St. Charles Investment Co., Burton C. Boothby, Tax Matters Person - Page 4

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               Effective March 30, 1995, St. Charles elected to terminate             
          its S corporation status and reverted to C corporation status.              
               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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