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Organizing The Family Office To Deduct Advisory Expenses As Trade Or Business Expenses – Taking Advantage Of The Lender Decision

Introduction

Prior to the passage of the Tax Cuts and Jobs Act (the “Act” ), expenses incurred for the production of income (“investment expenses”) could be deducted under Section 212 of the Internal Revenue Code of 1986, as amended (the “Code”).[1]  These types of expenses included, for example, fees paid to family offices and/or investment advisors.  The Act eliminated this deduction for the years 2018 – 2025. This loss may have significant adverse tax consequences for those individuals who pay such types of fees.

A recent case, Lender Management, LLC v. Comm’r (“Lender”)[2], allowed a management company formed by the taxpayer to manage his family’s investments to deduct these types of expenses as “trade or business expenses” under Code Section 162 against the taxable income of the management company received on account of a “profits interest” in family investment partnerships.  If a taxpayer’s facts are similar to those in Lender, it may be possible to create or even refine an entity structure that would support a position taken on a tax return that the investment expenses are deductible even under the law as revised by the Act.

Lender Facts

The Lender decision is very fact specific.  Therefore, a careful review of those facts must be undertaken to understand how the Tax Court reached its decision:


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