Promoter structures library
Family Management Company Fee Stripping
Sold as: "convert your non-deductible investment expenses into deductible business expenses", "family management company", "profits interest structure"
A management company that manages only your own money, for a fee you chose, is not a business. A CPA was permanently barred from federal practice for selling that structure.
Classification C. Defensible, but fact-intensive and audit-attracting.
The pitch
Convert your non-deductible investment expenses into deductible business expenses. Stand up a management company, have it charge your investment entities a management fee, and deduct under Sec. 162 what Sec. 212 no longer lets you deduct.
Why this market exists
TCJA suspended Sec. 212 miscellaneous itemized deductions via Sec. 67(g) for 2018 through 2025. OBBBA MADE THAT SUSPENSION PERMANENT. So the Sec. 162 versus Sec. 212 characterization question is now a permanent structural issue rather than a temporary one. Expect promotion of these structures to increase.
Where it breaks
Whether the management company is a trade or business under Sec. 162 rather than an investment activity under Sec. 212. Lender Management won on facts most family offices do not have: clients who did NOT act collectively, some in conflict with one another, and compensation through a profits interest. Where the family acts as a single group, the fee is a plug number, and the only clients are the owner's own entities, the deduction is a Sec. 212 expense that Sec. 67(g) no longer allows.
What it costs you if it is wrong
The management fee is recharacterized as a Sec. 212 investment expense, which Sec. 67(g) now disallows permanently, so the deduction is gone rather than deferred. On the advisor side, a CPA marketing this structure was permanently barred from federal practice in November 2024.
Red flags specific to this structure
- The fee was chosen to produce the deduction
- The only clients are entities you own
- The service is managing your own money
- Personal expenses run through the management company
- There is no written service agreement or comparable-fee support
- The family acts as one group and the office decides for all of it
Questions to ask the person selling this
Take these into the next meeting. Someone selling the legitimate version answers them without difficulty.
- 1How was the fee determined, and what comparable supports it?
- 2Will the company have clients other than my own entities?
- 3What services will it perform that I am not already performing myself?
- 4Who will be employed by it?
- 5Is there a written service agreement?
- 6On my facts, how is this different from the structure that got a CPA barred?
Which of the Seven Markers this trips
The client keeps control of what they supposedly gave away
'The IRS has never listed this'
The legitimate version
A management company with real employees performing real services.
What distinguishes it
- Arm's-length fees supported by a transfer pricing or comparable-fee analysis
- Ideally third-party clients
- Profits-interest compensation rather than a flat markup
- Separate ownership from the entities being managed
- Documented service agreements
- Services that would satisfy the Higgins and Groetzinger trade-or-business standard
What makes it a sham
- The fee is a plug number sized to the desired deduction
- The services are the owner managing his own money
- Personal expenses run through it
- The only clients are the owner's own entities
What the courts have done
How this has actually gone for the people who bought one.
The case that went the taxpayer's way
- name
Lender Management, LLC v. Commissioner, T.C. Memo. 2017-246
- holding
The management company was engaged in a trade or business under Sec. 162.
- facts the court relied on
- Clients did NOT act collectively. Geographically dispersed, some IN CONFLICT with each other.
- The management LLC held only a MINORITY stake in the investment LLCs and was indirectly owned by only two family members
- Compensation was a PROFITS INTEREST for services
- The entity HELD ITSELF OUT PROFESSIONALLY to third parties: governmental authorities, investment banks, hedge funds
- Services were provided to clients INDIVIDUALLY, not to the group
The cautionary counterpoint
- name
Hellmann
- outcome
Same theory, worse facts, SETTLED BEFORE RULING
- facts
Family members lived in the same place with good relationships. The office made decisions for the group as a whole. The family owned 99 percent of the investment partnerships and 25 percent each of the management entity. The IRS argued no trade or business. No definitive guidance resulted.
The enforcement warning shot
- case
United States v. Charles Dombek and The Optimal Financial Group LLC, N.D. Tex., November 1, 2024
- outcome
PERMANENT INJUNCTION against a licensed CPA
- detail
Dombek, marketing himself as 'the premier dental CPA in America,' was permanently barred from promoting tax plans involving sham management companies to shift income to lower tax brackets, improperly deferring income, claiming personal expenses as bogus business deductions, and assisting in the creation of captive insurance companies. Estimated Treasury harm 10,000,000 dollars or more. Dombek may not prepare federal returns for anyone but himself.
- why it matters
This is a DOJ action against a CPA marketing exactly the adjacent product set: management companies and captives to professional-practice owners.
Holding one of these, or being pitched one?
The diagnostic work is worth doing before the return gets filed rather than after. That is a conversation, not an engagement.
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