Many of us are familiar with how a limited liability company can be a disregarded entity for income tax purposes. There is a similar concept for trusts, so-called “grantor trusts” for income tax purposes, which means that the property owned by the trust is treated as owned by the settlor (or some other third party in limited circumstances) for income tax purposes.
The Facts: A recent Alabama Tax Tribunal decision involved three parties: (i) the NBS Memorial Trust (the “Trust”), a Nevada inter vivos trust established pursuant to a Declaration of Trust between Donna M. Steiger (“Donna”), as settlor, and Donna and her son, Bradley Steiger (“Bradley”), as original Trustees; (ii) TVF Trucking, LLC (“TVF”); and (iii) Bradley, individually. NBS Mem’l Trust v. Dep’t of Revenue, Docket No. S.24-0533-RC (Ala. Tax Trib. Feb. 19, 2026). The Trust is for the benefit of Bradley, and Bradley became the sole Trustee following Donna’s death. TVF is an Alabama limited liability company whose initial members were Donna and Bradley until Bradley became the sole member upon his mother’s death.
On May 28, 2021, a semi-truck was purchased in the name of the Trust in Missouri. On July 4, 2021, the Trust entered into a Lease/Operator Agreement with TVF. The agreement designated Bradley as the truck’s operator. Prior to purchasing the truck, the Trust applied for and received an Alabama sales tax license, allowing the Trust to purchase items at wholesale that it intended to resell or to lease. The Trust also opened a rental tax account with the Department of Revenue (“Department”) and paid rental tax on the lease proceeds from TVF.
At a later date, the Department became aware that the Trust had not paid sales or use tax on the purchase of the truck and that the agreement between the Trust and TVF was for both a truck and a driver. Concluding that the agreement was not a lease, the Department closed the Trust’s rental tax account and entered a final assessment against the Trust for use tax.
The Law: In Alabama, automobiles and trucks purchased at retail for the purpose of leasing to others are not taxable purchases at retail but rather are purchases at wholesale and, thus, are not subject to sales or use tax. Ala. Code §§ 40-23-61(c)(1), 40-23-60(4)(j). Moreover, lease agreements that provide for the lease of an automobile/truck and an operator are not “true leases” exempt from sales or use tax. Ala. Code § 40-12-223(8).
The Decision: On review, the Tribunal avoided figuring out whether the Trust was engaged in the business of renting or leasing and, thus, exempt from sales or use tax, or whether the lease agreement was a “true lease” under Alabama law. Instead, the Tribunal determined that “for tax purposes, neither the Trust nor TVF exists. They are both one and the same taxpayer as [Bradley], and therefore the purported lease agreement between the Trust and TVF is a legal nullity.”
The Tribunal’s conclusion that the Trust does not exist for tax purposes was based on its conclusion that the Trust is a grantor trust. However, the Tribunal acknowledged that it was not “presented with the Declaration of Trust itself” and relied solely upon a certificate of trust provided by Bradley, which indicated “‘[f]or U.S. Federal Tax purposes, the Trust shall be treated as a Grantor Trust.’”
This may be where both Bradley and the Tribunal stumbled.
Generally, for tax purposes, a trust will be classified as a “grantor trust” or a “non-grantor trust” (i.e., a trust taxed as a separate taxpayer) based on, inter alia, (i) certain powers retained by the settlor and (ii) the identity of the trust’s beneficiaries. Transactions between the settlor of a grantor trust and the grantor trust are disregarded for income tax purposes. Similarly, transactions between the settlor of a grantor trust and an LLC that is a disregarded entity are disregarded for income tax purposes.
The Tribunal assumed that the Trust being a “grantor trust” means that it is disregarded as to Bradley. However, the settlor of the Trust was Donna, not Bradley. In all likelihood, the Trust was a grantor trust as to Donna during her lifetime, meaning that the Trust was treated as an extension of Donna. A grantor trust generally ceases to be a grantor trust upon the settlor’s death (in this case Donna) at which point it becomes a separate taxpayer. In limited circumstances, it is possible for a third-party to be the deemed “owner” of the trust property for income tax purposes, causing the Trust to be a grantor trust to a third person, such as a beneficiary. However, based upon the decision, it does not appear that any of those circumstances were present.
The Tribunal also found that TVF was a partnership during Donna’s lifetime, and became a disregarded entity following her death, meaning that the entity was not treated as separate from Bradley for tax purposes, even though it did in fact exist.
It is possible that certain evidence could have proven that the Trust is a separate taxable entity, which would have refuted the argument that the lease was a legal nullity and permitted the Tribunal to address the substantive merits of the positions. However, given that the Declaration of Trust was not filed with the Tribunal and was not part of the record, it is unclear whether the Trust was, in fact, grantor to Donna during her lifetime (and not grantor to Bradley). Based upon the facts outlined in the decision, the far more likely paradigm is that the Trust was grantor to Donna during her lifetime and became a non-grantor trust following her death.
The Takeaway:
What should be obvious is not always obvious to a court. If the Declaration of Trust and proof that the Trust was a separate taxpayer was provided to the Tribunal, it is likely that the Tribunal would have considered the substantive arguments about the applicability of a sales/use tax exemption. When dealing with complex tax disputes, it is always advisable for taxpayers to seek the guidance of tax counsel who, in this case, may have been able to easily disprove any claim that the Trust was a grantor trust with respect to Bradley.
This update is one in a series of updates written for the March 2026 edition of The BR State + Local Tax Spotlight.
© 2026 Blank Rome LLP. All rights reserved. Please contact Blank Rome for permission to reprint. Notice: The purpose of this update is to identify select developments that may be of interest to readers. The information contained herein is abridged and summarized from various sources, the accuracy and completeness of which cannot be assured. This update should not be construed as legal advice or opinion, and is not a substitute for the advice of counsel.