Dagres v. Commissioner
136 T.C. No 12 (2011)
Business Bad Debt Deduction
For Private Equity Fund Manager
Mr. Dagres
"Business" loan that
turned to a bad debt
+
General
Partner LLCs
(IV, V, & VI)
20% Profits
Interest
("Carried
Interest")
23%
2% Service Fee
G.P.s
-
Mr. Schrader
Mr. Schrader was an
important source of
leads to Mr. Dagres on
promising companies for
the Funds to invest into
12-14%
Salary
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BMC
(Management
Company)
L.P.s
(Insurance Co.s,
Pension Funds,
Foundations, & highnet-worth individuals
2% Service
Fee
1% of investment into
the funds
L.P.s
Fund L.P.s
(IV, V, VI)
The portfolio companies are sold, creating capital gains. The capital
gains flow up to the general partners and to the limited partners. The
20% of capital gains that flow up to the General Partner LLCs, further
flow up to the private equity fund managers, such as Mr. Dagres.
Portfolio
Companies
99% of investment
into the funds
The Tax Court held that the bad debt expense
incurred by Mr. Dagres was a "business" bad
debt rather than a "nonbusiness" bad debt. The
court held that the venture capital business was
attributed to Mr. Dagres and his loan to Mr.
Schrader was proximately related to those
venture capital activities. Consequently, the
loss was deductible as an ordinary loss.
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