100 STAT. 2236
PUBLIC LAW 99-514—OCT. 22, 1986 "(C) any such deduction or credit remaining after the application of subparagraphs (A) and (B) shall continue to be treated as arising from a passive activity.
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"(2) CHANGE IN STATUS OF CLOSELY HELD CORPORATION OR
PERSONAL SERVICE CORPORATION.—If a taxpayer ceases for any taxable year to be a closely held C corporation or personal service corporation, this section shall continue to apply to losses and credits to which this section applied for any preceding taxable year in the same manner as if such taxpayer continued to be a closely held C corporation or personal service corporation, whichever is applicable. "(3) FORMER PASSIVE ACTIVITY.—The term 'former passive activity' means any activity which, with respect to the taxpayer— "(A) is not a passive activity for the taxable year, but "(B) was a passive activity for any prior taxable year. "(g) DISPOSITIONS OF ENTIRE INTEREST IN PASSIVE ACTIVITY.—If
during the taxable year a taxpayer disposes of his entire interest in any passive activity (or former passive activity), the following rules shall apply: "(1) FULLY TAXABLE TRANSACTION.—
"(A) IN GENERAL.—If all gain or loss realized on such disposition is recognized, any loss from such activity which •' has not previously been allowed as a deduction (and in the case of a passive activity for the taxable year, any loss ^ tt > realized on such disposition) shall not be treated as a passive activity loss and shall be allowable as a deduction "'^- ' against income in the following order: "(i) Income or gain from the passive activity for the taxable year (including any gain recognized on the '•'f-' disposition). >^?:" "(ii) Net income or gain for the taxable year from all passive activities. • "(iii) Any other income or gain. "(B) SUBPARAGRAPH (A) NOT TO APPLY TO DISPOSITION INVOLVING RELATED PARTY.—If the taxpayer and the person
acquiring the interest bear a relationship to each other described in section 267(b) or section 707(b)(l), then subpara'-'"" graph (A) shall not apply to any loss of the taxpayer until the taxable year in which such interest is acquired (in a transaction described in subparagraph (A)) by another •iyfji person who does not bear such a relationship to the taxpayer. "(C) COORDINATION WITH SECTION 1211.—In the ceise of ~ any loss realized on the disposition of an interest in a passive activity, section 1211 shall be applied before subparagraph (A) is applied. "(2) DISPOSITION BY DEATH.—If an interest in the activity is
transferred by reason of the death of the taxpayer— "(A) paragraph (1) shall apply to such losses to the extent such losses are greater than the excess (if any) of— i "(i) the basis of such property in the hands of the transferee, over "(ii) the adjusted basis of such property immediately before the death of the taxpayer, and
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