In Fuhrman, TC Memo 2011-236, the Tax Court had held that management fees paid to a taxpayer’s wholly-owned corporation from the taxpayer’s single-member LLC were improper and lacked appropriate support and documentation to be deductible expenses.
Mr. Fuhrman owned several trucking companies that in the aggregate operated a trucking business for the transportation of goods. For liability and other business purposes, the business was separated into various asset holding, personnel and operational companies. The various companies contracted with one another to operate the business. Despite the significant related party transactions required to provide trucking services, Fuhrman failed to execute asset leases, management service contracts and other agreements among the entities that would be expected in similar arms-length transactions. For 2004 and 2005, Fuhrman’s SMLLC claimed approximately $110,000 each year for management services paid to a corporation also owned by Fuhrman which were reported as “Other Expenses”. Following an audit, the IRS determined that approximately $60,000 of these expenses for each year were improper. Upon review, the Tax Court sided with the IRS and determined that the amounts charged for management services were not supported by evidence and were not ordinary and necessary business expenses. This case, once again, demonstrates the importance of memorializing related party transactions through proper agreements and documenting how the amounts paid between related parties is determined.
For those businesses, with more than one entity, proper inter company documentation matters.
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