St. Charles Investment Co., Burton C. Boothby, Tax Matters Person - Page 25

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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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