- 21 -
The clear import of section 1371 is that a change in the
taxing regime applicable to a taxpayer as it moves from being an
S corporation to a C corporation or vice versa should not be an
occasion for permitting prior losses of one taxpayer from inuring
to the benefit of another taxpayer. Thus, the losses of a C
corporation should not inure to the benefit of its shareholders,
thereby giving them an opportunity to utilize a deduction which
would not otherwise have been available to them. Sec.
1371(b)(1).8 Similarly, losses of an S corporation, which pass
through, i.e., inure to the benefit of, its shareholders should
not be taken away from them for tax purposes in order to offset
income of their corporation which has forgone its S status. Sec.
1371(b)(2). To round out the picture, section 1371(b)(3) makes
it clear that the losses remain available for future use although
the clock will continue to tick for the purpose of computing the
period of availability. Consequently, the application of section
1371(b)(1) to preclude St. Charles from using its PAL's during
the year before does not extend to destroying their availability.
See Amorient, Inc. v. Commissioner, 103 T.C. 161, 167 (1994). In
this connection, we think it significant that, unlike NOL's,
PAL's may be carried over indefinitely. See S. Rept. 99-313,
8 We note that St. Charles is not seeking to use its
suspended PAL's against gains from the disposition of passive
activities. Rather, it seeks to utilize the disposition of those
activities at a substantial loss as the occasion for converting
the suspended PAL's into losses "not from a passive activity"
under sec. 469(g)(1)(A), thereby creating a significant tax
benefit to pass through to its shareholders.
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