Wednesday, November 3, 2021
Benjamin Alarie & Christopher Yan (Blue J Legal), Would Management Fees by Any Other Name Still Be Deductible?, 173 Tax Notes Fed. 499 (Oct. 25, 2021):
In this article, Alarie and Yan examine Aspro [T.C. Memo. 2021-8 (Jan. 21, 2021)] and use machine-learning models to evaluate the strength of the appellant’s arguments in its appeal to the Eighth Circuit concerning the deductibility of management fees the business paid to its shareholders. ...
Blue J predicts with 74 percent confidence that the expenses in connection with the set of services provided to Aspro that are customary or usual will be found to be ordinary and necessary expenses. Blue J also predicts with 56 percent confidence that expenses in connection with the set of services that Aspro has failed to establish are customary or usual will be found not to be ordinary and necessary expenses.
Ultimately, regardless of which way the Aspro case goes, it should serve as a cautionary tale that taxpayers who seek to claim deductions must take special care in substantiating the form and labels they choose to characterize their transactions. It is a critical practice point to note that taxpayers are best served by developing contemporaneous documentation, even if (perhaps especially if) they operate as closely held corporations.
Even if Aspro successfully convinces the Eighth Circuit that only deductions in excess of reasonable payments should be denied, it may still be difficult for a court to retroactively determine which portion of the fees are reasonable and which portions are disguised distributions, especially in the absence of contemporaneous documentation. Ex post valuations generated by the taxpayer’s experts may be seen as self-serving, inaccurate, or unreliable.
In the context of tax and business planning, practitioners ought to use legal technology to identify relevant practices and develop robust documentation to withstand scrutiny from tax authorities. In the context of litigation, practitioners can leverage machine learning to quantify the risk of going to trial while homing in on the most salient factors to focus on.
Prior TaxProf Blog coverage: