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income and expenses as “self-charged” items under sec.
469, I.R.C., and sec. 1.469-7, Proposed Income Tax
Regs., 56 Fed. Reg. 14036 (Apr. 5, 1991).
Held: The management fee expense is passive and
may not be deducted from petitioner’s passthrough
management fee income which is nonpassive within the
meaning of sec. 469, I.R.C.
Stefan F. Tucker, for petitioners.
Wilton A. Baker, for respondent.
SUPPLEMENTAL OPINION
GERBER, Judge: In an earlier Opinion filed by the Court in
this case we decided that petitioners were entitled to treat
management fees as offsetting self-charged items for purposes of
section 469.1 The Court of Appeals for the Fourth Circuit
disagreed and reversed our holding. Hillman v. Commissioner, 263
F.3d 338 (4th Cir. 2001), revg. 114 T.C. 103 (2000).2
1 All section references are to the Internal Revenue Code in
effect for the years in issue, unless otherwise indicated.
2 Petitioner had a self-charged item with the same
attributes, in terms of economic substance, as provided for in
sec. 1.469-7, Proposed Income Tax Regs., 56 Fed. Reg. 14036 (Apr.
5, 1991), with the difference being that it involved self-charged
management fees instead of interest. This Court held that the
same treatment should be afforded petitioner. In the reversal of
our holding, the Court of Appeals for the Fourth Circuit decided
that sec. 469(a) prohibited petitioner from a deduction or offset
until and unless it is specifically permitted by law (e.g., by
the issuance of an enabling regulation). Hillman v.
Commissioner, 250 F.3d 228 (4th Cir. 2001), revg. 114 T.C. 103
(2000). The Court of Appeals, however, was sympathetic to
petitioner’s plight, finding the situation to be an inequity, but
(continued...)
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