- 5 -
on the Schedules K-1 of upper tier passthrough entities for the
1993 and 1994 taxable years.
In computing their 1993 and 1994 taxable income, petitioners
treated the proportionate ownership share of the passthrough
entities’ management fee deduction as a reduction from
petitioners’ gross income from activities characterized as
nonpassive under section 469.
In the notice of deficiency, respondent disallowed the
characterization of the management fee expense as nonpassive,
referencing section 1.469-7, Proposed Income Tax Regs., 56 Fed.
Reg. 14036 (Apr. 5, 1991), which provides that lending
transactions (i.e., any transaction involving loans between
persons or entities) may be treated as self-charged.
Discussion
Enacted by Congress as part of the Tax Reform Act of 1986,
Pub. L. 99-514, 100 Stat. 2085, the passive activity loss rules
were designed to limit a taxpayer’s ability to use deductions
from one activity to offset income from another activity. In
particular, under the section 469 passive activity loss rules,
income generated from nonpassive activities cannot be offset by
deductions generated from passive activities.4
4 Nonpassive losses may be carried to future years and
applied against future passive income. Congress mandated in
section 469(l) that the Secretary issue regulations to implement
section 469. Under that mandate, sec. 1.469-7, Proposed Income
(continued...)
Page: Previous 1 2 3 4 5 6 7 8 9 10 11 12 Next
Last modified: May 25, 2011