St. Charles Investment Co., Burton C. Boothby, Tax Matters Person - Page 17

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          passive activity income6 to use all or any of the suspended PAL's           
          in that year.  In such case, the unused suspended PAL's are again           
          disallowed and will be similarly treated as a deduction in the              
          next (third) year, and so on.  See H. Conf. Rept. 99-841 (Vol.              
          II), supra, 1986-3 C.B. (Vol. 4) at 137; S. Rept. 99-313, supra,            
          1986-3 C.B. (Vol. 3) at 722 (where it is specified that suspended           
          PAL's are "carried forward indefinitely").                                  
               Petitioner further points out that it is only using the                
          suspended PAL's allocated to the properties which were sold, and            
          not those allocated to other activities that St. Charles                    
          conducted.  Petitioner goes on to argue that the losses at issue            
          stem entirely from the operation of section 469(g)(1)(A), see               
          supra p. 5, not from section 469(a) and (b); that is, they                  
          consist solely of excess PAL's that "shall be treated as a loss             
          which is not from a passive activity."  This, petitioner argues,            
          is another reason why the losses which respondent disallowed are            
          not carryovers and therefore section 1371(b) is inapplicable.               
               The application of section 469(g)(1)(A), however, turns on             
          the meaning of the parenthetical phrase "determined after the               
          application of subsection (b)" which appears twice therein, once            
          with respect to the disposed activity and then with respect to              
          all other passive activities.  There is no way to determine the             
          amount of excess PAL's to be treated as nonpassive losses without           

               6  For the closely held C corporation, this would include              
          active income as well.  Sec. 469(e)(2).                                     

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