In December, the Tax Court decided a case that is very significant for families that maintain family offices. In Lender Management, LLC v. Commissioner (December 13, 2017), the court held that a family office structured as a limited liability company was engaged in a trade or business. The result of the court’s holding is that the company could deduct the significant expenses it incurred in managing various investment vehicles for the family as business expenses rather than as investment expenses.
For the tax years at issue, this meant that the expenses could be deducted in full by the members of Lender Management, LLC. If the expenses had been considered investment expenses, they would have been deductible only to the extent they exceeded 2% of the adjusted gross income of the various family members.
Beginning in 2018, this case takes on increased importance as investment expenses which were treated as miscellaneous itemized deductions are no longer deductible at all. We will include a more detailed analysis of this important case in our new Family Office Newsletter, which is scheduled to begin publication in June.