                          T.C. Memo. 1995-552



                        UNITED STATES TAX COURT



   LAKEWOOD ASSOCIATES, ROBERT G. MOORE, TAX MATTERS PARTNER,
   Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 24656-93.                  Filed November 21, 1995.



     Douglas E. Kahle, for petitioner.

     John C. McDougal, for respondent.



                          MEMORANDUM OPINION



         PANUTHOS, Chief Special Trial Judge:     This matter

originally came before the Court on respondent's Motion for

Judgment on the Pleadings filed pursuant to Rule 120(a).1       During


     1
        Unless otherwise indicated, Rule references are to the
Tax Court Rules of Practice and Procedure, and section references
are to the Internal Revenue Code in effect for the year in issue.
                                 - 2 -


the course of a hearing conducted in this case, the parties made

certain factual representations to the Court going beyond the

matters alleged in the pleadings.    Consistent with Rule 120(b),2

the Court advised the parties of its intention to treat

respondent's motion as a Motion for Summary Judgment and directed

the parties to file separate reports with the Court attaching

thereto any exhibits, affidavits, or other documentation

necessary to complete the record.    See Rule 121(b) and (d).   The

parties having complied with the Court's order, respondent's

Motion for Judgment on the Pleadings shall be treated herein as a

Motion for Summary Judgment.     See Francis v. Commissioner, T.C.

Memo. 1988-30.

     The issue for decision is whether respondent is entitled to

a summary judgment denying Lakewood Associates' claim to a loss

for 1989 related to a "taking" of certain real property.

     Summary judgment is intended to expedite litigation and

avoid unnecessary and expensive trials.     Florida Peach Corp. v.

Commissioner, 90 T.C. 678, 681 (1988).    Summary judgment may be

     2
         Rule 120(b) provides:

          (b) Matters Outside Pleadings: If, on a motion
     for judgment on the pleadings, matters outside the
     pleadings are presented to and not excluded by the
     Court, the motion shall be treated as one for summary
     judgment and shall be disposed of as provided in Rule
     121, and all parties shall be given reasonable
     opportunity to present all material made pertinent to
     such a motion by Rule 121.
                                 - 3 -


granted with respect to all or any part of the legal issues in

controversy--

     if 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).]

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).     The

moving party bears the burden of proving that there is no genuine

issue of material fact, and factual inferences will be read in a

manner most favorable to the party opposing summary judgment.

Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985); Jacklin v.

Commissioner, 79 T.C. 340, 344 (1982).

     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 motion and are not findings of fact for this

case.   Fed. R. Civ. P. 52(a).

Background

     Lakewood Associates (Lakewood or the partnership) is a

general partnership subject to the unified partnership audit and

litigation procedures set forth in sections 6221 through 6233.

See Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA),

Pub. L. 97-248, sec. 402(a), 96 Stat. 648-667.   At all relevant

times, Lakewood maintained its principal place of business at
                                - 4 -


Virginia Beach, Virginia.    Sec. 7482(b)(1)(E).   Robert G. Moore

(petitioner) is Lakewood's tax matters partner.

     Lakewood was formed in the State of Virginia on August 12,

1987.    During 1987, Lakewood acquired approximately   649 acres of

unimproved real estate located in Chesapeake, Virginia.    Although

Lakewood acquired the property with a view towards profiting from

its development, efforts in this regard were halted when the

Federal Government issued its Wetlands Manual of 1989 (Wetlands

Manual).3   Under the Wetlands Manual, property falling within the

definition of protected wetlands is subject to the jurisdiction

of the Environmental Protection Agency and the United States Army

Corps of Engineers (COE).4

     As a consequence of the release of the Wetlands Manual,

Lakewood engaged various environmental engineering consultants to

prepare wetland evaluations and provide advice regarding the

feasibility of developing the property.    After determining that

approximately 75 percent of Lakewood's property constitutes

protected wetlands as defined in the Wetlands Manual, the

consultants advised Lakewood that, in accordance with the

Wetlands Manual, a permit would have to be obtained from COE

     3
        While not critical to the disposition of the pending
motion, it appears that the 1989 Wetlands Manual was abandoned
sometime in 1991 in favor of the readoption of the Wetlands
Manual of 1987.
     4
        Prior to 1989, the property in question was not
considered wetlands.
                                - 5 -


pursuant to the Clean Water Act, Pub. L. 95-217, sec. 404, 91

Stat. 1600 (see 33 U.S.C. sec. 1344 (1988)) prior to developing

the property.

     When asked to opine as to the likelihood that COE would

grant Lakewood's application for a permit to develop the

property, the consultants generally agreed that Lakewood would

not be permitted to develop the land, and, in fact, COE probably

would never formally act on Lakewood's application.   The

consultants' view in this regard is reflected in the following

statement:

          Based on my review of the documentation, all the
     signals from [COE] indicate that the permit would not
     be issued, and it was not probable that Lakewood would
     get a permit. The more probable result would be that
     [COE] would require Lakewood to provide more and more
     studies of alternative sites, endangered species
     reconnaissance, and archeological surveys, until
     Lakewood finally gave up, due to the rising costs. It
     is my experience that this is the pattern in other
     cases in which a residential developer applies to [COE]
     for a permit to develop a large wetland area.

Based on this advice, Lakewood decided that it would not be

economically feasible to attempt to develop the property.

     Lakewood reported a loss of $9,849,682 in respect of the

property on its 1989 partnership return.   Respondent subsequently

examined Lakewood's 1989 return and disallowed the loss in its

entirety.    Although an appraiser engaged by respondent to review

the matter found it unlikely that the property could be developed

in an economically feasible manner, respondent issued a notice of
                              - 6 -


final partnership administrative adjustment (FPAA) to Lakewood

stating in pertinent part:

          Since it has not been established that a
     condemnation, involuntary conversion or a disposition
     based on a closed completed transaction occurred within
     the meaning of the Internal Revenue Code, no loss is
     allowable. In addition, it has not been established
     that the designation of your property as wetlands or
     the issuance of the wetlands manual and regulations
     deprived you of all economic use of the property. If,
     however, the issuance of the wetlands manual and
     regulations is ultimately determined to constitute a
     condemnation, an involuntary conversion, or other
     allowable loss; any such loss must be reduced by the
     partnership's right to reimbursement for such loss.
     Since you have not established that such reimbursement
     would not equal or exceed the partnership's basis in
     the property, no loss is allowable.

In response to the FPAA, petitioner invoked this Court's

jurisdiction by filing a timely petition for readjustment of

partnership items.

     As indicated, the matter is presently pending before the

Court on respondent's Motion for Summary Judgment.   For purposes

of the present motion only, respondent:   (1) Admits all of the

allegations of fact contained in the petition; and (2) concedes

that the issuance of the Wetlands Manual so restricted Lakewood's

ability to develop its property as to amount to a "taking" of the

property within the meaning of sections 1231 and 165.   Assuming

there was such a taking, respondent maintains that she is

entitled to judgment as a matter of law on the theory that

Lakewood "had a co-extensive right to reimbursement from the

Federal Government which would reduce to zero the amount of the
                              - 7 -


otherwise allowable loss in the year the loss occurred."

Petitioner filed a response and a supporting memorandum of law in

opposition to respondent's motion.

Discussion

     The issue for decision is whether, assuming the application

of the Wetlands Manual effected a "taking" of Lakewood's

property, respondent is entitled to summary judgment that

Lakewood is nonetheless precluded from reporting a loss relating

to such event on the ground that it possessed a claim for

reimbursement from the Federal Government with respect to which

there was a reasonable prospect of recovery.

     Section 165(a) states the general rule that a deduction may

be reported for any loss sustained during the taxable year and

not compensated for by insurance or otherwise.   Section 1.165-

1(d)(2)(i), Income Tax Regs., which concerns the year in which a

loss deduction may be reported, provides:

     If a casualty or other event occurs which may result in
     a loss and, in the year of such casualty or event,
     there exists a claim for reimbursement with respect to
     which there is a reasonable prospect of recovery, no
     portion of the loss with respect to which reimbursement
     may be received is sustained, for purposes of section
     165, until it can be ascertained with reasonable
     certainty whether or not such reimbursement will be
     received. Whether a reasonable prospect of recovery
     exists with respect to a claim for reimbursement of a
     loss is a question of fact to be determined upon an
     examination of all facts and circumstances. Whether or
     not such reimbursement will be received may be
     ascertained with reasonable certainty, for example, by
     a settlement of the claim, by an adjudication of the
     claim, or by an abandonment of the claim. When a
                               - 8 -


     taxpayer claims that the taxable year in which a loss
     is sustained is fixed by his abandonment of the claim
     for reimbursement, he must be able to produce objective
     evidence of his having abandoned the claim, such as the
     execution of a release. [Emphasis added.]

In sum, section 1.165-1(d)(2)(i), Income Tax Regs., provides that

a loss is not sustained, i.e., recognized, for purposes of

section 165(a), if there exists a claim for reimbursement with

respect to the loss for which there is a reasonable prospect of

recovery, until it can be ascertained with reasonable certainty

whether or not such reimbursement will be received.

     Respondent's Motion for Summary Judgment is premised on the

theory that Lakewood was guaranteed full compensation for the

loss resulting from the classification of its property as

wetlands.   In particular, assuming the classification of

Lakewood's property as wetlands constitutes a "taking" of the

property, respondent contends that Lakewood is guaranteed to be

compensated by the Federal Government pursuant to the Fifth

Amendment to the U.S. Constitution which provides that "private

property [shall not] be taken for public use, without just

compensation."

     Petitioner presents four alternative arguments in opposition

to respondent's motion.   First, petitioner contends that, to the

extent respondent's motion is based on an admission of all

allegations of fact contained in the petition, respondent is
                               - 9 -


deemed to have conceded paragraph 8(l) of the petition which

states:

          The possibility of recovery on a case brought
     before the United States Claims Court is speculative
     and the potential existence of a legal right to bring
     such a claim is not the equivalent of an insurance
     policy which serves to reduce the amount of otherwise
     deductible loss which has been incurred by the
     Partnership.

As petitioner sees it, an admission of this paragraph is contrary

to respondent's argument that Lakewood had a guaranteed right of

reimbursement from the Federal Government.

    Petitioner's second argument is that respondent's motion

should be denied on the ground that the question of whether

Lakewood enjoyed a reasonable prospect of recovery against the

Federal Government is a question of fact as opposed to a question

of law.   Specifically, petitioner cites the portion of section

1.165-1(d)(2)(i), Income Tax Regs., that provides that whether a

taxpayer has a reasonable prospect of recovery with respect to an

event causing a potential loss is a question of fact to be

determined upon an examination of all the facts and

circumstances.

     Petitioner's third argument is based on this Court's

decision in Hills v. Commissioner, 76 T.C. 484 (1981), affd. 691

F.2d 997 (11th Cir. 1982).   In Hills, we allowed the taxpayers to

claim a theft loss of $660, notwithstanding that the taxpayers

had an insurance policy that would otherwise have covered the
                             - 10 -


loss, where the taxpayers decided not to file a claim with the

insurance company for fear that the policy would not be renewed.

Relying on the reasoning underlying our decision in Hills,

petitioner contends that Lakewood is not required to seek a

judicial remedy as a prerequisite to recognizing the loss in

question.

     Finally, petitioner maintains that respondent's motion

should be denied on the ground that Lakewood's prospects of

recovery against the Federal Government are speculative at best.

In short, petitioner asserts that Lakewood would have to apply to

COE for a permit to develop the regulated wetlands and have that

application denied before being permitted to commence an action

in the U.S. Court of Federal Claims.   Petitioner further contends

that he is prepared to prove at trial that, based upon current

COE practices, Lakewood's permit application might never be

formally denied, thus denying Lakewood access to the Court of

Federal Claims.

      Based upon our review of the pleadings and the other

materials making up the record in the case, and having fully

considered the parties respective positions, we are persuaded

that respondent's Motion for Summary Judgment should be denied.

Section 1.165-1(d)(2)(i), Income Tax Regs., provides that when an

event occurs that may result in a loss, yet there exists a claim

for reimbursement on the loss with respect to which there is a
                              - 11 -


reasonable prospect of recovery, no loss may be reported until it

can be ascertained with reasonable certainty whether or not such

reimbursement will be received.   Section 1.165-1(d)(2)(i), Income

Tax Regs., further provides that whether a reasonable prospect of

recovery exists with respect to a claim for reimbursement of a

loss is a question of fact to be determined upon an examination

of all facts and circumstances.

     Respondent argues that, assuming Lakewood suffered a

"taking" in this case, Lakewood necessarily possessed a

"reasonable prospect of recovery" as contemplated under section

1.165-1(d)(2)(i), Income Tax Regs.     Relying on affidavits

executed by Lakewood's environmental engineering consultants,

petitioner counters that, by virtue of COE's method of operation,

there is a genuine issue of fact whether Lakewood's property was

taken in such a manner as to eliminate any reasonable prospect of

recovery.

     While there is a certain allure in the fundamental logic

underlying respondent's argument, on the whole we find

respondent's position to be overly simplistic.     It is beyond

peradventure that the Federal Government is obliged to provide

just compensation where private property is taken within the

meaning of Fifth Amendment.   See, e.g., Lucas v. South Carolina

Coastal Council, 505 U.S. 1003 (1992).     Nevertheless,

respondent's abstract concession that Lakewood suffered a
                             - 12 -


compensable "taking" does not ensure or confirm that Lakewood

will in fact secure such a remedy given the administrative

realities of wetlands regulation.    In light of petitioner's

allegations concerning COE's administrative practices, we

conclude that a genuine issue as to a material fact remains in

dispute with regard to Lakewood's prospects for a recovery.5    For

these reasons, we conclude that the question of whether Lakewood

sustained a loss within the meaning of section 165(a) in this

case is not ripe for disposition by summary judgment.

     To reflect the foregoing,

                                      An order denying respondent's

                                 Motion for Summary Judgement

                             will be issued.




     5
        Because this matter is before us on respondent's motion
for summary judgment, the inferences that we draw from the
underlying facts are viewed in the light most favorable to
petitioner, the party opposing the motion. Dahlstrom v.
Commissioner, 85 T.C. 812, 821 (1985).
