St. Charles Investment Co., Burton C. Boothby, Tax Matters Person - Page 21

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               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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