                        T.C. Memo. 1999-47



                      UNITED STATES TAX COURT



   MICHAEL A. CONVISER AND BARBARA L. CONVISER, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 17468-97.               Filed February 17, 1999.



     Robert A. Wherry, Jr., for petitioners.

     Robert A. Varra, for respondent.



                        MEMORANDUM OPINION


     COLVIN, Judge:   Respondent determined that petitioners are

liable for deficiencies in Federal income tax of $4,931 for 1993,

$16,739 for 1994, and $14,229 for 1995.

     After concessions, the sole issue for decision is whether

discharge of indebtedness income from an S corporation increases

petitioners' basis in that corporation.    We hold that it does
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not.    See Nelson v. Commissioner, 110 T.C. 114, 130 (1998), on

appeal (10th Cir., May 8, 1998).

       Section references are to the Internal Revenue Code.   Rule

references are to the Tax Court Rules of Practice and Procedure.

                               Background

       The parties submitted this case fully stipulated under Rule

122.

A.     Petitioners

       Petitioners lived in Aspen, Colorado, when they filed the

petition in this case.

B.     Mikama, Inc.

       Petitioners were shareholders in Mikama, Inc. (Mikama), from

1988 to 1995.      Mikama was an S corporation during the years in

issue.      Petitioners owned a one-third interest in Mikama during

the years at issue.

       1.     Dove Canyon

       From 1987 to 1995, Mikama was a general partner with a 10-

percent interest in a limited partnership known as Dove Canyon

Co. (Dove Canyon).      Dove Canyon was formed in 1987 to develop 874

acres of real property in Orange County, California.      After it

bought the land, Dove Canyon built the major improvements on the

property, including roads, a sewage system, a golf course, a

clubhouse, and a swim and tennis club, and sold parcels of the

development to builders to build homes on lots for sale to

individuals.      Dove Canyon sold the last parcel in 1993.
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     2.     Discharge of Indebtedness Income

     Dove Canyon made a profit from its activities in its first

years.    Later, a downturn in the California real estate market,

inflation, and increased interest costs resulted in significant

losses on the project.    In 1992 and 1993, banks forgave a

substantial amount of debt owed by Dove Canyon.    Thus, Dove

Canyon realized $20,345,080 in discharge of indebtedness income

in 1992 and $11,887,728 in 1993.    Cost overruns and a decline in

real estate values caused Dove Canyon's debts to exceed the value

of its assets.    The income from discharge of indebtedness was

included in Dove Canyon's taxable income since, in the case of

partnerships, the insolvency exception applies at the partner

level.    See sec. 108(a)(1)(B), (d)(6).

     Mikama's allocable share of discharge of indebtedness income

from Dove Canyon was $2,034,508 for 1992 and $1,188,773 for 1993.

In 1992, Mikama excluded $2,034,508 from gross income under

section 108(a)(1)(B).    In 1993, Mikama excluded $952,600 from

gross income because section 108(a)(3) limits the section

108(a)(1)(B) exclusion to the amount by which the taxpayer is

insolvent.

     Mikama's assets in 1992 and 1993 were its partnership

interest in Dove Canyon and a small amount of cash.    Mikama had

cash before the discharge of indebtedness of $1,900 in 1992 and

$1,100 in 1993.
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     3.     Petitioners' Share of the Discharge of Indebtedness
            Income

     Petitioners' pro rata share, as one-third shareholders in

Mikama, of Dove Canyon's discharge of indebtedness income was

$678,170 for 1992 and $396,257 for 1993.    Petitioners' allocable

share of the Mikama loss was $228,330 for 1993, $50,091 for 1994,

and $623 for 1995.

     4.     Petitioners' Basis in Mikama

     Petitioners increased their basis in Mikama by the amount of

their discharge of indebtedness income and claimed losses from

Mikama of $228,330 in 1993, $5,032 in 1994, and $623 in 1995.

Petitioners also carried over losses of $368,188 to 1994 and

$269,101 to 1995.    Petitioners' basis in Mikama, without taking

into account the discharge of indebtedness income, was $357 on

December 31, 1993, $537 on December 31, 1994, and $6 on December

31, 1995.

     The parties agree that, if petitioners may not increase

their basis in Mikama by their share of the Dove Canyon discharge

of indebtedness income, petitioners' deficiencies in income tax

are $4,204 for 1993, $16,571 for 1994, and $12,437 for 1995.      The

parties also agree that if petitioners prevail and as a result

may increase their basis in Mikama by the discharge of

indebtedness income, no deficiencies in income tax are due from

petitioners for 1993, 1994, and 1995.

                             Discussion

     In Nelson v. Commissioner, supra, we held that a shareholder

of an insolvent S corporation may not increase his or her basis
                                 -5-

to reflect discharge of indebtedness income to the S corporation.

The parties agree that Nelson controls here.     Accordingly,

petitioners may not increase their basis in Mikama by their share

of the Dove Canyon discharge of indebtedness income.

     To reflect the foregoing,


                                            Decision will be entered

                                       under Rule 155.
