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This post addresses Closet Inc. and passive activity losses.

Scenario:

Let's say for example, Closet, Inc. was a closely held C corporation involved in the real estate rental business in 2010. The company had $3.5 million in passive activity losses. In 2011, Closet, Inc. elected to be taxed as an S corporation, and the company sold a number of rental properties.

Can Closet, Inc. claim the suspended passive activity losses (PALs) as deductions under §469(g)(1)(A)? Also, if the PAL deductions are not allowed, may Closet readjust its cost basis in the sold property upward?

Solution Preview

The second part of the question is irrelevant because the company can claim the suspended PAL as deductions under §469(g)(1)(A). The court has already ruled on previous cases that when a company changes from a closely held C corp. to an S corp. that the PAL is allowed. The main problem when addressing this issue is that the ...

Solution Summary

This solution provides the correct answer, references, and explanation to the following scenario:

Let's say for example, Closet, Inc. was a closely held C corporation involved in the real estate rental business in 2010. The company had $3.5 million in passive activity losses. In 2011, Closet, Inc. elected to be taxed as an S corporation, and the company sold a number of rental properties.

Can Closet, Inc. claim the suspended passive activity losses (PALs) as deductions under §469(g)(1)(A)? Also, if the PAL deductions are not allowed, may Closet readjust its cost basis in the sold property upward?

$2.19