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Effective March 30, 1995, St. Charles elected to terminate
its S corporation status and reverted to C corporation status.
Discussion
The parties have locked horns on the impact of sections
469(b) and 1371(b)(1). St. Charles contends that section 469
governs and that section 1371(b) has no application under the
circumstances herein. Respondent takes a diametrically opposed
position and contends that section 1371(b) controls and that
therefore section 469 is inapplicable.
Section 469(a) disallows the PAL for the taxable year to any
individual, estate or trust, any closely held C corporation, and
any personal service corporation. The term "passive activity
loss" generally means the amount by which the aggregate losses
from all passive activities for the taxable year exceed the
aggregate income from all passive activities for such year. Sec.
469(d)(1). However, a closely held C corporation, unlike the
other taxpayers to whom section 469 applies, also may use its PAL
for a taxable year to offset net active income for such year, and
the amount so used will not be disallowed under section 469(a).
Sec. 469(e)(2). The term "passive activity" includes any rental
activity, with exceptions not relevant herein. Sec. 469(c)(2).
Although section 469(a) disallows PAL's, section 469(b) provides:
"Except as otherwise provided in this section, any loss or credit
from an activity which is disallowed under subsection (a) shall
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