Mattie K. Carter Trust v. United States

The Mattie K. Carter Trust (plaintiff) was established in 1956 under Mattie Carter’s will. The trust included cattle ranching and oil and gas interests. In 1994 and 1995 there were between 3,300 and 4,700 head of cattle on the ranch. Benjamin J. Fortson, Jr. was the trustee of the trust. Fortson kept a full-time ranch manager, David Rohn, as well as other full- and part-time workers who performed all tasks on the ranch. Fortson was involved in financial and operational matters of the ranch and routinely discussed management issues with Rohn. Fortson’s son, who was also a beneficiary of the trust, also spent about 500 hours per year on ranch-related business. The trust took deductions for losses of $856,518 in 1994 and $796,687 in 1995 in regard to ranch operations. The IRS (defendant) issued a notice of deficiency, arguing that the ranching and cattle activities were not deductible because they were a passive activity of the trust. The trust paid the disputed tax, filed a claim for a refund, which the IRS denied, and then filed suit for a refund. The trust argued that the proper consideration regarding whether ranch operations were passive or active to the trust was whether the activity was passive in light of actions of all its agents, employees, and fiduciaries. The standard for such conclusion was that the efforts in question needed be regular, continuous, and substantial to be active and not passive activity. The trust argued that the ranch activities were not passive and that the deductions were correct. The IRS argued that only the trustee’s activities should be considered, and as those were not regular, continuous, and substantial in regard to the daily operations of the ranch, the trust should not be allowed the deductions.