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Expenses & Deductions
In Lender Management LLC, T.C. Memo. 2017-246, the Tax Court concluded that a taxpayer was engaged in the trade or business of providing investment management services and, therefore, could benefit from having its expenses treated as fully deductible business expenses under Sec. 162 rather than being treated as expenses for the production of income under Sec. 212 subject to the Sec. 67(a) 2%-of-adjusted-gross-income floor for miscellaneous itemized deductions. The court ruled that the operations of the company consisted of activities that were beyond those of an investor even though the clients it provided investment management services to were primarily family entities, and its primary source of income was an allocation of profits (i.e., an incentive allocation, or carried interest) from various partnerships to which it provided these services.
This case, which was decided on Dec. 13,2017, is particularly significant because of provisions in the law known as the Tax Cuts and Jobs Act (TCJA), P.L. 115-97, which was enacted on Dec. 22,2017. The TCJA disallows all Sec. 67(a) miscellaneous itemized deductions for tax years beginning after Dec. 31, 2017, and ending before Jan. 1,2026 (see TCJA, §11045). In Lender Managements case, because the Tax Court held it was engaged in a trade or business, its business expenses were deductible in full under Sec. 162 rather than being nondeductible under Sec. 67(g). This case could provide planning opportunities for taxpayers with similar facts and circumstances.
Lender Management's family office structure
During the years covered in the case (2010-2012), Lender Management provided direct management services to three limited liability companies (LLCs) taxed as partnerships for federal income tax purposes. The only members in these three LLCs were the families of Marvin and Murray Lender, two of the sons of Harry Lender, who founded the company that became Lenders Bagels. Each LLC had a distinct investment strategy, with one investing in private equities, one investing in public equities, and the third investing in hedge funds. The endlevel owners of the three LLCs were, in all cases, children, grandchildren, or great-grandchildren of Harry.
Initially, Lender Management was owned 99% by Marvin Lender Trust and 1% by Helaine G. Lender Revocable Trust (Helaine was Marvins wife). Later, Keith Lender Trust acquired by assignment a 99% interest...