What happens when taxpayer acquires stock in a C corp, which a few years later converts to an S corp when additional S corp stock is acquired? I see in the posts that it is considered that interest resulting from S stock is not investment interest, but no cites to authority. Is it possible that the investment interest carried over suddenly becomes Not Investment stock? taxpayer only owns about 10% of the stock after acquisiitions. Taxpayer is activly and materially engaged in the business. Is the interest then partly Sch E, page 2 deducted, and partial investment interest? If the taxpayer was able to allocate all indebtness to the assets, can he do so with the investment interest income carryover too?