Trustee income or self employment income?

I would argue that the nature of what you are doing hasn't changed, only the entity for which you are providing services has changed. Therefore, it's SE income.

Ira Smilovitz

I would say exactly the opposite. OP is now serving in the capacity of Trustee, which has an entirely different level of responsibility, oversight, and liability than merely providing "financial assistance". Since OP is not in the business of being a Trustee, this is clearly not SE income.

I think the IRS would argue otherwise. With multiple trusts involved, it's harder to argue that one is not "in the business". It doesn't have to be the primary professional activity of the individual for it to be considered business income. The fact that this position evolved from a prior business relationship also argues for continued business treatment.

Ira Smilovitz

Two trusts for a single taxpayer is not uncommon. If that is the only trustee work one is doing, they are hardly "in the business" of being a trustee, regardless of their other job type.

My little experience in this matter is there is basically nothing out there in the way of prior taxpayer examples to guide us.

I stand by my position.

I agree with Ira, though the issue of multiple trusts is more icing on the cake than the real issue. If OP is acting as a trustee for a regular client of his, and he became a trustee as a result of his business, that his work as trustee is really an extension of his business, even though it has different responsibilities.

That's what the IRS would argue, and I believe the courts would agree.

I agree that being a trustee of two related trusts, by itself, may not be sufficient to call the trustee's fee self employment income.

However in this case the trustee is in the business of being a financial advisor, the client came to him in that capacity, and his work as a trustee is an extension of that work.

You do not know that is what the IRS would argue, that is merely your opinion.

I disagree. First, I doubt the IRS would even question the matter. Second, if they did, the fact that OP only serves as a trustee on these two trusts clearly, in my opinion, establishes that OP is NOT in the business of being a trustee.

I stand by my opinion, and I believe the IRS would not fight the matter when presented with the facts. I believe the courts would agree with me as well.

As it turns out, there may be something "out there". There is an IRS Revenue Ruling. It goes back to 1958. It deals with non-professional fiduciaries of an estate, but I believe it would also hold for a non-professional trustee managing a trust. In other words, I believe you can just substitute the word trust for estate in the the R.R. See Rev. Rul. 58-5.

Here is an excerpt. Please read the ruling. =====================================================================In order for an individual to have net earnings from self-employment, he must carry on a trade or business, either as an individual or as a member of a partnership. Whether or not a person is engaged in a trade or business is dependent upon all of the facts and circumstances in the particular case. However, the following will serve as guides in determining this question in the case of fiduciaries of decedents' estates:

(1) Professional fiduciaries will always be treated as being engaged in the trade or business of being fiduciaries, regardless of the assets contained in the estate.

(2) Generally, nonprofessional fiduciaries (that is, for example, persons who serve as executor or administrator in isolated instances, and then as personal representative for the estate of a deceased friend or relative) will not be treated as receiving income from a trade or business unless all of the following conditions are met:

(a) There is a trade or business among the assets of the estate, (b) The executor actively participates in the operation of this trade or business, (c) The fees of the executor are related to the operation of the trade or business. ====================================================================After the examples, there is another relevant section that says: ==================================================================== In some cases the activities of the executor of a single estate may constitute the conduct of a trade or business even though the assets of the estate do not include a trade or business as such. If, for example, an executor manages an estate which requires extensive management activities on his part over a long period of time, an examination of the facts may show that such activities are sufficient in scope and duration to constitute the carrying on of a trade or business. If doubt exists concerning the status of a fiduciary believed to be in this category, the complete facts should be transmitted to the National Office for consideration. ==================================================================== In my opinion, I don't believe it matters that becoming the trustee grew out of a prior business relationship. No where does it say that I can't operate more than one business nor does it say that I can't operate a business and also a hobby nor does it say that everything I do because of a contact that grew out of my business is also a business that generates SE income. I think we have a non-professional fiduciary and unless that 3 prong test in the RR is met or the last paragraph about extensive management activities over a long period of time is met, the fees are line 21 income.

If, for example,

Your quote in the above paragraph, is where I come down on the side of SE income. The trusts in question are for the benefit of disabled children (per the OP). The activities of the trustee are likely to be both significant and of long duration. I can see your argument, and if I were the trustee, I would be taking that (your) position even though I expected the IRS to disagree.

Ira Smilovitz

Actually, you quoted what I recall and what I based my comments on. When I said there is "nothing out there" I meant specific cases, applying specific facts and coming up with a result.

I agree with your comments. It sounds like the trustee relationship will be a "regular and continuous" activity, and that is generally a strong indicator of a "trade or business" activity.

Further, it is not clear to me that the 3 factors listed in the ruling that Alan quoted are meant to COMPLETELY SUBSTITUTE for the facts and circumstances that would otherwise apply to a T-or-B determination, or are simply "guides" (as the ruling states) to be considered IN ADDITION to the traditional tests. ???

MTW

I'm really not sure what you mean. I will merely say that Revenue Rulings have the force of law until either modified, rescinded or replaced by the Treasury or tossed out by court.

Restating.... I believe the ruling is on point for a trust as well as an estate. And.... based on the facts presented (which may not be all the facts) in the OP, it would appear that the last paragraph in the ruling would be applicable and would make the fees SE income.

This was a fantastic discussion, and I appreciate all who contributed. I'm going to digest it all and make a decision. Thank you.

What I mean is that we have the revenue ruling, but no specific cases, with specific facts, to help us interpret the revenue ruling in light of OP's specific facts, which we also don't have the nitty gritty details of.

I agree it is on point for trusts as wells as estates.

I would not be so quick to jump to the conclusion that OP has SE income. Based on the limited facts, I would opine it is not SE income. And the fact that the trust may last a long time is not in and of itself determinative. We really need to know how extensive the trustee work is, and the nature of that work. If it is just monitoring investment accounts and paying over funds for the care of the beneficiaries, I don't think it is SE income no matter how long the trust lasted.

You are welcome, and I hope it helped. I think this is an example of what a good discussion can be. We don't always hit the mark, though. :)

Further details: My current business is really tax and small business accounting. For the trusts I will be monitoring investments, reconciling bank accounts, paying their bills, monitoring their care providers, and answering their constant calls. Thanks again!

As you should realize by now, what you consider your current business to be is irrelevant to the determination. That said, there is an honest disagreement between the responders as to whether your trustee duties are significant enough to rise to the level of being a secondary business.

Ira Smilovitz

I, of course, am still of the opinion that this is not SE income. I would add some food for thought: If what the OP has stated does not qualify for the exemption from SE income, what would? It sounds like the OP is doing pretty standard trustee work. If that is deemed to be SE income, then the Revenue Ruling might as well just be erased from the records.

To my mind the revenue ruling cited doesn't cover this precise point.

Let's say you own a restaurant and are the chef. One day a waiter doesn't show up and you have to wait on a couple of tables. Is the tip you get not from your employment? It's a completely separate function, and your participation in it is very brief. But I believe it should be included in your self employment income.

In OP's case the business arose from and is an extention of her primary business. On the other hand if it work out better for her not to treat it as self-employment income, there's a strong argument that treatment would be reasonable, so she shouldn't have a huge problem if the IRS ever decides to challenge it.