                        T.C. Memo. 1997-444



                      UNITED STATES TAX COURT



                 SOOREN HOVHANNISSIAN AND ESTATE
             OF MARY HOVHANNISSIAN, DECEASED, SOOREN
             HOVHANNISSIAN, EXECUTOR, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6556-95.                Filed September 29, 1997.



     Stephen G. Utz and Ann McClure, for petitioners.

     Elise F. Alair and Bradford A. Johnson, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     BEGHE, Judge:   Respondent determined the following

deficiencies, addition to tax, and penalties:
                                - 2 -


                                         Addition to tax    Penalty
  Year     Petitioner(s)1   Deficiency     Sec. 6651(a)    Sec. 6662
  1989         SH             $7,963         $1,472          $1,593
  1989         MH             16,656           ---           3,331
  1990      SH & MH          129,181           ---           25,836
     1
       Petitioners are: (1) SH--Sooren Hovhannissian; (2) MH--
Estate of Mary Hovhannissian, Deceased, Sooren Hovhannissian,
Executor; and (3) SH & MH--Sooren Hovhannissian and Estate of
Mary Hovhannissian, Deceased, Sooren Hovhannissian, Executor.

     After concessions by both parties,1 we first address whether

petitioner Sooren Hovhannissian (petitioner) is required to

include in his 1990 gross income, as gain under section 1038(b),2

$383,288, the portion of the cash he received on an installment

sale of real property in 1988 that he had not previously reported

as gain.   We hold that section 1038 governs petitioner’s

reacquisition in 1990 of the property upon the buyer’s default on

the installment note secured by the property; petitioner must

include $383,288 as gain in his 1990 gross income.    We also hold

that petitioner is not entitled to claim a section 165 loss in

1990 on his reacquisition of the property.    As a result,


     1
       Petitioner conceded the addition to tax, and respondent
conceded the penalties. Petitioners argued on brief that they
have conceded only $3,120 of their claim for car and truck
expenses for taxable year 1990. However, the parties’
stipulation clearly states that petitioners conceded $4,449 of
those claimed deductions.
     2
       All section references are to the Internal Revenue Code in
effect for the years in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
                                - 3 -


petitioners are not entitled to any loss carrybacks from 1990 to

1989.

                          FINDINGS OF FACT

     Some of the facts have been stipulated and are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by reference.    Petitioners resided in

Trumbull, Connecticut, when they filed their petition.

Mrs. Hovhannissian thereafter died, and her estate was

substituted as a party to this proceeding.

     Beginning in 1953, petitioner acquired several contiguous

parcels of land in Bridgeport, Connecticut (hereinafter 225-235

Boston Avenue property and 245 Boston Avenue property), upon

which he built several structures.      Petitioner operated a retail

carpet and furniture business on the premises from the time of

their construction until he sold the 225-235 Boston Avenue

property in 1988.   Petitioner continued to operate a carpet

business at the 245 Boston Avenue property through at least 1990.

     In 1972, petitioner began to build a combination parking

garage and warehouse on the rear portion of the 225-235 Boston

Avenue property.    Petitioner encountered various difficulties in

building this structure, which was never completed or put into

service.   Petitioner estimated that he spent $400,000 in

constructing this structure, but lost his records of the

construction costs.   Petitioner submitted an expert report that
                                - 4 -


estimated the likely construction costs of the structure at

$253,000 at the time of construction in the early 1970's.

Thereafter, petitioner let the structure stand idle and

unfinished, fenced off to prevent vandalism.    One of the walls

of the structure collapsed prior to the 1988 sale and was never

repaired.

     On February 8, 1988, petitioner sold the 225-235 Boston

Avenue property, which then consisted of the furniture store

building (the front property) and the unfinished garage/warehouse

structure (the rear property), to the Bridgeport Mini Limited

Partnership (the partnership) for the stated consideration of

$2,710,000.    Petitioner received $719,480 in cash and a

nonrecourse purchase money mortgage note in the face amount of

$2,030,400.3   Under the terms of the note, petitioner was to

receive quarterly payments of interest for 3 years, at which time

the principal amount of $2,030,400 and all accrued or unpaid

interest would become due.    As part of the sale, petitioner

obtained an engineering report showing that the garage structure

was suitable for conversion into a self-storage facility.    He

also obtained the permits necessary for conversion of both the

front and rear properties into self-storage facilities.


     3
       As part of the $719,480, petitioner received from the
partnership approximately $39,880 above and beyond the sale
price, which was properly reported by petitioner as part of the
payments from the sale that were received during 1988.
                                 - 5 -


     For taxable year 1988, petitioner and Mrs. Hovhannissian

filed a joint income tax return.    Of the $719,480 in cash

received upon the sale of the 225-235 Boston Avenue property,

petitioners reported $336,192 as gain and $383,288 as a recovery

of basis from an installment sale.       Petitioners also received and

reported $176,228 in interest payments from the partnership.

     Petitioner and Mrs. Hovhannissian filed separate returns for

taxable year 1989.   They each reported $60,000 of the $120,000 of

interest payments received from the partnership during that year.

In 1990, petitioner and Mrs. Hovhannissian received no interest

payments from the partnership.

     Following the sale in 1988, the partnership began converting

the 225-235 Boston Avenue property into a self-storage rental

facility.   In 1989, the partnership filed for bankruptcy, leaving

the conversion incomplete and defaulting on its obligations to

pay interest and principal on the mortgage note.       The main

building on the front property, which had formerly served as

petitioner’s furniture store, had been stripped to a bare shell

to house the self-storage facility.       The main building contained

449 mini storage bins installed on all three floors.       The doors

from all of the bins were missing.       The partnership had also

removed the roof of the unfinished garage structure and several

important structural members.
                                - 6 -


     On or about June 1, 1990, the Federal bankruptcy court

supervising the partnership bankruptcy permitted petitioner to

reacquire the 225-235 Boston Avenue property.   The parties have

stipulated that the fair market value of the 225-235 Boston

Avenue property on the reacquisition date was $465,000.   Pursuant

to a claim petitioner made in November 1990, he received an

insurance recovery of $4,000 in a later year for damage resulting

from alterations made to the 225-235 Boston Avenue property by

the partnership.   Petitioner also filed suit against the attorney

who represented him on the sale of the property, alleging that

the partnership’s purchase money mortgage note should have been

recourse and not nonrecourse.   Petitioner recovered no damages.

     For taxable year 1990, petitioner and Mrs. Hovhannissian

filed a joint income tax return, reporting a loss of $99,797.

Upon the advice of their then income tax return preparer, they

did not report any gain or loss on the reacquisition.   Petitioner

and Mrs. Hovhannissian filed separate Forms 1045, Application for

Tentative Refund, claiming net operating loss carrybacks of

$48,898 and $48,899, respectively, from 1990 to taxable year

1989.

     In January to February 1995, respondent issued separate

notices of deficiency to petitioner and Mrs. Hovhannissian for

taxable year 1989 and a joint notice of deficiency for taxable

year 1990.   Petitioners filed a timely petition with this Court.
                                    - 7 -


                                   OPINION

1.   Application of Section 1038

      The primary issue for decision is whether section 1038

governs petitioner’s reacquisition of the 225-235 Boston Avenue

property, requiring petitioners to report $383,288 as hitherto

unrecognized gain in taxable year 1990 under section 1038(b).

      Congress added section 1038 to the Code to ensure that

certain reacquisitions of real property sold in installment sales

would not be treated as taxable exchanges by simple reference to

the fair market value of the reacquired property.   Act of

September 2, 1964, Pub. L. 88-570, 78 Stat. 854.    Section 1038(a)

provides that a reacquisition of real property governed by

section 1038 is one in which a sale of real property gave rise to

indebtedness in favor of the seller, the indebtedness was secured

by the real property sold, and the seller reacquired the real

property in full or partial satisfaction of the indebtedness;

except as provided in section 1038(b), no gain or loss results

from the reacquisition and no debt can be treated as having

become worthless or partially worthless for any such

reacquisition.4

      4
          Sec. 1038(a) provides:

      If--
           (1) a sale of real property gives rise to
      indebtedness to the seller which is secured by the real
      property sold, and
                                                     (continued...)
                               - 8 -


     For reacquisitions governed by section 1038(a), section

1038(b)(1) requires the seller to recognize gain to the extent

that money and the fair market value of other property received

from the sale prior to reacquisition exceed the amount of gain

recognized in previous periods.5     Section 1038(b)(2) limits the

amount of gain to be recognized to the amount by which the

original sale price exceeded the sum of:     (1) The adjusted basis

of the property, (2) gain previously recognized on the sale, and




     4
      (...continued)
          (2) the seller of such property reacquires such
     property in partial or full satisfaction of such
     indebtedness,

     then except as provided in subsections (b) and (d), no
     gain or loss shall result to the seller from such
     reacquisition, and no debt shall become worthless or
     partially worthless as a result of such reacquisition.
     5
         Sec. 1038(b)(1) provides:

     In the case of a reacquisition of real property to
     which subsection (a) applies, gain shall result from
     such reacquisition to the extent that--

                (A) the amount of money and the fair market
           value of other property (other than obligations
           of the purchaser) received, prior to such
           reacquisition, with respect to the sale of such
           property, exceeds

                (B) the amount of the gain on the sale of
           such property returned as income for periods prior
           to such reacquisition.
                                - 9 -


(3) any money paid or other property (measured by its fair market

value) transferred in connection with the reacquisition.6

     Section 1038 governs the Federal income tax treatment of all

reacquisitions described therein, even where “the mandatory

language of section 1038(b) works a hardship on a taxpayer”.

Greene v. Commissioner, 76 T.C. 1018, 1026 (1981) (relief

available to such taxpayers through increases to basis under

section 1038(c) that offset gain reported upon reacquisition);

sec. 1.1038-1(a), Income Tax Regs.      Section 1038 applies to such

reacquisitions even when substantial improvements have been made


     6
         Sec. 1038(b)(2) provides:

     Limitation.--The amount of gain determined under
     paragraph (1) resulting from a reacquisition during any
     taxable year beginning after the date of the
     enactment of this section shall not exceed the amount
     by which the price at which the real property was sold
     exceeded its adjusted basis, reduced by the sum of--

                 (A) the amount of the gain on the sale of
            such property returned as income for periods prior
            to the reacquisition of such property, and

                 (B) the amount of money and the fair market
            value of other property (other than obligations of
            the purchaser received with respect to the sale of
            such property) paid or transferred by the seller
            in connection with the reacquisition of such
            property.

     For purposes of this paragraph, the price at which real
     property is sold is the gross sales price reduced by
     the selling commissions, legal fees, and other expenses
     incident to the sale of such property which are
     properly taken into account in determining gain or loss
     on such sale.
                                 - 10 -


that substantially change the property.      Conners v. Commissioner,

88 T.C. 541 (1987).

     In Conners v. Commissioner, supra, we held that section 1038

does not require a taxpayer who reacquires land improved by the

buyer to recognize gain on the reacquisition with respect to the

improvements.     In Conners, the taxpayers sold land for $10,000

cash and a $720,000 promissory note to a developer who

constructed a 48-unit town house project.     The developer/buyer

defaulted on his note to the taxpayers when he could not sell all

the units.   The taxpayers ultimately agreed to take title to six

units, the land underlying those units, and six forty-eighths of

the common land in lieu of exercising their right to foreclose.

The taxpayers did not report any gain upon the reacquisition.

Id. at 542-543.

     In Conners, the Commissioner argued that the taxpayers were

required to recognize gain from the improvements because the

property was “substantially different from that which they sold”,

id. at 544, contending that section 1038 did not apply because,

contrary to congressional intent, the taxpayers “were in a better

position following the reacquisition”, id. at 545.      However, we

found that the taxpayers were not in a better position, and that

to tax them on the improvements at that point would be to

“require the recognition of gain not yet realized, out of funds

not yet received.”     Id.   We held that “repossession of improved
                              - 11 -


property in satisfaction of an obligation resulting from the sale

of the same property prior to improvements is entitled to

nonrecognition treatment under section 1038.”   Id. at 546.

     To aid in determining the applicability of section 1038 to

the facts in Conners, we used four factors enumerated in the

legislative history, indicating

     that Congress felt it was inappropriate to measure gain
     upon repossession of the property by reference to the
     fair market value at the time of the repossession
     because (1) the taxpayer was actually in no better
     position than he was before he made the sale; (2)
     valuation at the time of repossession was difficult;
     (3) to tax the initial seller on gain at the time of
     repossession was to tax him on gain not yet realized;
     and (4) because the taxpayer had not received a
     monetary return with respect to the property, funds to
     pay the taxes may be unavailable. [Id. at 544-545
     (citing S. Rept. 1361, 88th Cong., 2d Sess. (1964),
     1964-2 C.B. 828, 831).]

     Petitioners argue that the 225-235 Boston Avenue property

was so changed by reason of the partnership’s failure to complete

the conversion to the self-storage facility that section 1038

should not apply to the entire property, but only to the front

property, the former furniture store and the land on which it

stands.   Petitioners argue that section 1038 should not apply to

the rear property because the buyer so irreparably damaged the

parking structure that petitioners “cannot be taxed as though the

building still existed and could therefore be said to have been

recovered as well.”   Petitioners argue alternatively that, even

if section 1038 does apply to the entire property, petitioner is
                               - 12 -


entitled to a section 165 loss upon the reacquisition of the rear

property in its damaged condition.      Respondent, citing Conners v.

Commissioner, supra, argues that section 1038 applies to real

property that has been reacquired, even if it has been

substantially changed.

       Before considering the four factors described in the

legislative history and quoted in Conners v. Commissioner, supra

at 544, we address petitioner’s argument that the property should

be bifurcated so as to apply section 1038 only to the front

property.    Petitioner sold the 225-235 Boston Avenue property as

a single piece of property and reacquired it as a single piece of

property.    The warranty deed by which petitioner conveyed the

property to the partnership in 1988 also identifies the property

as a single parcel.    Cf. Goudas v. Commissioner, T.C. Memo. 1996-

555.    There is nothing in the facts of this case to support a

finding that the 225-235 Boston Avenue property is divisible in

any meaningful way that would be supported by language of the

statute, the regulations, or the legislative history.     On this

ground alone, we could hold that section 1038 applies to the

reacquisition of the entire 225-235 Boston Avenue property

because petitioners have conceded the applicability of section

1038 to the front property.    However, we go on to consider the

four factors referred to in the legislative history.
                              - 13 -


     We cannot determine from the record whether petitioner was

in a better or worse position at the time of reacquisition than

he was at the time of the original sale.   Upon the reacquisition,

petitioner had the property, plus $719,480 in cash he had

received at the time of sale, and $296,228 in interest payments.

The parties have stipulated that the fair market value of the

225-235 Boston Avenue property was $465,000 at the time of

reacquisition.   Under the terms of the mortgage note, petitioner

had no further recourse against the partnership or its general

partners upon reacquisition of the property.    Despite his

subsequent expressions of discontent with the terms of the

transaction, petitioner willingly sold the property on those

terms in 1988 and received $719,480 at the closing and interest

payments pursuant to the mortgage note in 1988 and 1989.      Only

when petitioner resells the property will he be able to ascertain

whether the changes by the partnership and the then-current

market conditions will result in a loss.   Congress enacted

section 1038 to provide mandatory, uniform income tax treatment

in precisely this kind of case, deferring recognition of either

gain or loss until the seller once again sells the reacquired

property and the amount of the gain or loss can be objectively

measured.   S. Rept. 1361, supra, 1964-2 C.B. at 831; see also

Greene v. Commissioner, 76 T.C. at 1025-1026.
                              - 14 -


     The difficulty in determining a fair market value by which

to ascertain an amount realized in the absence of a realization

event was another major reason why Congress enacted section 1038.

S. Rept. 1361, supra, 1964-2 C.B. at 831.    That valuation

difficulty is present in this case:    Although the parties have

stipulated, based on petitioner’s expert’s opinion, a fair market

value of $465,000 at reacquisition, the record also contains a

1989 appraisal of the same property in the same condition for

$2,300,000.

     We discuss the third and fourth factors in light of

petitioner’s further argument that applying section 1038 to this

case would be unconstitutional because petitioner did not realize

any gain in connection with the sale and subsequent reacquisition

of the 225-235 Boston Avenue property and should therefore not be

taxed on any gain nor denied a claim for a loss at the time of

reacquisition.   To support his argument, petitioner also claims

that the fair market value of the property at the time of

reacquisition governs whether any gain was realized on the

transactions at issue.7

     7
       Petitioner argues that he should not be taxed if the value
of the property he received back and the amount of cash and other
property he received in connection with the initial sale are less
than his presale basis in the property. The amount that
petitioner received ($719,480) plus the fair market value of the
property at acquisition ($465,000) is slightly less ($1,184,480)
than the adjusted presale basis in the property ($1,187,465)
claimed on his 1988 income tax return for the year of the sale.
                                                   (continued...)
                               - 15 -


     Petitioner’s arguments misconstrue both the intent and

operation of section 1038.   As discussed supra, Congress enacted

section 1038 to obviate the difficulties, in the absence of an

identifiable sale or other exchange at the time of reacquisition,

of ascertaining the fair market value of the property and

objectively determining whether gain or loss was actually

realized.    See S. Rept. 1361, supra, 1964-2 C.B. at 831.

     To that end, section 1038(a) expressly disallows any

recognition of gain or loss in connection with the reacquisition

itself.   Section 1038(b) requires only that the seller recognize

and report as gain that amount of any cash or other property that

was received by the seller on the original sale and whose

recognition was deferred under section 453.   Such recognition

rectifies the imbalance created by the section 453 deferral,

which Congress allowed in order to sidestep “the seemingly

elementary issue of when the ‘amount realized’ by the seller

includes the value of the buyer’s obligations to make the future

payments”.   Bittker & McMahon, Federal Income Taxation of


     7
      (...continued)
     For at least two reasons, this argument cannot prevail.
First, the relevant realization event for measuring gain is the
initial sale, not the subsequent reacquisition. Second, both the
legislative history and the regulations specifically state that
the fair market value of the property at the time of
reacquisition is immaterial. See S. Rept. 1361, 88th Cong., 2d
Sess. (1964), 1964-2 C.B. 828, 831; sec. 1.1038-1(a), Income Tax
Regs. Moreover, we are not satisfied that petitioner has proved
the presale basis claimed on the 1988 return.
                              - 16 -


Individuals, sec. 29.12, at 29-34 (2d ed. 1995 & Supp. 1997).     As

section 1.1038-1(a)(1), Income Tax Regs., explains:

     It is immaterial, for purposes of applying * * *
     [section 1038], whether the seller realized a gain or
     sustained a loss on the sale of the real property, or
     whether it can be ascertained at the time of the sale
     whether gain or loss occurs as a result of the sale.
     It is also immaterial what method of accounting the
     seller used in reporting gain or loss from the sale of
     the real property or whether at the time of
     reacquisition such property has depreciated or
     appreciated in value since the time of the original
     sale. * * *

     Petitioner also argues that the $719,480 he received in

connection with the original sale was not income, but only a

“receipt”.   We may dismiss this argument by noting that it has

been long settled that all amounts received in connection with a

realization event, which in this case was the original sale, must

be included in income under sections 1001 and 61(a).

Commissioner v. Glenshaw Glass Co., 348 U.S. 426, 431 (1955).

Petitioner had “complete dominion” over the cash in that he had

no expectation that he would ever have to return it to the buyer,

Commissioner v. Indianapolis Power & Light Co., 493 U.S. 203, 210

(1990); Herbel v. Commissioner, 106 T.C. 392, 413 (1996).8

     8
       We note in passing that we could alternatively view the
1988 sale not as a sale of the property as such, but as the sale
to the partnership for $719,480 of an option to purchase the
property for the face amount of the note, $2,030,400, especially
if the nonrecourse note were seen as invalid under the analysis
in Estate of Franklin v. Commissioner, 64 T.C. 752, 762-763
(1975), affd. on other grounds 544 F.2d 1045 (9th Cir. 1976),
because the face amount of the note so greatly exceeded the fair
                                                   (continued...)
                              - 17 -


     The operation of section 1038(b) and (c) illustrates why it

is appropriate that petitioner should be liable for income tax on

hitherto untaxed amounts received prior to the reacquisition.      In

1988, petitioner recognized $336,192 of the $719,480 received as

part of the consideration for the sale of the 225-235 Boston

Avenue property and deferred the balance under section 453(c).

Section 1038(b)(1) requires the recognition of that balance,

$383,288, up to the limit imposed by section 1038(b)(2) of the

original sale price less petitioner’s claimed presale basis, or

$1,186,343.9   Section 1038(b) ensures that all receipts of cash

and other property by the seller prior to reacquisition are taxed

as income to return the seller to as close to status quo ante

     8
      (...continued)
market value of the property. If the 1988 sale were analyzed as
the sale of an option to buy the 225-235 Boston Avenue property,
the overall Federal tax consequences would be similar to the
operation of sec. 1038, although the timing of recognition and
adjustment to basis would differ. Only when an option lapses
does the grantor of an option include in gross income the amount
received for the option, id. at 763, Koch v. Commissioner, 67
T.C. 71, 82 (1976); see also Rev. Rul. 78-182, 1978-1 C.B. 265,
267; Rev. Rul. 58-234, 1958-1 C.B. 279, 283, as short-term
capital gain, sec. 1234(b)(1). The option grantor retains his
property with its basis unchanged. The more favorable treatment
of a seller who reacquires real property under sec. 1038 in terms
of allowed adjustments to basis belies petitioner’s argument that
sec. 1038 is unconstitutional in its application to the facts of
his case. See also Greene v. Commissioner, 76 T.C. 1018 (1981).
     9
       Sec. 1038(b)(2) limits the amount required to be
recognized under sec. 1038(b)(1) to the amount by which the sale
price exceeds the sum of: (1) presale basis; (2) amounts
previously recognized; and, (3) amounts paid in connection with
the reacquisition (in this case, nothing) ($2,710,000 -
(1,187,465 + 336,192 + 0) = 1,186,343).
                              - 18 -


with respect to the reacquired property as circumstances will

permit.   Section 1038(c)10 recalculates petitioner’s basis in the

reacquired property to account for the original, presale basis

that the seller had in the property, plus other adjustments such

as sales costs, as reflected in the seller’s basis in the debt

instrument under section 453, see sec. 1.453-9(b)(2), Income Tax

Regs., plus the gain reported under section 1038(b), sec.

1038(c)(1), gain reported in prior taxable years, sec.

1038(c)(2), and any amounts paid in connection with the

reacquisition, sec. 1.1038-1(g)(1)(iii), Income Tax Regs.     The

operation of these two subsections leaves the seller having paid

all Federal taxes due on cash and other property received prior

to reacquisition, and in possession of his original property with

an increased basis.

     In light of the foregoing, we hold that section 1038 governs

petitioner’s reacquisition of the real property at 225-235 Boston

Avenue in satisfaction of the indebtedness arising from its sale,

sec. 1.1038-1(a), Income Tax Regs.     Section 1038 governs the

entire reacquisition even though the property has been

substantially changed through incomplete modifications to both

the erstwhile furniture store and the structure on the rear

     10
       There is conflicting evidence in the record with respect
to petitioner’s basis in the parking structure at the time of the
1988 sale, which will have a direct bearing on the calculation of
petitioner’s post-reacquisition basis in the property under sec.
1038(c).
                                - 19 -


property.   See Conners v. Commissioner, supra at 546-547

(reacquisition of real property governed by sec. 1038 even though

substantial improvements made).    Under section 1038(b)(1),

petitioner must recognize and include in gross income the

previously excluded balance of the initial cash payment,

$383,288.

2.   Disallowance of Loss Related to Reacquisition Governed
     by Section 1038

     Petitioner argues in the alternative that, as a matter of

law, he is entitled, under section 165, to claim a loss on the

reacquisition.   Section 1038(a) forestalls a seller, incident to

a section 1038 reacquisition of real property, from claiming a

bad debt deduction under section 166 for the default in payment

of the purchase money mortgage debt secured by that property.

Rose v. Commissioner, T.C. Memo. 1987-19, affd. 855 F.2d 65 (2d

Cir. 1988).   The language of section 1038(a), which states that

“no gain or loss shall result to the seller from such

reacquisition”, see also sec. 1.1038-1(a)(1), Income Tax Regs.,

also disallows other kinds of losses, including those that might

be claimed under section 165.    Disallowing any loss claimed under

section 165 is consistent with the broader congressional intent

in enacting section 1038:

     Your committee also believes that it is desirable to
     have a uniform rule applicable in case of repossession
     of real property, whether the initial sale was at a
     gain or loss * * * it is desirable to have the same
     rule applicable whether the value of the property after
                                 - 20 -


     the initial sale has gone up or down.    * * *   [S. Rept.
     1361, supra, 1964-2 C.B. at 831].

Applying the plain meaning of the language of the statute, United

States v. Ron Pair Enters., 489 U.S. 235, 242 (1989); National

Life Ins. Co. & Subs. v. Commissioner, 103 F.3d 5, 8 (2d Cir.

1996), affg. 103 T.C. 615 (1994); Belloff v. Commissioner, 996

F.2d 607, 616 (2d Cir. 1993), affg. T.C. Memo. 1991-350, the

legislative history, see S. Rept. 1361, supra, 1964-2 C.B. at

831, and the associated regulations, see sec. 1.1038-1(a), Income

Tax Regs., we hold that petitioner, as a matter of law, is not

entitled to recognize any loss on the reacquisition of the 225-

235 Boston Avenue property.

     Even if section 1038 did not forestall a claim to a

concurrent loss under section 165--a claim we reject--petitioner

has not shown that he has satisfied the conditions for allowance

of a loss under section 165.11    We cannot easily identify from

the record what--if any--loss petitioner incurred as a result of

the closed and completed transaction, CRST, Inc. v. Commissioner,

92 T.C. 1249, 1260 (1989), affd. 909 F.2d 1146 (8th Cir. 1990),

attributable to the 1988 sale and 1990 reacquisition that

resulted in petitioner’s receipt and retention of more than $1

million in cash, plus the reacquisition of his property.    We

     11
       Sec. 165(c), which limits the types of losses that
individuals may claim, does not appear to forestall petitioner
from claiming a loss because he is claiming it incident to a
transaction entered into for profit. Sec. 165(c)(2).
                               - 21 -


cannot identify the specific amount that petitioner spent in

constructing the structure.    Although petitioner claims $400,000,

the record, including the report submitted by petitioner’s

expert, indicates that petitioner spent, or should have spent, no

more than $253,000.    After having spent this money constructing

the structure, petitioner let the structure stand unused for

nearly 15 years, doing nothing with it except closing it off to

prevent vandalism.    Petitioner then received $719,480 in cash

(and substantial interest payments thereafter) and a note for

$2,030,400 for the sale of the entire 225-235 Boston Avenue

property, at a time when the record, including petitioner’s own

testimony that one of the walls collapsed prior to the 1988 sale,

strongly supports the inference that the garage structure was

virtually worthless prior to the sale.12   These difficulties in

identifying the amount and time of petitioner’s loss suffice to

preclude petitioner’s claim of a casualty loss under section

165(c)(3) and (h).    There are other hurdles to allowance of a

casualty loss that petitioner has not surmounted.    A casualty


     12
       Even if petitioner were entitled to a casualty loss, he
would be restricted to the lesser of adjusted basis or value
prior to the casualty--the garage was not part of a trade or
business because it had never been placed in service. Helvering
v. Owens, 305 U.S. 468 (1939); sec. 1.165-7(b)(1)(ii), Income Tax
Regs. The evidence in the record that the garage structure was
virtually worthless when the 225-235 Boston Avenue property was
sold, which is even less than the $253,500 cost of construction
figure imputed by petitioner’s expert, would leave petitioner
short of his goal of proving entitlement to a casualty loss.
                               - 22 -


loss must be “sudden”, “unexpected”, or “unusual”.      Maher v.

Commissioner, 680 F.2d 91, 92 (11th Cir. 1982), affg. 76 T.C. 593

(1981); Matheson v. Commissioner, 54 F.2d 537, 539 (2d Cir.

1931), affg. 18 B.T.A. 674 (1930).      As noted supra, the garage

was probably already worthless prior to the 1988 sale before the

occurrence of any of the events that--petitioner claims--

destroyed the value of the garage.      The dismantling of the garage

by the partnership was neither sudden nor unexpected.     Both

petitioner and the partnership contemplated that the partnership

would convert the structure into a self-storage facility, as

evidenced by the permits and engineering reports that petitioner

obtained prior to the closing of the sale.

     Finally, we note that the circumstances in cases allowing

casualty losses under section 165(c)(3) have been very different

from the facts of this case.   This Court and other courts have

disallowed casualty losses where human hands intervene in

circumstances not constituting “fire, storm, shipwreck, or * * *

theft”, sec. 165(c)(3); see e.g., Maher v. Commissioner, 680 F.2d

at 93-94 (citing numerous cases allowing and disallowing casualty

losses); Powers v. Commissioner, 36 T.C. 1191, 1192 (1961)

(confiscation of automobile by “officials in East Germany acting

under color of legal authority, arbitrary and despotic as it may
                             - 23 -


have been, could not have been a ‘theft’ for tax deduction

purposes”).13

     Neither section 1038 nor section 165 allows petitioners’

claim to a loss upon petitioner’s reacquisition of the 225-235

Boston Avenue property in 1990.

     To reflect the foregoing and the parties’ concessions,


                                           Decision will be entered

                                      under Rule 155.




     13
       Sec. 280B expressly restricts the deduction of losses
resulting from demolition of buildings.
