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We are reinforced in our reasoning by the legislative
history of section 469, which states: "The determination of
whether a loss is suspended under the passive loss rule is made
after the application of the at-risk rules and the interest
deduction limitation, as well as other provisions relating to the
measurement of taxable income." S. Rept. 99-313, supra, 1986-3
C.B. (Vol. 3) at 723. The "basis is reduced as under present
law, even in the case where deductions are suspended under the
passive loss rule." Id. at 723 n.9.
In sum, the description of the deductions as being
"disallowed" has no independent substantive significance but
relates only to the manner of their treatment in the calculation
of the PAL.
Nor are we persuaded by petitioner's argument that the
restoration of depreciation is required by the "proper
adjustment" of basis language in section 1016. Whatever the
impact of that language might be in the context of a disallowance
of a deduction for depreciation which has a permanent effect, it
has no bearing herein. Our conclusion that the PAL's cannot be
utilized in 1991 but remain available to potential future use
supplies a critical difference from the situation that existed in
Perkins v. Thomas, 86 F.2d 954 (5th Cir. 1936), affd. on another
issue 301 U.S. 655 (1937), relied upon by petitioner. The fact
that the deduction for depreciation resulted in no tax benefit to
St. Charles in 1991 is beside the point. The PAL's, which were
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