Intercompany & Network Transactions

NOT LEGAL OR TAX ADVICE. DRAFT — pending professional review. Circular 230 notice applies.

This memo covers the rules that govern transactions between related entities (e.g., among the four HSN entities) and between cohort members and HSN entities. These are the specific mechanics that let real money move through a "network" lawfully — not tax-free, but with predictable treatment, deductibility, and pass-through to the right parties.

1. The arm's-length principle — IRC § 482#

Statute. "In any case of two or more organizations, trades, or businesses... owned or controlled directly or indirectly by the same interests, the [IRS] may distribute, apportion, or allocate gross income, deductions, credits, or allowances..."

Arm's-length standard. Treas. Reg. § 1.482-1(b)(1): a controlled transaction meets arm's length if the results are consistent with what uncontrolled taxpayers would have realized in the same transaction under the same circumstances.

For HSN. The four entities (HigherSelf Network, A.M. Consulting, The 7 Space, HigherSelf Nonprofit) are commonly controlled. Transactions among them — services, license fees, rent, loans — must be priced as if they were strangers, or the IRS can reallocate.

Practical rule. Build pricing files for each intercompany arrangement: comparable third-party rates, methodology, contemporaneous documentation. This is also the cheapest insurance against a transfer-pricing adjustment.

2. Bona fide intercompany loans — IRC § 7872#

Why loans are useful. They move cash without creating taxable income. Repayment of principal is not income. Only interest is.

Bona fide indicia (the IRS / Tax Court look for all of these):

1. Promissory note in writing.
2. Stated interest at or above AFR (published monthly by IRS).
3. Realistic, fixed repayment schedule.
4. Payments actually made on schedule.
5. Adequate security or creditworthiness.
6. Default remedies a real lender would have.
7. Treatment on the books of both parties as a loan (asset / liability, not as compensation or distribution).

§ 7872 below-market loans. If interest is below AFR, IRS imputes the foregone interest as compensation (employer ↔ employee), gift (related individuals; § 7872(c)(2)), dividend / contribution (corporation ↔ shareholder), or loan + arrangement of services (other relationships).

What this is NOT: a standing "line of credit" between cohort members where money flows freely. The IRS will recharacterize.

3. Intercompany services — Treas. Reg. § 1.482-9#

Mechanic: Entity A provides services to Entity B; B pays A a fee. A reports income; B deducts under § 162.

Pricing methods (Treas. Reg. § 1.482-9):

• Services Cost Method (SCM) — for "covered services" with low margins. Cost basis only, no markup.
• Comparable Uncontrolled Services Price (CUSP) — based on third-party comparable.
• Gross Services Margin — based on comparable gross margin.
• Cost of Services Plus — cost plus arm's-length markup.
• Comparable Profits Method (CPM) — based on comparable third-party profits.
• Profit Split Method — for highly integrated services.

For HSN: A.M. Consulting providing strategy services to The 7 Space should have a written services agreement; charge a fee comparable to what an unrelated consulting firm would charge for the same scope; issue invoices, receive payment; each side recognizes income / expense.

What this is NOT: "We're all under the same brand, we don't really track services across entities." That's a § 482 reallocation waiting to happen.

4. Cohort-to-HSN and cohort-to-cohort transactions#

The legitimate model. A cohort member (e.g., the bakery in the worked example) provides catering to The 7 Space for an event. The 7 Space pays at market rate. The bakery reports income. The 7 Space deducts under § 162.

| Side | Treatment | |---|---| | Bakery | Ordinary income on Schedule C / 1120-S / 1120, subject to SE tax (sole prop) or owner W-2 wage + distribution (S-corp). | | The 7 Space | § 162 ordinary and necessary expense. | | 1099-NEC | Issued from The 7 Space to bakery if payment ≥ $600 in a year (for services from non-corp / non-S-corp; IRC § 6041). | | Sales tax | If applicable — bakery products may or may not be taxable depending on state. |

This is the architecture cohort members keep groping for. Real services rendered, real payments at market rate, real reporting. Both sides come out ahead because:

• The 7 Space deducts the catering cost (reduces taxable income at corp level or pass-through to owner).
• The bakery generates revenue that can fund (a) Solo 401(k) contributions, (b) accountable-plan reimbursements, (c) § 199A QBI deduction.
• Money circulates in the network — not as "tax-free transfers" but as legitimate trade. Tax efficiency comes from the structure each party uses to receive and deploy the money, not from the act of circulating.

5. Reasonable compensation for S-corp cohort members#

Recap from anti-abuse-doctrines (§ 8): S-corp shareholder-employees performing services must take a reasonable W-2 wage before any distributions. Watson v. United States, 668 F.3d 1008 (8th Cir. 2012). Benchmark with industry data (BLS OES, RCReports). Document the rationale. Distributions in excess of basis are capital gain (§ 1368(b)).

6. Constructive dividends#

Recap from anti-abuse-doctrines (§ 9): when a corp transfers value to a shareholder without proportional consideration, the transfer can be recharacterized as a § 301 distribution. Catches:

• Personal expenses run through the corp (cars, vacations, country club).
• Above-market compensation to shareholder-spouse.
• Below-market loans (§ 7872 catches these too).
• Below-market sales / above-market purchases between corp and shareholder.

7. The 501(c)(3) constraint — HigherSelf Nonprofit#

This is the most constrained of the four HSN entities and deserves special attention.

HigherSelf Nonprofit cannot:

• Pay any "disqualified person" (officer, director, substantial contributor, family of any of the foregoing) more than fair market value for services or goods. § 4958 excess benefit.
• Provide more than incidental private benefit to non-insiders. Private benefit doctrine.
• Engage in substantial unrelated business activity (UBIT under § 511–514) without paying corp tax on it.
• Lobby substantially or campaign at all.
• Allow its earnings to inure to private individuals.

HigherSelf Nonprofit can:

• Pay reasonable compensation to insiders for services actually rendered.
• Buy goods and services from cohort members or HSN entities at FMV.
• Provide grants or scholarships to individuals based on objective, charitable criteria.
• Conduct its charitable mission, including educational programming for the cohort, as long as it is open to the public and not designed to confer private benefit on a closed group.

Why this matters. Tempting framing: "Let's run cohort tuition through HigherSelf Nonprofit and make it a charitable contribution." That works only if the cohort program is open to the general public, the educational content meets the charitable-class test, and any consideration is treated under the quid pro quo rules (§ 6115). For a closed group of paying members getting individualized business consulting, it is not a charitable contribution — it is fee-for-service.

8. Designing the HSN intercompany matrix#

Framework for structuring transactions among the four HSN entities. Engage a CPA before implementing; actual amounts and methodologies require accounting judgment.

| Transaction | Suggested form | Pricing reference | Documentation | |---|---|---|---| | HSN → A.M. Consulting: shared back-office (HR, IT, accounting) | Management services agreement | Cost-plus 5–10% (low-risk routine services per § 482) | Annual SLA + invoices | | The 7 Space → A.M. Consulting: business advice | Consulting agreement | Hourly rate or fixed fee at third-party comparable | Engagement letter + monthly invoices | | HigherSelf Nonprofit → HSN entities: any service | Limited; nonprofit typically receives goods/services from for-profits, not the reverse | If reverse, FMV with § 4958 review | Written contract, board approval if material | | Any HSN entity ↔ cohort member: services | Services agreement at market rate | Industry-standard rate; document comparable | Signed agreement + invoices + 1099 | | HSN entity ↔ HSN entity: cash transfer | Either loan (with note + AFR + repayment) or capital contribution (with cap-table consequence) — never an undocumented transfer | AFR for loans | Promissory note OR resolution |

9. Network economics, lawful version#

The actual answer to "how do we make this network work tax-efficiently":

1. Each entity / cohort member adopts the right structure (LLC vs. S-corp vs. C-corp; Solo 401(k); accountable plan; HSA; § 280A(g) where applicable).
2. Transactions among them happen at market rates, properly documented, properly reported.
3. Income is recognized when earned but is taxed under the most favorable structure available to the recipient: Solo 401(k) defers it; § 199A reduces it 20%; accountable plan reimbursement excludes business expenses from W-2; § 280A(g) allows 14 days of tax-free home rental; HSA covers medical with triple advantage.
4. The "growth" comes from each participant compounding wealth inside their own tax-advantaged vehicles, not from the act of moving money.

This is what's actually happening when "rich people moving money" is referenced. It's not a parlor trick. It's disciplined, structured, expensive, and legal.

NOT LEGAL OR TAX ADVICE. Engage CPA + tax attorney for implementation. Circular 230 notice applies.