St. Charles Investment Co., Burton C. Boothby, Tax Matters Person - Page 14

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               According to petitioner, these regulations make it clear               
          that deductions do not lose their character in determining a PAL            
          but are the items that are carried over under section 469(b)                
          whereas such deductions lose their character in the case of an              
          NOL.  We think petitioner reads too much into the regulations and           
          in effect ignores the word "loss" in section 469(b).  In this               
          connection, we note that, with respect to section 469, the                  
          conference report on the Tax Reform Act of 1986 speaks of                   
          "Deductions in excess of income (i.e. losses)" and states:                  
          "Disallowed losses and credits are carried forward and treated as           
          deductions and credits from passive activities in the next                  
          taxable year."  (Emphasis added.)   H. Conf. Rept. 99-841 (Vol.             
          II), 1986-3 C.B. (Vol. 4) at 137.  In sum, we view section 469 as           
          denying the PAL deduction with the regulations merely supplying             
          the mechanics for allocating expenses among the taxpayer's                  
          various activities in order to calculate the amount of expenses             
          to be deducted in computing the PAL from a particular activity.             
               Going beyond the "method of accounting" argument, petitioner           
          points to specific provisions of section 469 to support the                 
          position that PAL's are not carryovers for purposes of section              
          1371(b)(1).  Petitioner argues that, since PAL's are not personal           
          to the taxpayer but may follow the property as basis adjustments            
          in certain types of transfers, PAL's more closely resemble basis            
          (which does "carry over" from C corporation to S corporation)               
          than NOL's (which do not).                                                  

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