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?