Attorney-at-Law

ALL IN THE FAMILY – PART DEUX

In Uncategorized on 12/13/2017 at 17:04

But Still a Trade Or Business

Judge Kerrigan recognizes that a family hedge fund manager can still be engaged in a trade or business, sufficient to permit it to take Section 162 deductions, rather than the restricted Section 212 “expenses for production of income.”

Here’s Lender Management, LLC, Keith F. Lender Revocable Trust, Tax Matters Partner, 2017 T. C. Memo. 246, filed 12/13/17, and Keith’s daddy’s trust.  They are TMP’s of the manager of the family fortunes, which started when Grandpa froze the first of the family’s eponymous bagels.

I shall not here revisit the controversies, nay, the cries of “revolution!” and “national apostasy!” which followed the first of Grandpa Lender’s creations hitting the freezers of my native town.

The point is simple. The wealth that sprung from the icy glutinous masses had to be managed, as the family descended through the generations, many of whose members hated one another, even to the second and third generation. Echoes of my childhood (the hatred, not the wealth).

Keith ran the show and operated like a true hedge fund manager, dropping fee-for-services in exchange for a piece of the (profitable) action, employing a faithful amanuensis and various temps, renting office space and collaborating with outside investment advisors, exchanging hot tips and investment prospects. Lender Management’s clients were three investment LLCs, each with different goals, whose members were various family types with varying interests and varying rights to opt out of the investment LLCs.

“Lender Management provided investment advisory and financial planning services for the investment LLCs and their individual investors.  Its employees worked full time.  Keith’s work involved researching investment opportunities, negotiating and executing new investments, monitoring existing positions, and working with individual clients to understand their investment needs.” 2017 T. C. Memo. 246, at p. 29.

IRS claimed Lender Management was managing its own investments, and wasn’t really a management business.

Except Judge Kerrigan says it was.

“Respondent contends in respondent’s reply brief that this Court ‘often considers the relationship between people who interact through entities for the obvious reason that the relationships between the individuals might affect how the entities interact with each other’.  Respondent further contends that managing investments for yourself and for members of your family is not within the meaning of a trade or business for the purpose of section 162.

“Generally transactions within a family group are subjected to heightened scrutiny. Where a payment is made in the context of a family relationship, we carefully scrutinize the facts to determine whether there was a bona fide business relationship and whether the payment was not made because of the familial relationship.” 2017 T. C. Memo. 246, at p. 34 (Citations omitted).

But Lender Management passes the test.

“There was no requirement or understanding among members of the Lender family that Lender Management would remain manager of the assets held by the investment LLCs indefinitely.  Lender Management’s investment choices and related activities were driven by the needs of clients, and its clients were able to withdraw their investments if they became dissatisfied with its services.  Investors in [LLC 1] and [LLC 2] were entitled to withdraw their capital interests for any reason at least annually.  Although a complete withdrawal from [LLC 3] required the manager’s approval, we are satisfied on the facts before us that there was a common understanding that Lender Management would grant such approval if any investor became unhappy with how his or her funds were being managed.” 2017 T. C. Memo. 246, at pp. 35-36.

And Keith ran the show like a true hedge fund manager. The family did not have common investment goals, did not agree; in fact, some refused to be in the same room with one another. Keith really worked full time, had minuscule interests in the investment LLCs (and the rest of the family had no interest in Lender Management) , and Keith got paid only if they made money.

“Respondent cites no applicable attribution rules that would require us to treat Lender Management or its managing member as owning all of the interests in the investment LLCs.  Lender Management carried on its operations in a continuous and businesslike manner for the purpose of earning a profit, and it provided valuable services to clients for compensation.  For the tax years in issue Lender Management was carrying on a trade or business for the purpose of section 162.” 2017 T. C. Memo. 246, at p. 38.

IRS gets frozen out.

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