“Intercompany Management Fees – The Need For Proper Documentation” by Sharon Sledzik, CPA, CGMA | Manager – Tax
The IRS had disallowed over half of the management fees paid between two related entities. Now the Tax Court has agreed per T.C. Memo 2011-236. A taxpayer owned trucks in a single member limited liability company (LLC) and leased them to his wholly owned corporations. The corporations paid a flat monthly fee to the LLC. There were no written contracts or sufficient documentation to support such services.
Taxpayer argued that management fees were for consulting, accounting, sales management, and driver safety relations. Problem was the LLC only owned the trucks, leased them to only the related companies, and did not have any employees. The Court figured he was only consulting himself since he was the owner of all companies. Also he failed to show how management fees were determined. Invoices only showed a one line item with the flat fee.
Since the burden of proof is with the taxpayer, here is a heads up! For any management or consulting arrangement, get a written document with guidelines on how fees should be calculated and paid. Internal records such as time cards should reflect charges. Invoices should be issued with adequate detail. The case did not address the fact whether the related companies picked up the fees as income. The IRS and Court held that for expenses to be deductible, they must be ordinary and necessary. In this case there wasn’t enough credible evidence to support the deduction of fees.