                       T.C. Memo. 2001-238



                     UNITED STATES TAX COURT



          ROBERT K. AND DAWN E. LOWRY, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 11579-00.            Filed September 14, 2001.


     Daniel C. Ertel, for petitioners.

     Michael A. Menillo, for respondent.



                       MEMORANDUM OPINION


     PANUTHOS, Chief Special Trial Judge:    This matter is before

the Court on the parties' cross-motions for partial summary

judgment under Rule 121.    Unless otherwise indicated, section

references are to the Internal Revenue Code, and all Rule

references are to the Tax Court Rules of Practice and Procedure.
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     Petitioner Robert K. Lowry (petitioner) was a partner in a

partnership that realized taxable income from cancellation of

indebtedness.1   The issue for decision is whether the event

causing the recognition of such income; i.e., the partnership's

surrender of real property, occurred in 1993 or 1994.

Petitioners resided in Santa Ana, California, at the time they

filed their petition.

     Summary judgment is intended to expedite litigation and

avoid unnecessary and expensive trials.     FPL Group, Inc. v.

Commissioner, 116 T.C. 73 (2001); Shiosaki v. Commissioner, 61

T.C. 861, 862 (1974).    Summary judgment may be granted with

respect to all or any part of the legal issues in controversy if

the pleadings and other materials 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); Sundstrand Corp. v.

Commissioner, 98 T.C. 518, 520 (1992), affd. 17 F.3d 965 (7th

Cir. 1994); Zaentz v. Commissioner, 90 T.C. 753, 754 (1988);

Naftel v. Commissioner, 85 T.C. 527, 529 (1985).    Both parties

assert that the issue before us is ripe for summary adjudication

and that there is no genuine issue as to any material fact.




     1
        Although petitioners Robert K. and Dawn E. Lowry filed
joint tax returns for the years in issue, and respondent issued a
joint notice of deficiency, the adjustment that is the subject of
the pending motions relates solely to petitioner Robert K.
Lowry's investment in a partnership.
                               - 3 -

     The following is a summary of the relevant facts that do not

appear to be in dispute.   They are stated solely for purposes of

deciding the pending motions and are not findings of fact for

this case.   Fed. R. Civ. P. 52(a); Rule 1(a); Sundstrand Corp. v.

Commissioner, supra.

Background

     During the years in issue, petitioner was a 50-percent

partner in a partnership known as Lowry Wells Investments (the

partnership).   The partnership owned a building located at 17862

Fitch Street, Irvine, California (Fitch Property), that was

subject to a mortgage reflecting a loan from Aid Association of

Lutherans (AAL).

     On December 15, 1993, the partnership as borrower and AAL as

lender entered into a “Covenant Not to Sue”.    The covenant stated

in pertinent part:

          In consideration of the hereinafter granted
     release from [the partnership] * * *, the conveyance of
     the real property located at 17862 Fitch Street, and
     other good and valuable consideration, * * * [AAL]
     hereby covenants not to sue Borrower * * * in
     connection with * * * those mortgage loans made by
     Lender to Borrower * * *. [Emphasis added.]

The release referred to above was contained within the covenant

and stated that the partnership released all claims it might have

had against AAL in connection with the loans.   On May 27, 1994,

escrow closed on the Fitch property, and title to the Fitch

property passed from the partnership to AAL.
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     AAL issued to the partnership a Form 1099-A, Acquisition or

Abandonment of Secured Property, indicating that the partnership

had an outstanding debt of $3,218,046 on the Fitch property and

that the Fitch property had been surrendered to AAL on December

15, 1993, at an appraised value of $1,915,000. On October 14,

1994, the partnership filed an amended return for 1993, which

included a statement that the information contained in the Form

1099-A issued by AAL was "wholly inaccurate" and that AAL erred

in reporting the transaction during 1993.   The statement

indicated that a deed in lieu of foreclosure was delivered to AAL

on May 27, 1994, and further indicated that the Fitch property

had been transferred to Lowry Wells Limited Liability Company

which "will correctly report this 1994 event on a 1994 return and

realize and recognize any gains (or losses) as is appropriate in

that filing."

     Following an examination of the partnership's return for

1994, respondent issued a 30-day letter to the partnership

including an examination report which stated in pertinent part:

"On 12-15-93, it [the partnership] surrendered the property back

to the Lender [AAL]".   Respondent subsequently issued a notice of

deficiency to petitioners determining deficiencies in and

accuracy-related penalties with respect to their Federal income

taxes for 1994 and 1995.   Contrary to the examination report

attached to the 30-day letter, respondent determined that the
                                - 5 -

partnership surrendered the Fitch property to AAL in 1994 and

that petitioners failed to report $774,982 on their 1994 return

representing petitioner's distributive share of the gain

recognized by the partnership under section 1231.

     Petitioners filed a petition contesting the notice of

deficiency in which they contend that the surrender of the Fitch

property occurred in 1993 and respondent erred in determining

that the resultant cancellation of indebtedness income was

recognized in 1994.    Respondent contends that the partnership

recognized a gain in 1994 because the closing of escrow on, and

transfer of title to, the Fitch property occurred on May 27,

1994.

Discussion

     The partnership and AAL executed a covenant which plainly

states that AAL's cancellation of the partnership's debt was

conditioned, among other requirements, on "the conveyance" of the

Fitch property.    Black's Law Dictionary 334 (7th ed. 1999)

defines the term "convey" as "To transfer or deliver (something,

such as a right or property) to another, esp. by deed or other

writing."    The covenant does not purport to convey the Fitch

property from the partnership to AAL.    Rather, the covenant

merely describes the consideration to be exchanged by the

partnership and AAL to support their mutual agreement not to sue.

It is well settled that an agreement to cancel debt in the future
                                - 6 -

will not be deemed to discharge the indebtedness immediately if

the cancellation is contingent upon future events.       Walker v.

Commissioner, 88 F.2d 170 (5th Cir. 1937), affg. White v.

Commissioner, 34 B.T.A. 424 (1936); Jelle v. Commissioner, 116

T.C. 63, 68 (2001).

     We have consistently held that "With respect to real

property, sale or transfer of ownership is complete upon the

earlier of the passage of legal title or the practical assumption

of the benefits and burdens of ownership."    Keith v.

Commissioner, 115 T.C. 605, 611 (2000), and cases cited therein.

In the instant case, there is no dispute that the passage of

legal title occurred in 1994.    Furthermore, the record is devoid

of any evidence that AAL assumed any benefit or burden of

ownership of the Fitch property before the passage of legal

title.    For these reasons, we hold that the partnership's

cancellation of debt provided for by the covenant not to sue was

recognized on May 27, 1994.    Accordingly, we shall deny

petitioners' motion for partial summary judgment and grant

respondent's cross-motion.

     Petitioners argue that the statement contained in the

examination report attached to respondent's 30-day letter that

the building was surrendered in 1993 constitutes an admission

that respondent found as fact that the surrender occurred in

1993.    Petitioners' reliance on the 30-day letter amounts to a
                                 - 7 -

request that the Court look behind the notice of deficiency.       It

has long been a general rule of this Court that we shall not look

behind a deficiency notice to examine the evidence used in making

a deficiency determination.   Greenberg's Express, Inc. v.

Commissioner, 62 T.C. 324, 327 (1974).       The underlying rationale

for not looking behind a deficiency notice is that a trial before

this Court is a proceeding de novo, and our determination must be

based on the merits of the case without regard to any previous

record developed at the administrative level.        Jones v.

Commissioner, 97 T.C. 7, 18 (1991); Greenberg's Express, Inc.,

supra at 328.   Accordingly, we do not consider the 30-day letter

or the examination report attached thereto.

     To reflect the foregoing,

                                         An order denying petitioners'

                                 motion for partial summary judgment

                                 and granting respondent's oral

                                 cross-motion for partial summary

                                 judgment will be issued.
