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Petitioner distinguishes himself from other partners because he
was the only partner/interest holder who received substantial
management fee income.5
In the notice of deficiency, respondent determined that
petitioner was not entitled to “recharacterize * * * [his] share
of the passive management expense of the Passthrough Entities as
nonpassive so as to match it against * * * [his] share of
nonpassive management income of * * * [SMC].” Respondent argues
that the payment of management fees by the real estate entities
cannot constitute a trade or business separate from the
associated income for purposes of section 469. We agree with
respondent.
In effect, petitioner’s reporting approach treated his
management income and the corresponding management fee deductions
as a “self-charged” item in the same manner as provided for by
sec. 1.469-7, Proposed Income Tax Regs., 56 Fed. Reg. 14036 (Apr.
5, 1991). The Court of Appeals for the Fourth Circuit, however,
did not approve the self-charged approach for petitioner’s
management fee income and expense. As an alternative to the
self-charged approach, petitioners argue that the real estate
entities’ management fee deductions, relative to SMC’s nonpassive
5 Petitioners do not dispute that the real estate entities
were engaged in rental (generally passive) activities or that
petitioner’s management income earned through SMC was nonpassive
in nature.
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