Magazine article The CPA Journal

Tenth Circuit Court of Appeals Supports Pals

Magazine article The CPA Journal

Tenth Circuit Court of Appeals Supports Pals

Article excerpt

A LANDMARK DECISION THAT WILL CREATE REFUND and planning opportunities for taxpayers.

In St. Charles Investment Co. v. Comm'r (10th Circuit, No. 99-2020, 11/14/2000), the U.S. 10th Circuit Court of Appeals overturned a lower court in a landmark decision that will create refund and planning opportunities for taxpayers.

The court reversed a decision involving the collision of IRC section 1371, which effectively prohibits losses incurred by C corporations that later convert to S status, and IRC section 469, which suspends the utilization of passive losses until they are either netted against passive income or allowable in the year of disposition of the passive activity.


Before 1991, St. Charles Investment Co. was a closely held C corporation engaged in a rental real estate business that constituted a passive activity within the meaning of IRC section 469(c). Since IRC section 469(b) provides for the carryforward of suspended losses generated from years in which expenses exceed income, St. Charles did so with the intention of utilizing them either when income was generated or when a complete disposition was triggered, whichever came first.

Effective January 1991, St. Charles elected S status. During the year, the corporation sold several rental properties with suspended passive activity losses (PAIs). On its 1991 income tax return, St. Charles idea titled the suspended PAIs and deducted them in full under IRC section 469(g)(IXA). It also deducted the appropriate suspend ed alternative minimum tax passive activi ty losses. The IRS issued a determination disallowing all losses incurred during the corporation's C period, citing IRC section 1371(b)(1). The Tax Court agreed with the IRS, but the 10th Circuit decided that IRC section 469(b) takes precedence over IRC section 1371(bXl). The language and reasoning of the decision acknowledged that the issue before them "in so far as we can determine, has not been addressed in any other circuit. …

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