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of section 469, unrelated. SMC provides services for the real
estate entities and receives income in exchange. The real estate
entities’ correlative expense or deductions are not costs
incurred by SMC in the performance of the management services.
Finally, petitioner’s ownership in the real estate entities is
not exclusive, and it was not exclusive in all years for SMC.
Unfortunately, petitioners have been snared by the reach of
section 469 in, what appears to be, most inequitable
circumstances. As we discussed in our prior opinion, section 469
was designed to limit the use of losses generated by passive
activities to offset unrelated income generated by nonpassive
activities. Although section 469 was designed to stop these
practices, Congress recognized that it would be inappropriate to
treat certain transactions between related taxpayers as giving
rise to passive expense and nonpassive income.
The Secretary was charged with issuing regulations to
implement section 469. Commentary contained in the legislative
history suggests that self-charged items should be provided for
in the regulations. In 1991, regulations were proposed that
provided for self-charged interest. Although more than 15 years
have passed since the enactment of section 469 and 10 years have
passed since the self-charged regulation for interest was
proposed, no action has been taken to relieve inequity that may
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