Salvador A. and Kathleen M. Gaudiano - Page 3

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          filed their petitions.  G. Asher resided in Middlesboro,                    
          Kentucky, at the time he filed his petition, and L. Asher resided           
          in Speedwell, Tennessee, at the time he filed his petition.                 
          I.  Increase in Basis of Four A Stock                                       
               During 1993, petitioners were shareholders of Four A, an S             
          corporation.  Petitioners each held a 25-percent interest in Four           
          A.                                                                          
               During 1993, Four A had COD income of $1,289,048.  On                  
          December 3, 1993, Four A filed for bankruptcy and was insolvent             
          within the meaning of section 108(d)(3).  On its Form 1120S for             
          1993, Four A excluded the COD income under section 108(a).                  
          During that year, each petitioner increased his basis in his Four           
          A stock by $322,262--this represented his pro rata share of Four            
          A's COD income for the year.                                                
          II.  Increased Section 1231 Loss                                            
               From May 1988 through February 1991, Four A mined coal which           
          it sold to Appolo.  Four A ceased its mining operations in                  
          February 1991, and it leased its mining equipment (the equipment)           
          to Black Mountain Coal Mining Co., Inc. (Black Mountain).                   
          Pursuant to the lease with Black Mountain (the lease), Black                
          Mountain mined the coal seams formerly mined by Four A and sold             
          the coal to Appolo.  Appolo paid Black Mountain a certain price             
          per ton for coal produced and paid Four A 50 cents per ton of               
          coal produced as a fee for Black Mountain's use of the equipment.           





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