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expense of the partnerships for the services provided by SMC.
The essence of these transactions is that petitioner, through
entities in which he held an interest, earned and paid the same
management fees; i.e., moved management fees from his “passive
pocket” to his “nonpassive pocket”. Under those circumstances,
the partnerships’ management fee deductions should be offset8
against the management fee payments (income) received by SMC.
There was no net accretion of wealth with respect to the
management services provided from SMC to the partnerships. Under
respondent’s determination, petitioners would be required to
recognize income even though respondent does not dispute that, in
effect, petitioner has simply paid a management services fee to
himself. Respondent has identified no difference between the
circumstances in this case and those set forth in the proposed
regulation and the legislative history permitting an offset where
a taxpayer’s self-charged transaction involves interest (a
lending transaction).
Respondent’s position denying the offset to petitioners is
not only contrary to the legislative history and intent of
Congress, but it does not appear to be based on any established
tax policy or any reason other than the failure to promulgate a
regulation. Again, we note that respondent has not articulated
8 Any offset must, of course, be limited to petitioners’
ownership percentages.
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