Charles, Inc. was a closely held C corporation engaged in the real estate rental
ID: 2382137 • Letter: C
Question
Charles, Inc. was a closely held C corporation engaged in the real estate rental business in 2011. The company had $6 million in passive activy losses. In 2012, Charles elected to be taxed as an S corporation, and the company sold a number of rental properties. May these suspended passive activity losses (PAL) be claimed as deductions under section 469(g)(1)(A)?
Recall that an S corporation cannot use carryforwards from a year in which it was a C corporation. If the PAL deductions are disallowed, may Charles readjust its cost basis in the sold property upward? Summarize your findings in a memo to the tax research file of your firm. Be sure to cite your sources.
Explanation / Answer
Section 469(g)(1)(A) generally provides that if during the taxable year a taxpayer disposes of his entire interest in any passive activity (or former passive activity), and all gain or loss realized on such disposition is recognized, the excess of (i) any loss from such activity for such taxable year (determined after the application of