                         T.C. Memo. 1998-21



                       UNITED STATES TAX COURT



  LB&M ASSOCIATES, INC., RUDY J. ALVARADO, TAX MATTERS PERSON,
   Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 1609-96, 1610-96.            Filed January 20, 1998.



     Elizabeth K. Brown and James W. Bruce III, for petitioner.

     O. Christopher Meyers, for participating shareholders.

     Gary L. Bloom, for respondent.



                         MEMORANDUM OPINION

     CHIECHI, Judge:    This matter is before us on respondent's

motion to dismiss for lack of jurisdiction and to strike with

respect to affected items (respondent's motion).     We shall grant

respondent's motion.
                                -2-

     LB&M Associates, Inc. (LB&M), an S corporation, had its

principal place of business in Lawton, Oklahoma, at the time the

respective petitions in these cases were filed.   The record in

these cases establishes and/or the parties do not dispute the

following.

     During 1990, except for Rudy J. Alvarado (Mr. Alvarado) who

became a shareholder of LB&M during that year when he purchased

10 percent of its stock, all of the shareholders of LB&M (selling

LB&M shareholders), including James E. Ferguson, John P. Purcell,

Jr., Bloomer Don Sullivan, Steve Doerfel, Anthony Pokorny, and

Howard Rubin (participating shareholders), sold LB&M a portion of

their LB&M stock (1990 stock sale) in return for which LB&M

issued a promissory note to each such shareholder (promissory

note).   As a result of Mr. Alvarado's purchase and the selling

LB&M shareholders' sales of LB&M stock, Mr. Alvarado became a 51-

percent owner of the stock of LB&M.

     LB&M and each of the selling LB&M shareholders treated the

promissory note issued to each such shareholder in the 1990 stock

sale as reflecting an indebtedness of LB&M to that shareholder

(alleged LB&M liability).   Each of the selling LB&M shareholders

treated the alleged LB&M liability to each such shareholder as an

increase in such shareholder's (1) basis in the indebtedness of

LB&M to such shareholder and (2) combined basis (basis in LB&M)

in (a) such indebtedness and (b) the LB&M stock held by such

shareholder.
                               -3-

     During 1990, LB&M made a cash distribution (1990 cash

distribution) to each of the selling LB&M shareholders.   None of

those shareholders reported any capital gain with respect to the

1990 cash distribution in the Federal income tax return that each

such shareholder filed for 1990.   That is because, except for one

of the selling LB&M shareholders,1 the treatment by each of those

shareholders of the alleged LB&M liability as an increase in such

shareholder's basis in LB&M caused such shareholder's basis in

LB&M to exceed such shareholder's 1990 cash distribution.

     Respondent mailed notices of final S corporation administra-

tive adjustment for 1990 (1990 FSAA) and 1991 (1991 FSAA),

respectively, to Steve Doerfel (Mr. Doerfel) in his capacity as

the tax matters person (original tax matters person) of LB&M.    In

the 1990 FSAA, respondent made adjustments to certain subchapter

S items of LB&M and purported to make adjustments to (1) the

capital gains of certain shareholders of LB&M "on Cash Distribu-

tions in Excess of Basis" and (2) the capital losses of certain

of those shareholders because of the "basis limitation provisions

of Section 1366(d)".

     The original tax matters person timely filed a petition with

respect to the 1990 FSAA and a petition with respect to the 1991


1
   One of the selling LB&M shareholder's basis in LB&M would have
equaled or exceeded the 1990 cash distribution that such share-
holder received even if such shareholder had not increased his or
her basis in LB&M by the alleged LB&M liability to such share-
holder.
                                  -4-

FSAA.    Paragraph 5 of the amended petitions in these cases

alleges in pertinent part:

     Petitioner * * * disputes the determination of the
     Commissioner regarding the basis of the individual
     shareholders in the stock of Petitioner. The dispute
     here does not arise from the adjustments to income and
     expenses at the corporate level. The dispute arises in
     the computation of the basis of the individual share-
     holders in their stock. This computation of basis at
     the shareholder level in turn determines the amount and
     timing of the loss amounts deductible to the sharehold-
     ers.

                 *     *     *    *     *     *     *

        The Commissioner erred in failing to include in the basis
        computation the amount of money loaned to Petitioner by
        certain individual shareholders of Petitioner during calen-
        dar year 1990.

                 *     *     *    *     *     *     *

        The basis computation used by Commissioner at the share-
        holder level does not include an increase to basis as a
        result of these loans.

The amended petition in docket No. 1609-96 relating to 1990 also

alleges:

        All of the * * * adjustments except * * * Shareholders
        [sic] Capital Gain on Cash Distributions in Excess of
        Basis, (in the amount of $87,935) are agreed.

        (b) Petitioner disputes the said amount [relating to
        the shareholders' capital gain] * * *. * * *

        On June 20, 1997, the Court permitted Mr. Alvarado (current

tax matters person) to replace Mr. Doerfel as the tax matters

person in these cases.
                                -5-

     The original tax matters person admitted in the amended

petitions in these cases that the computation of the basis in

LB&M of each of the selling LB&M shareholders is to be made at

the shareholder level.   It is because that computation is to be

made at the shareholder, and not the corporate, level that

respondent argues, the current tax matters person concedes,2 and

we conclude that this Court has no jurisdiction in these proceed-

ings over the determination of the basis in LB&M of each LB&M

shareholder.   See Dial USA, Inc. v. Commissioner, 95 T.C. 1, 4-6

(1990); sec. 301.6245-1T(c)(1) and (3), Temporary Proced. &

Admin. Regs., 52 Fed. Reg. 3004 (Jan. 30, 1987); see also sec.

6231(a)(5);3 sec. 301.6231(a)(5)-1T(a) and (b), Temporary Proced.

& Admin. Regs., 52 Fed. Reg. 6779 (Mar. 5, 1987).   Nor do we have

jurisdiction over the other affected items referred to in the

amended petitions, which also are matters that must be determined


2
   Although the position of the participating shareholders is not
altogether clear, they appear to concede that the determination
of the basis in LB&M of each of the selling LB&M shareholders is
not a subchapter S item. To the extent that the participating
shareholders contend otherwise, they are wrong. See Dial USA,
Inc. v. Commissioner, 95 T.C. 1, 4-6 (1990); sec. 301.6245-
1T(c)(1) and (3), Temporary Proced. & Admin. Regs., 52 Fed. Reg.
3004 (Jan. 30, 1987). We have considered all of the arguments of
the participating shareholders that are not discussed herein, and
we find them to be without merit.
3
   All section references are to the Internal Revenue Code in
effect at all relevant times. Sec. 6244 extends and makes the
partnership audit and litigation provisions applicable to
subchapter S items.
                                 -6-

at the shareholder, and not the corporate, level (viz., (1) for

1990 and 1991 the amount of loss, if any, deductible by each LB&M

shareholder and (2) for 1990 the amount of capital gain, if any,

of each LB&M shareholder).   See sec. 6231(a)(5); sec.

301.6231(a)(5)-1T(a), Temporary Proced. & Admin. Regs., 52 Fed.

Reg. 6790 (Mar. 5, 1987).    The only matters in dispute in these

cases over which the Court has jurisdiction are whether for each

of the years at issue LB&M was indebted to each of the selling

LB&M shareholders and, if so, the amount of such indebtedness.

See University Heights at Hamilton Corp. v. Commissioner, 97 T.C.

278, 281 (1991); sec. 301.6245-1T(a)(1)(v), Temporary Proced. &

Admin. Regs., 52 Fed. Reg. 3003 (Jan. 30, 1987).

     To reflect the foregoing,




                                            An appropriate order will

                                       be issued granting respondent's

                                       motion.
