Why Brokers treat Investment Clubs differently than other Partnerships
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Why Brokers treat Investment Clubs differently than other Partnerships There have been comments in other message strings about brokers having a separate application for investment clubs than other partnerships. Does anyone know why the distinction? 1. How does the broker know the entity is an investment club? Is it just if the words are in the name? 2. Are there some regulatory benefits of being categorized as an investment club at the broker? I know there are specific regulations by the SEC that provide benefits to an investment club, but I don't know that it is necessary to have the brokerage account so identified to qualify for them. If anyone who has had the regular partnership application denied and been told why the broker has a separate application for investment clubs has been told why, I would be interested in the answer. Jack For my investment club, Sumner Stock Selectors Investment Club, after we completed the Fidelity partnership application, their review "team" looked at our By-Laws and decided we had to apply as an investment club. Indeed, there was no logic to it and my contact could point to nothing specific in the By-Laws that tipped the scales. I suspect that investment clubs have a bit of a reputation as being tricky to deal with. One or two guys are the designated traders in a partnership application, and if one of those guys does a trade and a member says it was not authorized by the club, then the disgruntled member says "I never signed anything agreeing to this relationship", then it all goes downhill. That is the only explanation I am able to think of. Otherwise, it is hogwash. The Fidelity decision was a surprise to me, as I questioned my contact at Fidelity pretty heavily before we completed the application. I kept asking him what is the difference if we apply as a partnership or an investment club, and other than the investment club application being more complicated, he could not tell me the difference. I had the impression it was a surprise to him, too. I, too, would like to hear a lucid explanation of the difference. Peter Dunkelberger On Wed, Jan 8, 2025 at 12:27 PM John W Ranby Trustee PGM Cariboo Trust via bivio.com <user*15792700001@bivio.com> wrote: There have been comments in other message strings about To be more specific to your questions: 1. The name and your by-laws probably state that your organization is an investment club. 2. My contact at Fidelity could not tell me any differences in the way the two entities are treated by regulation. My opinion is that the only difference is in the liability in the lawyer's mind , but I don't know that for certain. 3. Again, my contact at Fidelity was as clueless as to the reasons as I was. I ragged on my contact at Fidelity to the point of exasperation, but he had no insight. Peter Dunkelberger On Wed, Jan 8, 2025 at 12:27 PM John W Ranby Trustee PGM Cariboo Trust via bivio.com <user*15792700001@bivio.com> wrote: There have been comments in other message strings about An 'Investing Partnership' is referred to under the Exception from Partnership Rules section, on Page 9, of IRS Publication 541 on Partnerships. You might look at that. Suzanne McNealy Investment clubs generally do not meet the requirements for an "investing partnership" as defined by the IRS. The following was written by Rip West, CPA, (former tax and accounting advisor to bivio) in 2007: However, later, it became apparent that this election was never meant for investment clubs, for a number of reasons. First of all, all properties would have to be held in the name of the partners jointly, not as a partnership. Secondly, each partner would have to report his share of each dividend received. That is to say that you don't report the amount [on] the k-1 as your share of total dividends, you have to report your share of each dividend from each company. There are other factors. I was part of a tax workshop in the '90s and we were told by the IRS that this election was never meant for investment clubs. Ira Smilovitz An 'Investing Partnership' is referred to under the Our club recently had to re-file a bunch of paperwork with Fidelity when our club president passed away. My general impression from working through this paperwork with Fidelity and hearing the experiences of others on this forum is that most advisors at the brokerages only have a limited understanding of investment clubs and partnerships. I've done some digging on my own and have found some information that distinguishes investment clubs from partnerships in general. I'm not sure how well Brokerages use or understand this information 1) I found the following statement in the Investment Club Operations Handbook published by Better Investing in 2004 (p. 54) - "In conjunction with the Securities Transfer Association, NAIC helped establish Rule 3.0610, which lets partnerships transfer securities using one authorized signature. Normally, there is no need for any supporting papers. If your brokerage firm asks for supporting papers for all partners' signatures for transactions, refer it to the above rule number." I found the above rule at the following link - https://cdn.ymaws.com/stai.org/resource/resmgr/guidelines/sta_guidelines_2023.11.07.pdf 2) IRS publication 550 (Investment Income and Expenses) has a section specific to Investment Clubs 3) The Better Investing website has the following article that distinguishes between Investment Partnerships and Business Partnerships Investment Partnerships Versus Business Partnerships The next topic is not so much a misconception as it is just Internal Revenue Service definition confusion. The issue is investment partnership versus business partnership. By IRS definitions, investment clubs are investment partnerships. Business partnerships offer goods and/or services to the public. Investment partnerships do not. Instead, investment partnerships invest only the capital of its partners in capital assets. The expenses of an investment club are not "business" expenses but "investment" expenses. One consequence is club members may not deduct the expenses of the club on their personal tax returns as business expenses. Before the 2017 tax law changes, investment expenses were miscellaneous deductions and subject to the 2% rule. That is, only the amount of the total miscellaneous deductions that is greater than 2% of adjusted gross income is deductible. Currently, investment expenses are not deductible at all. Another issue with investment partnerships is who has the right to run the partnership. If a club allows investors with no voting rights, that could be interpreted as providing investment services to the public. Such a club could run afoul of Securities and Exchange Commission regulations. This is the reason it is recommended that a club make it a mandatory requirement that all members participate in its management. There is a good side to being classified as an investment partnership that involves transferring stock as part of a full withdrawal. For a business partnership, securities are treated as cash. A partner receiving securities as part of a withdrawal from a business partnership would more likely incur a capital gain because the securities must be treated as cash. But for an investment partnership, securities are treated as property. This allows a withdrawing member to have part or their entire cost basis in the club transferred to property (securities) at withdrawal. Capital gains and tax liability can be delayed until the securities (property) are sold. This gives withdrawing partners more control over capital gain realization and tax liability resulting from a full withdrawal when they take payment in stock. In general, it appears that there are distinctions to be made but I'm not confident that these are clearly understood by brokers Len Delmolino Massachusetts High Flyers Investment Club Len, There is some interesting and useful information in your post. However, I have a few observations. Point 1 - I can't find Securities Transfer Act Rule 3.0610 anywhere other than the NAIC reference that mentions it. The STA Guidelines document you referenced only has Rule 3.06. Presumably, 3.0610 would be a subheading of 3.06, but I can't find it anywhere on the STA website. Point 3 - the document referenced - https://www.betterinvesting.org/getattachment/investment-clubs/how-to-start/form/legal-structure/businessformation.pdf is undated and out-of-date with regard to state filing requirements and forms. There could be additional out-of-date material in the article. Ira Smilovitz On Thu, Jan 9, 2025 at 9:38 AM Leonard J Delmolino via bivio.com <user*27879700001@bivio.com> wrote: Our club recently had to re-file a bunch of paperwork with |
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