David H. and Suzanne Hillman - Page 1

                                   114 T.C. No. 6                                     

                               UNITED STATES TAX COURT                                

                    DAVID H. AND SUZANNE HILLMAN, Petitioners v.                      
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                      

               Docket No. 19893-97.          Filed February 29, 2000.                 

                    P’s S corporation (S) performed management                        
               services for real estate partnerships in which P had                   
               direct and indirect interests.  P received passthrough                 
               nonpassive income from S and passthrough passive                       
               deductions from the partnerships.  Sec. 469(l)(2),                     
               I.R.C., required R to promulgate regulations “which                    
               provide that certain items of gross income will not be                 
               taken into account in determining income or loss from                  
               any activity (and the treatment of expenses allocable                  
               to such income)”.  Pursuant to sec. 469(l), I.R.C., R                  
               issued proposed regulations permitting the offsetting                  
               of “self-charged” interest incurred in lending                         
               transactions.  Under the regulations, a taxpayer who                   
               was both the payer and recipient of the interest was                   
               allowed, to some extent, to offset passive interest                    
               deductions against nonpassive interest income.  R,                     
               however, did not issue any regulation for self-charged                 
               items other than interest.  See sec. 1.469-7, Proposed                 
               Income Tax Regs., 56 Fed. Reg. 14034 (Apr. 5, 1991).                   

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