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Accounting". Petitioner argues that the PAL rules, like other
methods of accounting, such as basis and depreciation, are to be
continued after a C corporation becomes an S corporation. As the
subject of an accounting method, petitioner argues, PAL's are not
carryovers within the meaning of section 1371(b)(1).
"The term 'method of accounting' includes not only the over-
all method of accounting of the taxpayer but also the accounting
treatment of any item." Sec. 1.446-1(a)(1), Income Tax Regs. A
material item, for purposes of a method of accounting, is any
item which involves the proper time for the inclusion of the item
in income or the taking of a deduction. Sec. 1.446-1(e)(2)(ii),
Income Tax Regs. The legislative history of section 469
expresses concern over the mismatching of deductions and income
from passive activities which leads to the sheltering of other
income. S. Rept. 99-313, supra, 1986-3 C.B. (Vol. 3) at 716-717.
An accounting method addresses the timing of the deduction
of an item, it does not provide for any deduction per se. Sec.
1.446-1(a)(1), Income Tax Regs., states: "These methods of
accounting for special items include the accounting treatment
prescribed for research and experimental expenditures, soil and
water conservation expenditures, depreciation, net operating
losses, etc." Section 1371(b)(1) clearly precludes the carryover
of net operating losses (NOL's). Rosenberg v. Commissioner,
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