In Uncategorized on 10/01/2018 at 16:47

Well, that’s the question for Richard M. Hellmann & Dianna G. Hellmann, et al., Docket No. 8486-17, filed 10/1/18.

The issue for Rich, Di and the als is whether their family investment operation (hereinafter “Hellmannco”) is a Lender; that is, entitled to the same treatment as Lender Management, LLC.

If you’ve forgotten Lender and the Section 162 vs Section 212 deduction issue for family investment operations, see my blogpost “All in the Family – Part Deux,” 12/13/17.

Hellmannco claims it’s in the trade or business of running a mutual fund. IRS says the operation is not a trade or business, but an “activity ‘for the production or collection of income’ or ‘for the management, conservation, or maintenance of property held for the production of income,’ within the meaning of section 212.” Order, at p. 2.

And of course Hellmannco gets all its business deductions if it is a trade or business, but if it’s a mere “activity” the members (and Hellmannco is an LLC, presumably box-checked as a partnership) get hit with the 2% AGI floor for the Schedule A miscellany, the Schedule A phaseout, and AMIT.

And with the 2017 Jobs Creation and Tax Act, Schedule A miscellaneous deductions don’t look so good for this year and out to 2026. You can’t take them until 2026, so the suspension of the Schedule A phaseout doesn’t help the Hellmannco crowd. They won’t figure in AMIT either.

“These cases appear to resemble Lender Management in some respects, but not in others. [Hellmannco] is a family office that managed investment assets for four family members. All four family members resided in the Atlanta metropolitan area and appear to have been on good terms. [Hellmannco] received performance-based compensation keyed to the success of the investments it made. One investor… appears to have had authority over day-to-day investment decisions. But here, unlike in Lender Management, all of the other investors were also owners of the management company, with each investor holding a 25% profits interest in [Hellmannco].” Order, at p. 3. (Name omitted).

Remember, the Lender crowd was spread out, and hated one another. And the Boss Hoss of the Lender mutual fund got 99% of the profits therefrom, but only had a small piece of the action in the portfolio.

In the end it’s facts & circumstances. Did the management entity add value, and personalize investment advice to the individual members (“know your customer”)? Most importantly, were the profits from the management arm paid over to the members of the investment arm in the same proportion as their interests in the investment arm?

“In cases such as these, an important question is whether the owners of the family office are ‘actively engaged in providing services to others,’ Lender Management, at *26, or are simply providing services to themselves. See Dagres, 136 T.C. at 281 (‘Selling one’s investment expertise to others is as much a business as selling one’s legal expertise.’). Here, each family member had a 25% profits interest in [Hellmannco]. If each family member (for example) also had an aggregate 25% interest in the assets under management, there would be perfect proportionality between the two streams of income. In that event, it would not matter how [Hellmannco] was compensated, because that compensation, once distributed ratably to the four owners, would simply replace investment income that each person would otherwise have derived from the investment portfolios. That was not the case in Lender Management, where one family member had a 99% profits interest in the management company, but held only minority interests in the assets under management. The facts currently in the record do not enable the Court to assess the degree or proportionality (or lack thereof) here.” Order, at p. 4.

So while Judge Albert G (“Scholar Al”) Lauber lays out a laundry list of questions for Hellmannco and IRS to answer, as to ownership, management, operation, services, and portfolio composition of Hellmannco, the real question is the old question: “Who got the money?”

Leave a Reply

Please log in using one of these methods to post your comment: Logo

You are commenting using your account. Log Out /  Change )

Google photo

You are commenting using your Google account. Log Out /  Change )

Twitter picture

You are commenting using your Twitter account. Log Out /  Change )

Facebook photo

You are commenting using your Facebook account. Log Out /  Change )

Connecting to %s

This site uses Akismet to reduce spam. Learn how your comment data is processed.

%d bloggers like this: