St. Charles Investment Co., Burton C. Boothby, Tax Matters Person - Page 11

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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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