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amounts of the self-charged management fee deduction (the
deduction arising from the transaction between the partnerships
and SMC that gave rise to passive management fees expense and
nonpassive income) as a reduction from petitioners’ gross income
from activities characterized as nonpassive under section 469.
The notice of deficiency disallowed the characterization of
the management fee expense as nonpassive, referencing section
1.469-7, Proposed Income Tax Regs., 56 Fed. Reg. 14034 (Apr. 5,
1991), which provides only that lending transactions (i.e., any
transaction involving loans between persons or entities) may be
treated as self-charged. No regulations were issued concerning
self-charged situations other than lending transactions.
Discussion
Respondent advances the unique position that the failure
(intentional or unintentional) to issue a regulation providing
for petitioners’ claimed tax treatment is sufficient to support
respondent’s disallowance. Ironically, respondent does not argue
that petitioners’ claimed treatment was incorrect, inappropriate,
or otherwise unjustified. More particularly, respondent contends
that Congress gave the Secretary the power and/or discretion to
issue legislative regulations, and, absent the issuance, there is
no entitlement to the tax treatment sought by petitioners.
In section 469(l), Congress mandated that the Secretary
issue such regulations as may be necessary or appropriate to
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