Has Congress (Inadvertently?) Repealed All Deductions Previously Allowed Under IRC 212, Not Just the De Minimis Deductions Identified in the Legislative History and Most Summaries of the TCJA?If So, What Does That Mean for Shareholders and Real Estate Investors?[1]I. Quick Explanation and History of IRC 212 IRC Section 212 provides, in its entirety and unchanged since its inclusion in the 1954 Code:§ 212 Expenses for production of income.In the case of an individual, there shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year— (1)for the production or collection of income;(2)for the management, conservation, or maintenance of property held for the production of income; or(3)in connection with the determination, collection, or refund of any tax.

ers will note that Treas. Reg. § 1.263(a)-4(b) includes a general “facilitation” clause that applies to both IP development (in-house costs) and IP acquisitions. Therefore amounts paid to investigate or pursue IP acquisitions are also capitalized. There are simplifying conventions. Employee compensation (partner guaranteed payments and director fees for regular – not special – board meetings are compensation for this purpose), general overhead, and “de minimis” ($5,000 or less) costs related to IP acquisitions can often be expensed. The de minimis rule is per transaction, except that a taxpayer that reasonably expects to enter at least 25 similar transactions in a tax year can pool similar transactions for investigative cost efficiencies. Special rules apply to pooling de minimis costs.Since capitalization is typically prescribed for IP acquisitions, the period of cost recovery becomes important. If IP is acquired as part of a trade or business acquisition (or an activity described in § 212) the assets are typically “amortizable section 197 intangibles” eligible for 15-year amortization deductions. In many, if not most, cases it is obvious when a trade or business is being acquired (i.e. buyer purchases all of the assets of a transportation company). In those cases all of a target’s assets are subject to a § 1060 allocation, with IP simply being allocated a portion of the purchase price and essentially amortized over 15 years pursuant to § 197. Status as an “amortizable section 197 intangible” matters for several other reasons:Partial Dispositions. If a buyer ends up disposing of any “amortizable section 197 intangible” but other such intangibles are retained (i.e. partial disposition of intangibles), no loss will be recognized on the disposition (or even worthlessness and abandonment). Instead the taxpayer’s basis in retained § 197 intangibles is increased pro rata by the amount of the disallowed loss.Nonrecognition Transfers. If a taxpayer acquires § 197 intangibles in

ibilities (§§ 162, 167, 174, 197, etc.) Like many areas of federal income tax, the rules are full of exceptions and exceptions to exceptions. Naturally federal courts have also supplied a host of tests and factors that can impact the federal income tax cost of IP development. This post is therefore not exhaustive and covers only select topics. As such, specialized areas, like film and television production expenses under § 181 are beyond the scope of this discussion.The General Deduction Rule: § 162To use § 162, an IP development cost must be (1) an ordinary and necessary expense (as opposed to a capital expenditure) and (2) paid or incurred “in carrying on a trade or business”. With respect to the expense requirement, the Treasury Regulations include a robust regulatory regime under §§ 263 and 263A that specifically discusses the capitalization of IP costs. However, it is important to remember that the foregoing regulations only affect amounts otherwise deductible under §§ 162(a) and 212. The § 263 regulations are mainly exceptions to the “expense” test of § 162 and those regulations identify multiple intangibles treated as capital expenditures. A non-exclusive list including some of the more important IP related capitalized costs (and certain exceptions) in commercial and corporate transactions today follows:Creation Costs. Amounts paid to create certain intangibles such as (i) amounts paid to create, originate, or renew financial interests like entity equity, letters of credit, options, and futures contracts; (ii) prepaid expenses; (iii) certain contract rights, (iv) memberships and privileges; (v) rights obtained from a governmental agency for things like trademarks, licenses, permits, or franchises; and (vi) certain contract rights.Separate and Distinct Intangible Assets and Carveouts. Amounts paid to create or enhance a separate and distinct intangible asset, meaning an IP interest with ascertainable and measurable value in moneys worth that is subject to protect

(1) Yes. After weighing all the facts and circumstances, and by applying the non-exhaustive factors contained in the Treasury Regulations, the Tax Court concluded that the Wondries engaged in their ranching activity for profit and not as a hobby. The Court did not sustain the IRS’s disallowance of the loss deductions related to the ranching activity under section 183. (2) Yes. The Wondries are liable for an accuracy-related penalty as it pertains to an underpayment related to an IRA distribution but not for the penalties determined for the expense deductions for the ranch activity.Key Points of Law:Burden of Proof. The determinations in a notice of deficiency bear a presumption of correctness, and the taxpayer generally bears the burden of proving them erroneous in proceedings in this Court. SeeWelch v. Helvering, 290 U.S. 111, 115 (1933); Rule 142(a)(1).For-Profit Business. Taxpayers are generally allowed deductions for business-related and investment expenses. See 26 U.S.C. §§ 162, 212. Under section 183(a), individuals are not allowed a deduction “if such activity is not engaged in for profit.” “[I]f such activity is not engaged in for profit, no deduction attributable to such activity [is] allowed” except to the extent provided by section 183(b). Id. at § 183(a). Section 183(b) allows deductions that would have been allowable had the activity been engaged in for profit but only to the extent of gross income derived from the activity (reduced by deductions attributable to the activity that are allowable without regard to whether the activity was engaged in for profit). Section 183(c) defines an activity not engaged in for profit as “any activity other than one with respect to which deductions are allowable for the taxable year under section 162 or under paragraph (1) or (2) of section 212.”Primary Objective of Making a Profit. For expenses to be fully deductible under section 162 or 212, taxpayers must show that they are engaged in the activity with the primary obj

The Tax Court determined that the activities of Lender Management -- which involved providing investment management services to others for profit (although the others were all part of the Lender extended family or their related entities) -- were sufficient to constitute a trade or business to give rise to fully deductible trade or business expenses under IRC section 162. The Internal Revenue Service had contended that these expenses were not trade or business expense deductions under IRC section 162, but instead were deductible under IRC section 212 -- which meant that, as miscellaneous itemized deductions, they were subject to the 2% of adjusted gross income (“AGI”) floor and the alternative minimum tax. (Importantly, under the new tax law, IRC section 212 expenses are no longer tax deductible.)

The IRS chief counsel’s memo concluded that personal income tax preparation expenses are not excludable as a working condition fringe benefit because they are not IRC Section 162 expenses. Tax preparation costs still may be deductible under IRC Section 212, which applies to expenses incurred for the determination, collection, or refund of any tax. However, IRC Section 212 expenses are not eligible for exclusion from an employee’s income as a working condition fringe benefit.

How can we use insurance to address these risks?How do our rights differ when investing in a club deal as opposed to a fund?What co-investment and other rights should we negotiate when investing into a fund?What are the pros and cons of investing in secondaries?Where are the legal risks of paying finders fees for deals?What are registration rights and why do we need them?The Lender Management strategy (US-based family offices)What are the facts and circumstances of the 2017 case of Lender Management, LLC v. Commissioner of Internal Revenue, and are they relevant to my family office?What is the difference between Internal Revenue Code Sections 212 and 162, and is this relevant to my family office?What are the factual differences between the Lender case and Hellmann v. Commissionerof Internal Revenue, and are they relevant to my family office?If my family office is organized in a Lender Management-type fashion, do we need to or can we manage investments for non-related other families?TaxesHave we optimized our family office entities and investment strategies to minimize adverse tax consequences?How should we best interface with the family office’s accounting advisors to optimize tax planning and compliance?In preparing for an audit, what steps should we take to ensure our family office is in compliance with all applicable laws?LitigationTo avoid conflicts of interest, should family members whose interests are or may differ from other family members retain separate counsel?

How can we use insurance to address these risks?How do our rights differ when investing in a club deal as opposed to a fund?What co-investment and other rights should we negotiate when investing into a fund?What are the pros and cons of investing in secondaries?Where are the legal risks of paying finders fees for deals?What are registration rights and why do we need them?The Lender Management strategy (US-based family offices)What are the facts and circumstances of the 2017 case of Lender Management, LLC v. Commissioner of Internal Revenue, and are they relevant to my family office?What is the difference between Internal Revenue Code Sections 212 and 162, and is this relevant to my family office?What are the factual differences between the Lender case and Hellmann v. Commissionerof Internal Revenue, and are they relevant to my family office?If my family office is organized in a Lender Management-type fashion, do we need to or can we manage investments for non-related other families?

These are already treated differently for purposes of the surtax on net investment income under IRC Sec. 1411. See IRC Sec. 212. I must confess, I was going to say “recent” history.

family’s needsFO Structuring – Family GovernanceFamily Council: Family offices will commonly have a family council made up of family members and trusted advisors to oversee the operations of the Family OfficePresident: A key member of the family will often serve as the President (e.g., family patriarch or matriarch) Leads the Family Office operations at a high levelChief Investment Officer (CIO): CIO oversees investment strategy Responsibilities include identifying strategic investments, evaluating investment strategies and investment managers, and working with third-party service providers to manage investmentsTrends include hiring private equity executives to oversee this activity or outsourcing the role to a third-party advisorLean Structure: Family Offices are increasingly employing a leaner staff and engaging more outside professionals for investment allocation, accounting and tax compliance, and other servicesFO Structuring – Potential Income Tax SavingsDeduction Limitations: IRC Section 212 prohibits individuals and trusts from deducting investment expenses, including – Outside investment managers Cost for outside investment advisors Costs related to investment advisor staffAccounting, tax preparation, etc.Nearly all of the other FO functions not directly tied to a businessFamily Office Tax Planning Absent advanced tax planning, HNW individuals and trusts often incur substantial non-deductible expensesFor families with high tolerance for complexity, advanced planning techniques can effectively reduce the burden of these non-deductible expenses by effectively creating tax deductions for the value of these servicesIn-House or Third-Party Advisors?Family Offices both include in-house advisors and third-party advisors (just like any business)Many Family Offices look to third-party advisors for significant issuesWhether a Family Office provides services in-house or engages third-party advisors will varyCommon Considerations Cost: Engaging third-party advisors can often