Since the regulations require that all trust contributors be its beneficiaries, the associates standard will most always be present if the business purpose standard is also present.
Thus, the critical analysis is whether the trust instrument properly confines the trustee's powers to merely collecting, preserving, protecting and disbursing environmental remediation funds rather than using those funds as an investment vehicle or to conduct an environmental remediation business. Investment trusts with fixed asset bases and a single class of ownership are considered ordinary trusts provided that the trust instrument does not reflect a power to vary the interests of the certificated beneficiaries.
The article concludes with a discussion of three "special purpose trusts" and how their unique structure and purpose affects their particular classification as a business trust (investment trusts, liquidating trusts and environmental remediation trusts). The term "trust" as used in the classification regulations therefore refers to an arrangement whereby trustees accept title to property for the sole or primary purpose of protecting or conserving it for the trust beneficiaries. Business trusts, on the other hand, often involve trusts created by beneficiaries as a device to carry on a profit- making business and thus do not involve a trust created by a settlor to simply protect or conserve property for beneficiaries (Treas. The presence of a business purpose gives trusts their "business trust" moniker and often is the most important of the two tests because it is not possible for a trust to have "associates" when the trust does not also have a business purpose. 344 (1935) and its three companion cases, Swanson v. In these cases, the issue becomes whether the business activities are merely "incidental and necessary" to the declared liquidation purpose or are rather dominant to that purpose. The tax regulations define an environmental remediation trust as one created for the primary purpose of collecting and disbursing amounts for environmental remediation of an existing waste site in order to address the potential liability of persons with a reasonable expectation of liability under state or federal law and those persons are the only contributors to the trust (Treas. As with liquidating trusts, if the initial remediation purpose becomes later obscured by business or investment purposes, the trust will "become" a business trust.
Ordinary trusts do not have associates or an objective to carry on business for profit (Treas. Thus, a trust-type arrangement will be respected as a trust only where a settlor creates the trust with a purpose to vest the trustees with responsibility for the protection and conservation of property for beneficiaries who cannot share in the discharge of this responsibility and therefore are not considered associates in a joint enterprise for the conduct of business for profit (Treas. The business purpose standard was initially developed in Morrissey v. Private Letter Ruling 9108025 was released prior to the check-the-box regulations and determined that an environmental remediation trust was an association because it possessed a business purpose and associates but was taxable as a partnership rather than a corporation because it lacked limited liability and free transferability of interests.
That partnership classification result is now the default rule for such trusts that are considered business trusts under the check-the-box regulations.
For trusts that desire to be taxed as an ordinary trust, the business purpose and associates test will be difficult to meet.
The regulations set forth four examples, two of which satisfy this incidental test and two which fail the test.
Notably, partnership income is taxed directly to its partners in their profit-sharing ratios in the year earned by the partnership regardless of whether actually distributed. Where the trust instrument vests exclusive power and authority over trust matters in the trustee and thus precludes beneficiaries from sharing this responsibility, the test will not be met (see also Bedell v. The important Elm Street Realty Trust case therefore sets forth various methods that lawyers may use to assure that a trust lacks associates and to further assure ordinary trust status even in trusts created with a business purpose.Trust rules will mirror this result only where trust income is actually distributed to beneficiaries. All four cases involved trust classification and all determined that the relevant trust possessed a demonstrable business purpose because the applicable trust instrument granted the trustee broad powers to conduct a business with trust property. In order to lack associates, a trust: The discussion that follows applies the business purpose and associates tests to trusts created for three very specific purposes.Thus, partnership taxation would eliminate separate taxation of accumulated income to the trust and place more pressure on trustees to actually make discretionary distributions in an amount at least necessary to cover beneficiary tax liability. In each case, it was irrelevant that such powers were not actually exercised and it was irrelevant that the settlor did not create the trust with a business purpose or similar intent in mind. The frequent use of these special purpose trusts prompted both the Kintner or the check-the-box regulations to include separate provisions discussing three separate trusts: liquidating trusts, investment trusts and environmental remediation trusts.Indeed, that momentous decision incorporates ancient case law. Thus, the check-the- box regulations added important flexibility to these trusts and to some degree desensitized the stakes of being classified as a business trust. Accordingly, the trust instrument must carefully and narrowly grant the trustee only the powers reasonably necessary to accomplish such a purpose. 1961), determined that "there was undoubtedly considerable business activity on the part of the trustees in this case, but it does not appear to have involved more than what was required to conserve the value of the property and obtain a satisfactory price for it." The case may be examined for particulars but the approach and result is encouraging.Whether a trust is considered an ordinary trust or a business trust depends on (1) whether the terms of the written trust instrument grants the trustee broad powers to engage in a business with the trust property and (2) whether the trust also has associates. The tax regulations define a liquidating trust as one created for the primary purpose of "liquidating and distributing its assets" (Treas. So viewed, a liquidating trust is not a business trust because it possesses only a liquidation objective (protect and conserve) rather than a broader business objective. While several pre-check-the-box private letter tax rulings considered the status of liquidating trusts, no noticeable post-1997 rulings have been released.