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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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