David H. and Suzanne Hillman - Page 4




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               During 1993 and 1994, petitioner did not participate in the            
          passthrough entities’ activities, but he did actively participate           
          in SMC by performing management services that SMC had contracted            
          to perform for the passthrough entities.  Petitioner treated his            
          involvement with SMC’s real estate management activity as a                 
          separate activity from any other activities carried on by SMC.              
          During 1993 and 1994 petitioner materially participated in SMC’s            
          real estate management activity in excess of 500 hours.  During             
          those same years, SMC also conducted other operations in addition           
          to real estate management services, such as recreational                    
          services, medical insurance plan underwriting, credit/collection            
          services, and a maintenance training academy.  Petitioner did not           
          materially participate in any of these other operations of SMC.             
               Petitioner reported his SMC salary as income, and SMC                  
          deducted those amounts as an expense for compensation paid to               
          petitioner for services related to the conduct of the real estate           
          management activity for the 1993 and 1994 taxable years.  SMC               
          separately reported management fee income (after deduction of               
          expenses, including petitioner’s salary from SMC) on petitioners’           
          1993 and 1994 Schedules K-1.  The portion of the management fee             
          paid by the passthrough entities to SMC (and allocable to                   
          petitioner’s ownership percentage in each passthrough entity) was           
          deducted as a loss from a trade or business on either                       
          petitioner’s Schedules K-1 for the 1993 and 1994 taxable years or           






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