and, as a result, trusts' share of research or experimental expenses incurred by the S corporation had to be amortized over 10 years by the trusts; IRS claimed that only participation of trustee of trusts in fiduciary capacity counts toward material participation test; IRS ignored interrelated role of taxpayer as special trustee and corporate president for purposes of material participation test; Treasury has never promulgated regulations for trusts for purposes of the material participation test and has lost the only court decision addressing how a trust establishes material participation for purposes of I.R.C. Sec. 469; litigation on issue currently pending in the U.S. Tax Court).