St. Charles Investment Co., Burton C. Boothby, Tax Matters Person - Page 1

                                   110 T.C. No. 6                                     

                               UNITED STATES TAX COURT                                

                   ST. CHARLES INVESTMENT CO., BURTON C. BOOTHBY,                     
                          TAX MATTERS PERSON, Petitioner v.                           
                    COMMISSIONER OF INTERNAL REVENUE, Respondent                      

               Docket No. 5793-96.                  Filed February 5, 1998.           

                    Prior to Jan. 1, 1991, X was a closely held C                     
               corporation, which incurred passive activity losses                    
               (PAL's) giving rise to suspended PAL's pursuant to sec.                
               469, I.R.C.  A portion of the suspended PAL's was                      
               attributable to depreciation.  X reduced the bases of                  
               the properties used in the passive activities by the                   
               amounts of such depreciation.  X elected S corporation                 
               status as of Jan. 1, 1991.  During 1991, it disposed of                
               several of the passive activities and calculated the                   
               gain (loss) from those dispositions using the bases of                 
               the properties involved as reduced by the depreciation.                
               X used suspended PAL's allocable to the sold activities                
               which had arisen prior to 1991, in calculating its                     
               taxable income for 1991.  Held, sec. 1371(b)(1),                       
               I.R.C., precludes X from using its suspended PAL's in                  
               1991, an S corporation year.  Held, further, X may not                 
               recompute the bases of the sold properties to include                  
               amounts representing the portions of the suspended                     
               PAL's attributable to depreciation.                                    

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