                        T.C. Memo. 1996-35



                      UNITED STATES TAX COURT



            DAKOTAH HILLS OFFICES LIMITED PARTNERSHIP,
                 AN ARIZONA LIMITED PARTNERSHIP,
                WILLIAM M. AND DIANNE B. STEPHENS,
           TAX MATTERS PARTNERS, ET AL.,1 Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent

         Docket Nos. 18955-93,   18956-93,Filed January 30, 1996.
                     18962-93,   18963-93,
                     18965-93,   18990-93,
                     18992-93,   18993-93,
                     19067-93.

     1
      Cases of the following petitioners are consolidated
herewith: Pavilion II Limited Partnership, An Arizona Limited
Partnership, William M. and Dianne B. Stephens, Tax Matters
Partners, docket No. 18956-93; Copper Crest I Limited Partner-
ship, an Arizona Limited Partnership, William M. and Dianne B.
Stephens, Tax Matters Partners, docket No. 18962-93; Dakotah
Hills Retail Limited Partnership, an Arizona Limited Partnership,
William M. and Dianne B. Stephens, Tax Matters Partners, docket
No. 18963-93; Club Carmel Limited Partnership, an Arizona
Limited Partnership, William M. and Dianne B. Stephens, Tax
Matters Partners, docket No. 18965-93; Pio Decimo II Limited
Partnership, An Arizona Limited Partnership, William M. and
Dianne B. Stephens, Tax Matters Partners, docket No. 18990-93;
Ina Thornydale Limited Partnership, an Arizona Limited Partner-
ship, William M. and Dianne B. Stephens, Tax Matters Partners,
docket No. 18992-93; Ironwood Manufacturing Ltd., An Arizona
Limited Partnership, William M. and Dianne B. Stephens, Tax
Matters Partners, docket No. 18993-93; and Vail Commerce Center
Limited Partnership, an Arizona Limited Partnership, William M.
and Dianne B. Stephens, Tax Matters Partners, docket No. 19067-
93.
                                 - 2 -



     George Tomas Rhodus, for petitioners.

     James E. Archie, for respondent.



                       MEMORANDUM OPINION

     WHALEN, Judge:     These nine consolidated cases are

before the Court to decide Petitioners' Motion for Summary

Judgment filed pursuant to Rule 121, Tax Court Rules of

Practice and Procedure.        All Rule references are to the Tax

Court Rules of Practice and Procedure.

     Each of the subject cases is a partnership action,

as defined by Rule 240(b)(2), that involves a limited

partnership.   Respondent issued a notice of final

partnership administrative adjustment (FPAA) to each

partnership stating that an adjustment to the partnership's

income would be made due to an "IRC Section 752(b)

Distribution".    Unless stated otherwise, all section

references are to the Internal Revenue Code, as amended and

in effect during 1989.     The adjustment determined by

respondent in each case is as follows:


                 Partnership                       Adjustment

     Dakotah Hills Offices Ltd. Partnership         $385,519
     Pavilion II Ltd. Partnership                    432,084
     Copper Crest I Ltd. Partnership                 181,371
     Dakotah Hills Retail Ltd. Partnership           972,812
     Club Carmel Ltd. Partnership                    234,902
     Pio Decimo II Ltd. Partnership                2,685,926
     Ina Thornydale Ltd. Partnership                 480,813
                               - 3 -
     Ironwood Manufacturing Ltd. Partnership         918,765
     Vail Commerce Center Ltd. Partnership           417,156


     Petitioners' motion asserts that none of the above

adjustments involves a "partnership item" as that phrase is

defined by section 6231.      Therefore, petitioners' motion

asks the Court to dismiss all of the subject cases on the

ground that the Court does not have jurisdiction to

readjust nonpartnership items in these proceedings

commenced under the unified partnership litigation

procedures set forth in sections 6221 through 6233,

inclusive.


                            Background

     According to Petitioners' Motion for Summary Judgment,

the operative facts in each of the nine consolidated cases

are similar, and are set forth in the pleadings and the

revenue agent's reports attached to petitioners' motion.

After argument was heard on petitioners' motion, the

parties submitted a Stipulation of Facts, together with

various documents attached as exhibits.        We have taken the

facts set forth in this opinion from the pleadings,

Petitioners' Motion for Summary Judgment, and the

Stipulation of Facts and attached exhibits filed by the

parties.
                             - 4 -

     For purposes of our consideration of Petitioners’

Motion for Summary Judgment, the parties have not presented

to the Court all of the documents that are pertinent to

each of the nine cases.    They have attached as exhibits to

the stipulation several categories of documents that relate

to each petitioner.    These include the partnership agree-

ment for each partnership, the U.S. Partnership Return of

Income filed on Form 1065 by each partnership for taxable

year ending December 31, 1989, and the FPAA issued by

respondent to each partnership.      They have also attached as

exhibits to the stipulation certain other documents that

relate to one of the partnerships, Dakotah Hills Offices

Limited Partnership, in the case of docket No. 18955-93

(Dakotah Hills).   As we read the Stipulation of Facts, the

parties intend the Dakotah Hills documents as exemplars of

the documents executed with respect to all of the cases.

In the following discussion, we have focused on the facts

in the Dakotah Hills case, and references to the partner-

ship are references to Dakotah Hills.

     Dakotah Hills was formed by a group of four general

partners, Mr. David Randall Jenkins, Ms. Renee Jenkins,

Mr. Timothy Lee Shaftel, and the JNC Companies, an

Arizona corporation.    It was established on or about

October 25, 1984, pursuant to the Uniform Limited

Partnership Act of the State of Arizona, when the Agreement
                             - 5 -

and Certificate of Limited Partnership of Dakotah Hills was

filed with the Arizona Secretary of State (partnership

agreement).   It was established to acquire a parcel of

property from another partnership with the same general

partners, Sierra Sunrise Limited Partnership, and to

complete the construction of an office building on the

property for the purpose of leasing the office building to

one of its general partners, the JNC Companies.   The

property consisted of approximately 1.113 acres of land

located in the metropolitan Tucson, Arizona, area.   As part

of the transaction, the seller agreed to assign to Dakotah

Hills a lease of the office building to the JNC Companies

for a term of 7 years with an option to renew for 3 years.

A stated objective of the limited partnership was to hold

the real property until the expiration of the lease and

then to sell it at a gain.

     In addition to the capital contributed by the four

general partners, in the aggregate amount of $1,000,

Dakotah Hills was capitalized by the sale of 35 units of

limited partnership interest for $26,000 per unit.   The

purchaser of each limited partnership unit paid $5,200 in

cash and issued a promissory note for the balance of the

principal amount of $20,800.   The promissory note was

payable to the partnership, without interest, in four

annual installments of $5,200 each commencing on October 1,
                            - 6 -

1985.   In this opinion, we refer to these promissory notes

as investor notes or as capital contribution notes.

     As security for the payment of the investor notes,

each investor was required to execute a security agreement

which gave the partnership a security interest in his or

her partnership interest.   The partnership’s security

interest in each unit of limited partnership interest was

recorded by the filing of a Uniform Commercial Code

financing statement that was also executed by the investor.

     The sale of units of limited partnership interest

in Dakotah Hills was preceded by the circulation of a

confidential private offering memorandum dated August 17,

1984 (private offering memorandum).   The private offering

memorandum states that the partnership intended to use the

investor notes as collateral for a loan, the proceeds of

which would be used to acquire partnership property.

The private offering memorandum describes the intended use

of the investors’ notes, in part, as follows:


     Leveraging. Immediately after the formation
     of the partnership, the partnership intends
     to obtain a loan from a bank, savings and loan
     association and/or other institutional lender
     in order to obtain the necessary funds with
     which to purchase the partnership property.
     The General Partners, based upon their past
     financing experiences, believe that they will
     be in a position to use the partnership property
     and the promissory notes, to be executed by all
     the Limited Partners, as collateral for a loan.
     Also in accordance with their prior financing
                             - 7 -

     experiences, the General Partners expect that
     the lender will require the partnership to obtain
     a financial guarantee bond from an insurance
     company acceptable to the lender. The insurance
     company will then, as surety, obligate itself to
     pay the lender should any of the Limited Partners
     default in making payments under the provisions
     of their respective promissory notes.

               *    *    *      *    *   *   *

     Institutional Financing. Immediately after the
     formation of the partnership, the partnership
     intends to use the partnership property and the
     promissory notes given by the Limited Partners as
     part of their capital contribution as security
     for a loan. Since the loan proceeds are
     necessary in order to obtain the partnership
     property, a simultaneous closing of the
     institutional loan and the acquisition of the
     partnership property will probably have to be
     arranged. The partnership expects to borrow
     Five Hundred Thirteen Thousand and No/100
     Dollars ($513,000) and expects to pay three (3)
     percentage points in order to obtain the loan.
     In addition, the partnership objects [expects]
     the institutional lender to require the issuance
     of a financial guarantee bond prior to the
     issuance of the loan. Certain expenses are
     projected in obtaining the financial guarantee
     bond. Based upon the General Partners’ prior
     experience in obtaining financial guarantee
     bonds, the partnership expects to pay two (2)
     percentage points per year for the financial
     guarantee bonds and plans to incur some
     significant legal expenses in obtaining the
     bond commitment. As set forth in the “Use of
     Proceeds” section, Forty-Two Thousand and No/100
     Dollars ($42,000.00) has been budgeted for this
     expense.


The Dakotah Hills partnership agreement also describes the

partnership’s intent on this point as follows:


     Use of Promissory Notes. Immediately upon the
     formation of the partnership, the partnership
                           - 8 -

     intends to assign all of the promissory notes
     issued by Limited Partners to purchase units of
     limited partnership interests to a bank and/or
     savings and loan association in order to raise
     operating capital for the limited partnership.
     The intent is to borrow as much as possible by
     using the promissory notes as collateral. If
     the partnership is successful in assigning the
     promissory notes and security agreements to a
     bank and/or savings and loan association, as it
     intends to do, the bank and/or savings and loan
     association will then be the holder of the
     promissory note and security agreement and the
     limited partners may be obligated to make all
     payments of interest and principal due on the
     promissory notes to the bank and/or savings and
     loan association despite certain claims that the
     limited partner may have or may want to assert
     against the General Partners and/or the partner-
     ship.


     As contemplated by the above, shortly after Dakotah

Hills was formed, it borrowed $520,000 from Northern

Telecom International Finance B.V. (Northern Telecom) and

issued its promissory note to Northern Telecom in the

principal amount of $520,000 payable in four installments

as follows:


          Due Date                 Amount

          12/1/85             $190,233.33
          12/1/86              182,000.00
          12/1/87              182,000.00
          12/1/88              182,689.00

              Total            736,922.33


As collateral for the loan, Dakotah Hills negotiated,

pledged, and assigned all of the investor notes, in the
                            - 9 -

aggregate principal amount of $728,000, to Northern

Telecom.

     Dakotah Hills’ promissory note to Northern Telecom

required it to notify each investor of the assignment of

his or her investor note and to direct each investor to

make payments to a non-interest bearing account maintained

by Northern Telecom.   In satisfaction of that requirement,

every investor who purchased a unit of limited partnership

interest in Dakotah Hills executed a letter to Northern

Telecom that made reference to Dakotah Hills’ promissory

note to Northern Telecom in the principal amount of

$520,000, to the investor note issued to Dakotah Hills

(referred to in the letter as “Borrower’s Note”), and to

“the Surety Bond securing the Borrower’s obligations under

the Borrower’s note issued by Admiral Insurance Company”.

In the letter, the investor agreed to make all payments

under the investor note directly to Northern Telecom.    The

letter also states as follows:   “THE BORROWER’S NOTE IS A

NEGOTIABLE INSTRUMENT AND WILL BE ENDORSED TO NTIF [i.e.,

Northern Telecom] AS PARTIAL SECURITY FOR PAYMENT BY THE

PARTNERSHIP OF THE PARTNERSHIP NOTE.”

     Each investor note contains the following statement:


          THIS NOTE IS A NEGOTIABLE INSTRUMENT AND,
     EITHER ALONE OR IN CONJUNCTION WITH OTHER NOTES
     PAYABLE TO THE PAYEE, WILL BE PLEDGED BY THE
     PAYEE TO SECURE LOANS. THE CONSENT OF THE
                           - 10 -

     UNDERSIGNED IS HEREBY GRANTED TO THE PAYEE AND
     ITS ASSIGNEE OR PLEDGEE FOR ANY ASSIGNMENT OR
     PLEDGE.


     All of the investor notes were endorsed by Dakotah

Hills “PAY TO THE ORDER OF NORTHERN TELECOM INTERNATIONAL

FINANCE B.V.” and were delivered to Northern Telecom along

with an assignment to Northern Telecom of the partnership’s

interest in the security agreements that had been executed

by the limited partners.

     As contemplated by the private offering memorandum and

the letter issued by each limited partner to Northern

Telecom, Dakotah Hills purchased a financial guaranty bond

from Admiral Insurance Co. (Admiral).   The guaranty bond

provided that in the event any limited partner defaulted on

his or her obligations under the investor note, Admiral

agreed to pay to Northern Telecom the amount due under the

investor note.   Under the terms of the financial guaranty

bond, after Northern Telecom received payment of the

principal amount payable under a defaulted investor note,

it was required to deliver the investor note and the

investor’s security agreement to Admiral.

     Dakotah Hills also entered into a partnership

indemnity agreement with Admiral under which Dakotah Hills

agreed to indemnify Admiral against any loss on the

financial guaranty bond.   The partnership’s obligation
                           - 11 -

under the indemnity agreement was secured by a deed of

trust and assignment of rents with respect to the real

property owned by the partnership.

     At some point, some or all of the limited partners of

Dakotah Hills ceased to pay their investor notes, and they

refused Northern Telecom’s demand for payment.   According-

ly, Northern Telecom demanded payment from Admiral pursuant

to the terms of the financial guaranty bond, and Admiral

paid the outstanding balance of the defaulted investor

notes.   Admiral then sued the individual limited partners

who had defaulted for collection of their investor notes,

and the investors countersued Admiral, alleging that they

had been fraudulently induced to enter into the partnership

and that Admiral was a party to the fraud.

     In 1987, Dakotah Hills filed for protection under

chapter 11 of the U.S. bankruptcy laws.   On or about

June 20, 1989, Admiral filed its First Amended Proof of

Claim in Dakotah Hills’ bankruptcy.   Admiral’s claim states

as follows:


          Through rights of subrogation and through
     direct liability pursuant to that certain
     Indemnity Agreement from Debtor attached hereto,
     the Debtor is indebted or liable to this Claimant
     in the sum of $367,142.68 (the “Specific Claim”),
     plus accrued and accruing interest, costs and
     attorneys’ fees. This sum includes approximate
     legal and professional fees and expenses as of
     March 31, 1989, and principal, interest and
     salvage payments of $372,233.32. The liability
                             - 12 -

     of Debtor may be reduced further by any future
     payments received by Claimant from limited
     partners of Debtor.


     Dakotah Hills was only one of approximately 42

partnerships and corporations related to the JNC Companies

and Mr. David Randall Jenkins that filed for protection

under the bankruptcy laws.    All of the cases were jointly

administered by the Bankruptcy Court, and a single trustee

in bankruptcy was appointed.    Admiral was the largest

creditor of the JNC estates and filed claims totaling

approximately $79 million.

     On or about November 10, 1989, Admiral and three law

firms representing investors in various JNC partnerships

executed a Settlement Agreement under which Admiral and any

investors who joined the agreement could settle their legal

claims against one another.    The preamble of the agreement

refers to an attached list of law suits “pending in the

United States District Court for the District of Arizona

and/or the Arizona Superior Court in which Admiral has

asserted claims against Investors and Investors have

asserted claims against Admiral.”     It appears that some of

the limited partners of Dakotah Hills were parties to a

suit against Admiral, but the record does not disclose

whether all of the limited partners of Dakotah Hills were

parties to such a lawsuit.    The same is true of the limited
                             - 13 -

partners in the other partnerships.   The preamble of the

Settlement Agreement also refers to a list of proceedings

“pending in the United States Bankruptcy Court for the

District of Arizona.”   It appears that the list of bank-

ruptcy proceedings includes proceedings filed on behalf

of seven of the nine partnerships involved in the

consolidated cases herein.

     Under the Settlement Agreement, an investor is given

until December 31, 1989, to elect one of two options.    The

first option provides as follows:


          Commencing on the later of (i) January 1,
     1990, or (ii) the effective date of any enacted
     statutory provisions amending the Internal
     Revenue Code to provide for preferential
     treatment with respect to the gain arising from
     the sale or exchange of a capital asset, the
     Investors’ shall abandon their interests in the
     JNC Partnerships by conveying them to the
     Trustee, and thereafter, the Investors’
     promissory notes that are the subject of claims
     by Admiral against the Investors or are other-
     wise held by Admiral shall be returned to the
     Investors. The return of the Investors’
     promissory notes is intended as a purchase price
     reduction within the meaning of I.R.C. Section
     108(e)(5). * * *


The second option provides as follows:


          Immediately after the conclusion of the
     bankruptcy proceedings, the Investors shall
     convey their interests in the JNC Partnerships
     to the Trustee; and all promissory notes executed
     by the Investors that are the subject of claims
     by Admiral against the Investors or are other-
     wise held by Admiral shall be returned to the
                          - 14 -

     Investors. The return of the Investors’
     promissory notes is intended as a purchase price
     reduction within the meaning of I.R.C. Section
     108(e)(5).


Under the Settlement Agreement, therefore, an investor

could “abandon” his or her interest or interests in the

partnership “by conveying them to the Trustee”, or the

investor could elect to “convey” his or her interest or

interests in the partnership to the trustee.   In either

event, the investor’s promissory note would be returned.

Under the Settlement Agreement, the investor also assigned

any claims he or she had against third parties to Admiral

and agreed to a division of any moneys distributed from a

court fund.

     An integral part of the Settlement Agreement was the

undertaking by Admiral and the investors who joined the

agreement to obtain the approval of the trustee and the

Bankruptcy Court to another agreement between and among

the trustee and the investors.   Under that agreement, the

trustee would agree to accept any limited partnership

interests that were abandoned pursuant to the terms of the

Settlement Agreement, and the parties agreed to mutually

release all claims they might have against each other.

The agreement also provides as follows:


          10. Investors agree to seek a “test case”
     determination letter or a private letter ruling
                     - 15 -

from the Internal Revenue Service regarding the
tax consequences of the abandonment of certain
interests in one of the Partnerships by one of
the Investors (the “abandonment issue”).
Investors shall be responsible for submitting
the request for a determination letter or private
letter ruling and shall bear the cost of filing
that request. Trustee agrees to cooperate with
Investors and their attorneys in connection with
the filing of the request, and Investors agree to
keep Trustee apprised as to the status of the
request.

     11. Trustee and Investors agree that
Trustee shall file federal and state income tax
returns for the partnerships consistent with any
determination letter or private letter ruling
issued by the Internal Revenue Service regardless
of whether that determination letter or ruling
concludes that the abandonment of the Partnership
interests by certain of the Investors gives rise
to capital gain to the abandoning partners
(Investors).

     12. Except as provided in paragraph 12
hereof, with respect to the filing of a motion
under 11 U.S.C. § 505(b), Trustee and Investors
agree that Trustee shall have no responsibility,
including no financial responsibility, with
respect to a Partnership audit proceeding which
deals with the abandonment issue, including any
administrative or judicial appeals of an adverse
“final partnership administrative adjustment”
dealing with the abandonment issue. Trustee
also shall have no responsibility for appealing
or contesting any Internal Revenue Service
determination letter or ruling dealing with the
abandonment issue which is adverse to the
Investors.

     13. Trustee and Investors agree that in the
event that the Internal Revenue Service declines
to issue a determination letter or ruling on the
abandonment issue or Investors’ attorneys with-
draw the request after mutual agreement with the
Trustee, then Trustee shall prepare and file the
partnerships’ federal and state income tax
returns recognizing that the abandonments result
in the withdrawal of the abandoning partners from
                            - 16 -

     the partnerships for federal income tax purposes,
     provided that a reasonable basis exists for that
     return position.

          In the event that the Internal Revenue
     Service declines to issue a determination letter
     or ruling on the abandonment issue or Investors’
     attorneys withdraw the request after mutual
     agreement with the Trustee, the Trustee may file
     a motion pursuant to 11 U.S.C. § 505 (b) for a
     prompt audit of the partnerships’ tax returns.


Ultimately, the trustee entered into the agreement with the

investors, and the agreement was approved by the Bankruptcy

Court.   The record does not disclose what action, if any,

was taken to seek a ruling from the Internal Revenue

Service as contemplated in the passages of the agreement,

quoted above, or what action, if any, was taken by the

Internal Revenue Service.

     The Form 1065, U.S. Partnership Return of Income,

filed on behalf of Dakotah Hills for calendar year 1989

includes balance sheets as of the beginning and end of the

year on Schedule L.   Line 5 of Schedule L includes the

following “Other current assets”:


                                 Beginning     Ending

   Notes receivable--investors   $192,400     $192,400


Line 12 of Schedule L includes the following “Other

assets”:

                                 Beginning     Ending
                          - 17 -

   Notes receivable--investors   $182,000      $182,000


     According to Dakotah Hills’ 1989 return, the following

persons held an interest in the partnership:
                                           - 18 -
                                                  Joined      Sec. 752                   Beginning   Ending
               Partner                Interest   Settlement   Adjustment   Liabilities   Capital     Capital


Bankruptcy Estate of D. R. Jenkins     0.0500%                                $8,363       ($337)    ($397)
Bankruptcy Estate of Renee Jenkins     0.0500%                                 8,363        (337)     (397)
Bankruptcy Estate of Tim Shaftel       0.0500%                                 8,363        (336)     (396)
The JNC Companies                      0.8502%                               142,210      (5,727)    (6,751)
Stanford Bienias                       2.8290%     2.8290%      $16,700       10,699       4,100       696
Stephen K. and Lindy Brigham           2.8290%     2.8290%       16,700       10,699       4,100       696
Courtney Investment Co.                2.8290%                                10,699       4,100       696
Vito and Christine Del Deo             2.8290%     2.8290%       16,700       10,699       4,100       696
Philip De Marie                        5.6580%                                21,398       8,201     1,391
Bert and Ann Ferganchick               8.4850%     8.4850%       50,083       32,089      12,317     2,105
Eugene W. and Leta Marie Friesen       2.8290%                                10,699       4,100       696
Bankruptcy Estate of D. R. Jenkins     1.4145%                                 5,349       2,049       347
The JNC Companies                      9.8992%                                37,437      14,079     2,164
Gary Johnson                           2.8290%     2.8290%       16,700       10,699       4,100       696
Woodrow J. Johnson                     2.8290%     2.8290%       16,700       10,699       4,100       696
Scott W. Langlee                       1.4142%     1.4142%       38,682        5,348       2,918     1,216
Antonio and Yolanda Leon               2.8290%                                10,699       4,101       697
Henry L. Leyva                         2.8290%                                10,699       4,100       696
Belverd E. Needles                     2.8290%     2.8290%       16,700       10,699       4,100       696
Hartley E. Newkirk                     0.0000%                                 5,336       2,076       -0-
Peter D. Beren                         0.0000%                                 5,336       2,076       -0-
R. Luther and Roberta Rae Olson        2.8290%                                10,699       4,100       696
Donald T. and Karen R. Pierce          2.8290%                                10,699       4,100       696
Carroll A. and Marilyn Rinehart        5.6570%     5.6570%       33,393       21,394       8,207     1,399
Bankruptcy Estate of Tim Shaftel       2.8290%                                10,699       4,100       696
William M. and Diane Stephens          5.6570%     5.6570%       33,393       21,394       8,207     1,399
George S. and Beverly M. Wilson        2.8290%     2.8290%       16,700       10,699       4,100       696
John S. Woodbridge II                  2.8290%                                10,699       4,100       696
Harry Orville Woody                    2.8290%                                10,699       4,100       696
Douglas J. Bol                         1.4142%     1.4142%       39,837        5,348       1,763        61
Andrew W. Richardson                   1.4142%     1.4142%       39,838        5,348       1,762        60
Stephen J. Moddelmog                   2.8290%                                10,699       4,101       697
Victor Montgomery                      5.6570%     5.6570%       33,393       21,394       8,207     1,399
Bankruptcy Estate of Renee Jenkins     1.4145%                                 5,349       2,050       348
Admiral Insurance Company              2.8220%                                10,699         -0-       759
                                     ________    ________       _______      _______     _______     ______
                                     100.0000%    49.5016%      385,519      552,401     136,877     16,541




      The FPAA issued to Dakotah Hills states that

respondent determined an adjustment to the partnership’s

1989 return in the amount of $385,519.                              It describes the

nature of that adjustment as follows:


      IRC Section 752(b) Distribution
                            - 19 -

         It has been determined that the discharge
    of liability on the partners’ capital contribu-
    tion notes in 1989 resulted in a partnership
    distribution pursuant to Internal Revenue Code
    Section 752(b).


    A more detailed description of respondent’s determi-

nation is set forth in the Form 4605-A, Examination

Changes--Partnerships, Fiduciaries, S Corporations, and

Interest Charge Domestic International Sales Corporations,

dated January 26, 1993, that was prepared by the revenue

agent who audited Dakotah Hills and the other limited

partnerships.    In this opinion, we refer to this form as

the RAR.

    According to the RAR, each of the 14 limited partners

of Dakotah Hills who joined the Settlement Agreement was

relieved of the obligation of paying his or her “capital

contribution note” and, in effect, was relieved of

liability for a portion of the partnership’s nonrecourse

debt.   According to the RAR, this decrease in each

partner’s share of partnership liabilities is a

constructive distribution of money, pursuant to section

752(b).    The RAR describes the effect of the constructive

distribution to the investors, as follows:


         After considering the discharge of their
    capital contribution notes, Investors had no
    out of pocket capital contribution and no further
    obligation to make any future capital
    contribution. Therefore, after following the
                                       - 20 -

      annual basis adjustments for partnership
      distributive items, pursuant to IRC Sect. 705.,
      the net effect of the investor note discharge, to
      each limited partner, is in general, a recapture
      under IRC 731(a)(1) of the net balance of all
      previously distributed tax losses and capital
      distributions. The constructive distribution
      pursuant to IRC 752(b) results in a negative (IRC
      733) basis adjustment to partners, which brings
      basis back to zero (but not below zero) prior to
      12/31/89.


The RAR includes the following schedule to show how the

adjustment in the amount of $385,519 was computed:



         Dakotah Hills Office Limited Partnership Schedule of Basis Computation


                                                                         Sec.      Adj. Basis
                                 Initial       Loss                    733 Basis     After
                                  Basis    Distribution   Difference   Reduction   Reduction

Langlee, Scott W.                $41,600     $38,682        $2,918       $2,918       --
Needles, Belverd E.               20,800      16,700         4,100        4,100       --
Wilson, George S. & Beverly M.    20,800      16,700         4,100        4,100       --
Brigham, Stephen K & Lindy        20,800      16,700         4,100        4,100       --
Del Deo, Vito & Christine         20,800      16,700         4,100        4,100       --
Bienias, Stauford                 20,800      16,700         4,100        4,100       --
Rinehart, Carroll A & Marilyn J. 41,600       33,393         8,207        8,207       --
Richardson, Andrew W.             41,600      39,838         1,762        1,762       --
Bol, Douglas J.                   41,600      39,837         1,763        1,763       --
Ferganchick, Bert & Ann           62,400      50,083        12,317       12,317       --
Johnson, Gary                     20,800      16,700         4,100        4,100       --
Stephens, William M. & Dianne B. 41,600       33,393         8,207        8,207       --
Montgomery, Victor                41,600      33,393         8,207        8,207       --
Johnson, Woodrow J.               20,800      16,700         4,100        4,100       --

                                 457,600     385,519

                                    Discussion

       All of the adjustments at issue in these consolidated

cases are based upon the fact that the limited partners who

joined the Settlement Agreement with Admiral obtained the

cancellation of their investor notes.                      Respondent

determined that each of those partners thereby realized a

decrease in his or her share of partnership liabilities.
                            - 21 -

Respondent treated the amount of that decrease as a

distribution of money to the settling partner by the

partnership, pursuant to section 752(b).

     Petitioners' Motion for Summary Judgment asks the

Court to dismiss the subject consolidated cases on the

ground that the adjustments do not involve "partnership

items" as defined by section 6231(a)(3).   Petitioners take

the position that the Settlement Agreement between Admiral

and 14 limited partners took place entirely outside of the

partnership, such that the determination of any item

relating to that transaction could not be a partnership

item within the meaning of section 6231(a)(3) and the

regulations promulgated thereunder.

          In order to decide a motion for summary judgment,

we must find that the pleadings, answers to

interrogatories, depositions, admissions, and any other

acceptable materials, together with the affidavits, if any,

show that there is no genuine issue as to any material fact

and that a decision may be rendered as a matter of law.

Rule 121(b).   The moving party bears the burden of proving

that there is no genuine issue of fact and that the moving

party is entitled to judgment on the substantive issues of

the case as a matter of law.   E.g., O’Neal v. Commissioner,

102 T.C. 666, 674 (1994).   In considering a motion for

summary judgment, we view factual inferences in the light
                          - 22 -

most favorable to the party opposing the motion.     Blanton

v. Commissioner, 94 T.C. 491, 494 (1990).

     At the outset, we note that petitioners do not take

the position that an adjustment involving a constructive

distribution of money pursuant to section 752(b), based

upon a decrease in a partner’s share of partnership

liabilities, can never, as a matter of law, be a

partnership item within the meaning of section 6231(a)(3).

Rather, petitioners argue that the adjustments determined

in these cases, as described in the RAR, cannot be

partnership items.

     In order to analyze petitioners’ argument, it is

necessary to review the definition of a partnership item.

Section 6231(a)(3) defines a "partnership item" as follows:


     The term "partnership item" means, with respect
     to a partnership, any item required to be taken
     into account for the partnership's taxable year
     under any provision of subtitle A to the extent
     regulations prescribed by the Secretary provide
     that, for purposes of this subtitle, such item is
     more appropriately determined at the partnership
     level than at the partner level.


     The regulations promulgated under section 6231(a)(3)

make clear that the determination of a partner’s share of

partnership liabilities is a partnership item.     Section

301.6231(a)(3)-1(a), Proced. & Admin. Regs., provides as

follows:
                              - 23 -


     the following items which are required to be
     taken into account for the taxable year of a
     partnership under subtitle A of the Code are more
     appropriately determined at the partnership level
     than at the partner level and, therefore, are
     partnership items:

          (1) The partnership aggregate and each
     partner's share of the following:

                  *   *   *    *   *   *   *

                (v) Partnership liabilities
           (including determinations with respect
           to the amount of the liabilities,
           whether the liabilities are nonrecourse,
           and changes from the preceding taxable
           year) * * *



     The regulations promulgated under section 6231(a)(3)

also make clear that items related to certain transactions,

including contributions to the partnership, distributions

from the partnership, and transactions to which section

707(a) applies, are partnership items, at least in certain

cases.   Section 301.6231(a)(3)-1(a)(4), Proced. & Admin.

Regs., provides as follows:


          (4) Items relating to the following trans-
     actions, to the extent that a determination of
     such items can be made from determinations that
     the partnership is required to make with respect
     to an amount, the character of an amount, or the
     percentage interest of a partner in the partner-
     ship, for purposes of the partnership books and
     records or for purposes of furnishing information
     to a partner:


           (i)   Contributions to the partnership;
                            - 24 -

            (ii) Distributions from the partnership;
     and

          (iii) Transactions to which section 707(a)
     applies (including the application of section
     707(b)).


     The regulations do not spell out all of the possible

items that can be related to such transactions.      Rather,

as quoted above, the regulations state that any such

related items are partnership items, to the extent that a

determination of such items can be made from determinations

that the partnership is required to make for purposes of

the partnership books and records or for purposes of

furnishing information to a partner.      Sec. 301.6231(a)(3)-

1(a)(4), Proced. & Admin. Regs.      In the case of a

distribution from the partnership, the regulations state

that, for purposes of a partnership’s books and records or

for purposes of furnishing information to a partner, the

partnership needs to determine the character of the amount

transferred to a partner, the amount of money distributed

to a partner, the adjusted basis to the partnership of the

distributed property, and the character of the partnership

property.   Sec. 301.6231(a)(3)-1(c)(3)(i), (ii), and (iii),

Proced. & Admin. Regs.

     As explained above, an item is a partnership item to

the extent that a determination of the item can be made

from these and similar determinations that the partnership
                           - 25 -

is required to make.   However, the regulations provide that

if other information is required to determine the item,

then it is not a partnership item.   These rules are set

forth in section 301.6231(a)(3)-1(c)(3), Proced. & Admin.

Regs., which provides as follows:


     To the extent that a determination of an item
     relating to a distribution can be made from these
     and similar determinations that the partnership
     is required to make, therefore, that item is a
     partnership item. To the extent that that
     determination requires other information,
     however, that item is not a partnership item.
     Such other information would include those
     factors used in determining the partner's basis
     for the partnership interest that are not them-
     selves partnership items, such as the amount
     that the partner paid to acquire the partnership
     interest from a transferor partner if that
     transfer was not covered by an election under
     section 754.


     This brings us back to petitioners’ argument in these

cases.   Petitioners seize upon the statement in the above

regulation that an item is not a partnership item to the

     extent that a determination of the item requires

informa-tion other than the information necessary to make

a required determination, and they argue as follows:


     under the facts and circumstances of these cases,
     the §752(b) adjustment--if any such adjustment is
     proper at all--must be made at the level of the
     individual partner because “the determination
     requires other information”, i.e., facts not in
     the possession or control of the partnership.
     REGS. §301.6231(a)(iii)-1(c)(3), supra. [Sic.]
                           - 26 -

     The focus of petitioners’ legal analysis is on section

301.6231(a)(3)-1(a)(4), Proced. & Admin. Regs., and the

illustration of those rules contained in section 301.6231

(a)(3)-1(c)(3), Proced. & Admin. Regs.   Petitioners assert

that under those provisions, an item relating to a distri-

bution from the partnership is defined as a nonpartnership

item to the extent that a determination of that item

requires “other information”.   Sec. 301.6231(a)(3)-1(c)(3),

Proced. & Admin. Regs.   According to petitioners, the

settlement transaction in this case took place between

Admiral and each individual limited partner who joined the

Settlement Agreement, and any item relating to that

transaction would require “information from either Admiral

or the individual partners regarding the settlement”.

Petitioners assert that any such item would not be a

partnership item because it requires information that is

“not in the possession or control of the partnership.”

     We disagree with petitioners’ legal analysis and with

the underlying factual premise of that analysis.   Contrary

to petitioners’ position, the determination of whether an

item is a partnership item does not depend upon whether the

item is determinable from information actually available at

the partnership level.   Cf. Dial U.S.A., Inc. v. Commis-

sioner, 95 T.C. 1, 4 (1990) (defining a subchapter S

corporation item).   The critical factor is whether the
                             - 27 -

partnership was required to make a determination of that

item.     Id.

        As mentioned above, the regulations require a part-

nership to determine the partnership aggregate and each

partner’s share of “Partnership liabilities (including

determinations with respect to * * * changes from the

preceding taxable year)”.     Sec. 301.6231(a)(3)-1(a)(1)(v),

Proced. & Admin. Regs.     The determination of the items at

issue in this case, the amount of money treated as a

distribution to the partner by the partnership under

section 752(b), flows automatically from the determination

that partnership liabilities have decreased from the

preceding taxable year.     Accordingly, in view of section

301.6231(a)(3)-1(a)(1)(v), Proced. & Admin. Regs., which

requires the partnership to determine the partnership

aggregate and each partner’s share of partnership

liabilities, including changes from the prior year, we

conclude that the determination of a constructive

distribution of money under section 752(b) that is brought

about by a decrease in a partner’s share of the liabilities

of a partnership is also a partnership item.

        Petitioners do not discuss section 301.6231(a)(3)-1(a)

(1)(v), Proced. & Admin. Regs.     Rather, as mentioned above,

petitioners focus their argument on the rules set forth in

section 301.6231(a)(3)-1(a)(4), Proced. & Admin. Regs.,
                           - 28 -

under which certain items relating to distributions by a

partnership are defined as partnership items, and the

illustration of those rules in section 301.6231(a)(3)-

1(c)(3), Proced. & Admin. Regs.     However, contrary to

petitioners’ argument summarized above, we believe that the

application of those rules to the subject adjustments under

section 752(b) buttress our conclusion that the subject

adjustments are partnership items.

     As discussed above, the regulations define as

partnership items certain items relating to distributions

from the partnership “to the extent that a determination

of such items can be made from determinations that the

partnership is required to make”.     Sec. 301.6231(a)(3)-

1(a)(4), Proced. & Admin. Regs.     In connection with a

distribution from the partnership, the partnership is

required to determine “The amount of money distributed to

a partner”.   Sec. 301.6231(a)(3)-1(c)(3)(ii), Proced.

& Admin. Regs.   The adjustments at issue in this case

involve respondent’s determination that petitioners made

constructive distributions of money to various partners.

Thus, the regulations upon which petitioners rely, section

301.6231(a)(3)-1(c)(3), Proced. & Admin. Regs., require

petitioners to determine the very items at issue in these

cases.
                          - 29 -

     Moreover, we do not agree with petitioners' factual

assertion that the settlement transaction with Admiral took

place outside the partnership.   To the contrary, the use of

the investor notes as collateral for a loan from Northern

Telecom and the involvement of Admiral as guarantor of the

partnership’s obligation to the lender was contemplated in

the offering memorandum, the partnership agreement, the

letter to Northern Telecom executed by each investor, and

by the investor notes themselves.   Additionally, under the

Settlement Agreement, the transaction was structured as an

abandonment of an investor’s partnership interest to the

partnership or as a conveyance of an investor’s partnership

interest to the partnership.   Contrary to petitioners'

assertion that the investor notes “were not partnership

assets but were assets owned by Admiral”, the balance

sheets filed as Schedule L attached to the partnership’s

Form 1065, U.S. Partnership Return of Income, list the

investor notes as partnership assets.   Furthermore,

contrary to petitioners’ assertion that the settlement did

not require the consent or notification of the partnership,

the Settlement Agreement itself required the execution of

an agreement between the trustee in bankruptcy and the

limited partners who joined the settlement, and further

required the settlement transaction to be approved by the

Bankruptcy Court.
                           - 30 -

     For the foregoing reasons, we find that petitioners

have not carried their burden of proving that the

adjustments determined by respondent are not partnership

items, as   defined by section 6231.    Accordingly,


                                       Petitioners' Motion for

                               Summary Judgment will be

                               denied.
