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Accordingly, to be successful here, petitioner would have to
show that the management fee income received and some portion of
the management fee deductions claimed by the real estate
passthrough entities were both passive or nonpassive.
Petitioners reported that the deductions (proportionate in amount
to their ownership in the passthrough entities) were nonpassive
and deductible from the management fee income. In order to
sustain that reporting position, petitioners must show that part
of the real estate pass-through entities’ deductions (expenses)
were incurred in a separate trade or business rather than from
the real estate activity, which is defined as passive by statute.
With that backdrop, we consider petitioners’ alternative
position that the real estate entities reported two separate
activities in connection with the payment of the management fees.
Petitioners describe the circumstances, as follows:
In this case, the Real Estate Entities separately, and
consistently, reported two K-1 line items: (1)Hillman’s
share of the management fee expense as “ordinary loss
from trade or business”, to the extent that he received
a distributive share of management fee income from SMC,
and (2) a line item from rental real estate income or
loss (which included the management fee expense in
excess of Hillman’s distributive share).
4(...continued)
Tax Regs., was issued in 1991 to provide, in certain situations,
for the offset of passive interest deductions against nonpassive
interest income. The offset avoided an inequity where a taxpayer
incurred nonpassive income and passive loss from the same
transaction (self-charged) in the same year.
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