Is Your Company's Tax Department a De Facto Family Office?

• Author: Hood, H. Carter

Many of todays family offices began as the back office of a privately held company. In such companies, tax department staff members often provide services to the company's owners and become indispensable. As a result, long after the operating business is gone, the back office lives on in the form of a family office. But when the family's business is still alive and well, what should the company do to ensure that its internal tax and treasury functions can peacefully coexist with family-related services?

In reviewing some of the risks of providing services to owners through the company's tax department, this article recommends developing a written policy to govern the provision of services and discusses points to consider when developing such a policy.

Typical Fact Pattern

A privately held business is often owned by multiple generations of a single family and perhaps by trusts for their benefit. The company's CFO and tax office prepare income and cash flow projections for the company, which are often relevant to the owners' taxes, especially if the company is taxed as a pass-through entity. In such cases, it is reasonable and practical for the company to become involved in preparing the owners' tax returns and planning cash flows. Over time, however, additional functions may get layered in, such as advising owners on tax issues unrelated to company income, preparing personal cash flow statements and balance sheets, preparing credit reports for personal mortgage applications, reviewing contracts for home purchases and renovations, preparing payroll for household employees, and eventually providing" concierge" services such as bill payment. This mission creep may occur gradually, making it hard to notice and harder to resist.

Risks to the Company

Providing services to shareholders can create a variety of potential problems and risks for the company. Perhaps the most pervasive problem is that company resources get diverted from important company matters to matters that are important only to individual owners. It is hard for tax staff to refuse a request from an owner, especially if the owner is also an officer of the company. Often, staff will try to satisfy the needs of both the company and the owner, but there are limits to how much they can do, and spreading staff too thin can result in mistakes or missed tax-saving opportunities.

Another potential problem is that providing services to owners can increase company expenses and decrease...