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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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Last modified: May 25, 2011