St. Charles Investment Co., Burton C. Boothby, Tax Matters Person - Page 23

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          allowed to recompute the bases of the disposed properties to                
          restore amounts for the portion of the suspended PAL's                      
          attributable to depreciation (and then recalculate the gain or              
          loss realized from the dispositions).  According to petitioner,             
          the reductions in basis for depreciation should not have been               
          taken because the depreciation deductions were neither "allowed"            
          nor "allowable".  Respondent's position is that the depreciation            
          deductions were allowable; it was the PAL's that were disallowed.           
               To a substantial degree, petitioner's alternative argument             
          is premised upon the assumption that we would hold that the                 
          suspended PAL's are lost as a result of the subchapter S                    
          election, an assumption which has proved to be erroneous.                   
          However, petitioner's arguments suggest that they should also               
          apply even if the suspended PAL's are held to remain available              
          for future use.  Consequently, we shall discuss petitioner's                
          alternative position.                                                       
               Taxpayers are required to reduce the basis of property for             
          depreciation by the greater of (1) the amount allowed as                    
          deductions in computing taxable income and resulting in a                   
          reduction for any taxable year of the taxpayer's taxes or (2) the           
          amount allowable as deductions in computing taxable income                  
          whether or not the amount properly allowable would have caused a            
          reduction for any taxable year of the taxpayer's taxes.  Sec.               
          1016(a)(2); sec. 1.1016-3(a)(1)(i) and (b), Income Tax Regs.                
          "'Allowable deduction' generally refers to a deduction which                

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