St. Charles Investment Co., Burton C. Boothby, Tax Matters Person - Page 19

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          closely held, it does so as an example of the situation that                
          arises "when a corporation * * * subject to the passive loss rule           
          ceases to be subject to the passive loss rule because it ceases             
          to meet the definition of an entity subject to the rule."  S.               
          Rept. 99-313, supra, 1986-3 C.B. (Vol. 3) at 728.  Under these              
          circumstances and given the broad statutory language, we think              
          that section 469(f)(2) applies to St. Charles, which ceased to be           
          a closely held C corporation by virtue of its subchapter S                  
               Section 469(f) ensures that once a taxpayer has suspended              
          PAL's, the taxpayer's use of the suspended PAL's continues to be            
          subject to section 469.  Thus, section 469(f)(1) provides that,             
          where the activity is no longer passive with respect to the                 
          taxpayer, the unused PAL's are to be used to offset income from             
          that activity, and any remaining PAL's shall be treated as                  
          arising from a passive activity.  Section 469(f)(2) provides that           
          PAL's shall continue to be treated as such where the taxpayer is            
          no longer a closely held C corporation (and otherwise would not             
          be subject to section 469).  Thus, the passive nature of St.                
          Charles' PAL's is preserved.                                                
               Petitioner argues that section 469(f)(2) requires St.                  
          Charles to use the suspended PAL's and that, if it is not                   
          permitted to use them against the gains from the disposition of             
          the disposed passive activities, it will be denied the use of the           
          PAL's forever.  Petitioner seeks to buttress this position by               

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