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The effect of making an election to be an S corporation is
that, generally, an S corporation is not subject to income tax;2
instead, the shareholders are taxed on their respective shares of
the items constituting the S corporation's taxable income. Secs.
1363, 1366. Section 1371(b)(1) provides that "No carryforward,
and no carryback, arising for a taxable year for which a
corporation is a C corporation may be carried to a taxable year
for which such corporation is an S corporation."3 On the basis
of this provision, respondent disallowed the deduction of the
suspended PAL's.
Before proceeding to discuss the specific arguments of the
parties, we think it important to recognize the purposes which
underlay the enactment of sections 469 and 1371 and the overall
context applicable to those sections. Section 469 was enacted in
1986 by section 501(a) of the Tax Reform Act of 1986, Pub. L. 99-
514, 100 Stat. 2233, in response to legislative concern that
certain categories of taxpayers were engaging in activities which
generated losses and using those losses to shelter income from
other activities. See Schaefer v. Commissioner, 105 T.C. 227,
230 (1995). It is essentially a transactional provision, i.e.,
it deals with the tax treatment of particular activities. In
2 The exceptions are the taxes imposed on built-in gains
under sec. 1374 and on excess net passive income under sec. 1375.
3 See infra pp. 20-22 for a discussion of the impact of
other provisions of sec. 1371(b).
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