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According to petitioner, these regulations make it clear
that deductions do not lose their character in determining a PAL
but are the items that are carried over under section 469(b)
whereas such deductions lose their character in the case of an
NOL. We think petitioner reads too much into the regulations and
in effect ignores the word "loss" in section 469(b). In this
connection, we note that, with respect to section 469, the
conference report on the Tax Reform Act of 1986 speaks of
"Deductions in excess of income (i.e. losses)" and states:
"Disallowed losses and credits are carried forward and treated as
deductions and credits from passive activities in the next
taxable year." (Emphasis added.) H. Conf. Rept. 99-841 (Vol.
II), 1986-3 C.B. (Vol. 4) at 137. In sum, we view section 469 as
denying the PAL deduction with the regulations merely supplying
the mechanics for allocating expenses among the taxpayer's
various activities in order to calculate the amount of expenses
to be deducted in computing the PAL from a particular activity.
Going beyond the "method of accounting" argument, petitioner
points to specific provisions of section 469 to support the
position that PAL's are not carryovers for purposes of section
1371(b)(1). Petitioner argues that, since PAL's are not personal
to the taxpayer but may follow the property as basis adjustments
in certain types of transfers, PAL's more closely resemble basis
(which does "carry over" from C corporation to S corporation)
than NOL's (which do not).
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