Fareportal: Management Fees Alleged to Be Disguised Dividends

In the Fareportal tax settlement, Fareportal agreed to pay $4.5 million to resolve the New York Attorney General’s allegations that management fees concealed taxable dividends. If you worked on fee calculations, year-end accounts or tax returns, the case turns on a familiar decision: how a payment to an owner became a business expense.

This page follows Fareportal’s calculations, adviser warnings and deductions within the broader management-fee and disguised-dividend pattern. The neighboring Harbert Management tax case concerns allegations that Harbert allocated income from New York investment work to Alabama. Here, the dispute concerned what the payments represented.

What Did Fareportal’s Tax Settlement Allege?

The New York Attorney General alleged that Fareportal, WK Travel, Jen NY and Tripmama, online travel companies, deducted distributions of their owner’s profits as management expenses. Its May 22, 2026 announcement described approximately $145 million in fees paid to Magic Travel from 2007 through 2012. The alleged New York corporate tax shortfall was more than $1 million.

The settlement agreement describes a single shareholder controlling the travel companies and owning 99% of Magic Travel. According to the Attorney General’s account, Magic Travel held that shareholder’s personal investments and had no employees. The fees purported to compensate the shareholder for services to the travel businesses, even though, as the Attorney General noted, he already worked as Fareportal’s CEO.

As the agreement explains, reasonable compensation for services can be deducted, while dividends paid to shareholders cannot. The federal deductions reduced the corporate income reported to New York, carrying the disputed expense into the state tax bill.

How Did the Management Fees Reduce Taxable Income?

The Attorney General’s account traces the management-fee arrangement to an outside accounting firm’s proposal in 2007. The firm proposed lowering Fareportal’s tax obligations through corporate deductions while increasing Magic Travel’s tax liabilities.

The later management service agreements gave the fees an operating formula. According to the settlement agreement, the contracts provided generally for a $50,000 monthly charge plus fees based on tickets booked through the companies’ websites. Management would decide how bookings were measured, and the accounting firm later described the contractual fees as having been calculated backward from payments already made earlier that year.

For someone in travel operations, that booking measure connects the service contract to the business generating the revenue. A person familiar with the bookings and invoices may know whether the charge followed ticket activity or a separate year-end calculation. The Attorney General’s account describes additional invoices beyond the contract’s formula.

In November 2010, according to the agreement, the accounting firm asked the companies’ outside accountant to estimate year-end profits and retained earnings, advise the shareholder and determine how much Magic Travel should bill. The companies then paid an additional $2.98 million above the contractual fees. We see the calculation running backward: first the profit to remove, then the service fee.

The agreement describes the same tax objective in 2011. The accounting firm advised dividing payments between management fees and dividends with the aim of bringing taxable income down to a nominal amount. After a December meeting with the outside accountant and CFO, it prepared a spreadsheet calculating the management fees needed to reduce corporate tax liability.

What Warnings Came Before the Deductions?

The Attorney General alleged that the companies kept deducting the fees despite internal descriptions of profit distributions and outside warnings about their tax treatment. The agreement quotes Fareportal’s CFO responding to a prospective employee’s question about profit sharing in 2008:

According to the agreement, a private equity firm considering a majority investment commissioned accounting due diligence. In March 2011, its accounting adviser warned that common control of the travel companies and Magic Travel could cause tax authorities to reclassify the fees as dividends. The travel companies received that warning, and their own advisers also identified potential tax exposure. Nevertheless, the Attorney General alleged, the companies deducted the full previous year’s fees on returns filed that September.

According to the agreement, an accounting firm compared the approximately $41.4 million paid to Magic Travel in 2011 with executive compensation and comparable businesses’ operating profits. In August 2013, it advised that appropriate fees for that year were between $1.41 million and $3.54 million.

Another accounting firm’s audit comment letter called the treatment of management fees as operating expenses, instead of distributions to owners, a material weakness. The Attorney General alleged that the companies nevertheless deducted the full management fees paid in 2012 on their returns filed in September 2013. For an insider who saw those reviews, the later return shows management’s response. The expense kept its place.

Why the IRS Audit Matters

According to the State’s account in the settlement agreement, an IRS audit accepted Fareportal’s management-fee deductions for 2010 and 2011. The auditor requested and received information about the expenses and concluded that they were deductible business expenses.

The State’s account describes the IRS auditor’s internal summary as referring to payments for services rendered by independent contractors. The agreement identifies the person doing that work in Magic Travel’s name: the travel companies’ own shareholder.

What Did the Fareportal Settlement Provide?

The agreement allocated $3,465,000 to New York. The Attorney General’s announcement described the whistleblower’s reward as approximately $1 million.

The investigation began after a whistleblower brought a qui tam case under the New York False Claims Act. A whistleblower case under the False Claims Act can pay 15% to 30% of what the government recovers. We work through state tax whistleblower options with insiders who know why a company chose that expense treatment.

What Can a Management-Fee Insider Show?

Fareportal’s management-fee and dividends case shows what a tax whistleblower can add: the decisions behind the deduction. The business records described in the agreement connect the service formula, the invoices, the year-end profit estimates and the returns. Ownership records and accounting advice supply the explanation for who benefited and what the companies had been told.

The 2014 Villanova Law Review article Not Just Whistling Dixie: The Case for Tax Whistleblowers in the States argues that inside information can help state tax agencies close gaps in what they know about a taxpayer’s transactions. In this case, the spreadsheet and CFO’s message illustrate the kind of information behind an expense entry.

Bring Us the Reason Behind the Fee

If you know why a management fee changed when year-end profits came into view, speak to one of our Whistleblower Experts about the fee and the deduction. We build your strongest tax whistleblower case around that inside knowledge, bring in tax fraud whistleblower lawyers who understand state corporate-tax claims, and stand beside you throughout the case.