                        T.C. Memo. 1997-469



                      UNITED STATES TAX COURT



L&C SPRINGS ASSOCIATES, SOLOMON A. WEISGAL INVESTMENT ASSOCIATES,
           TAX MATTERS PARTNER, ET AL.,1 Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket Nos. 11361-92, 10933-93,      Filed October 15, 1997.
                 11969-94.



     Randall G. Dick and Jeffrey I. Margolis, for petitioners.

     John J. Comeau and Rogelio A. Villageliu, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     SWIFT, Judge:   By notices of final partnership

administrative adjustments (FPAA), respondent determined

1
     Cases of the following petitioners are consolidated
herewith: L&C Springs Associates, Solomon A. Weisgal Investment
Associates, Tax Matters Partner, docket No. 10933-93; and L&C
Springs Associates, Century Capital Corp., Tax Matters Partner,
docket No. 11969-94.
                               - 2 -

adjustments to L&C Springs Associates’ (L&C Springs’) 1988, 1989,

and 1990 Federal partnership income tax returns, as follows:


                   Respondent's Partnership Adjustments
              Income On Discharge     Interest    Depreciation
     Year       Of Indebtedness       Expense       Expense

     1988        $2,250,000            $(254,413)      $(168,350)
     1989         2,250,000             (264,858)       (167,707)
     1990         2,250,000             (261,961)       (167,722)


     Unless otherwise indicated, 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.

     The above $2,250,000 in income that respondent charged to

L&C Springs in respondent's FPAA for each of the years 1988,

1989, and 1990 is the same item of income and relates to

respondent's contention that L&C Springs' ownership interest in

two apartment complexes (the L&C Properties) through a Florida

land trust was effectively abandoned or terminated in either

1988, 1989, or 1990, triggering, for Federal income tax purposes,

a sale or exchange of L&C Springs' interest in the L&C

Properties.

     Respondent's primary position is that L&C Springs' ownership

interest in the L&C Properties should be treated as having been

terminated as of the end of October of 1990.        Alternatively and

only as a protective measure, respondent contends that L&C
                               - 3 -

Springs' interest in the L&C Properties should be treated as

having been terminated in 1988 or 1989.

     The only issue for decision is whether L&C Springs’

ownership interest in the L&C Properties was abandoned or

terminated triggering for Federal income tax purposes a sale or

exchange of L&C Springs' interest therein in 1988, 1989, or 1990.

If we conclude that L&C Springs’ ownership interest in the L&C

Properties was abandoned or terminated in one of those years,

then L&C Springs would be required, under sections 1001, 1231,

1245, and 1250, to recognize ordinary income and capital gain in

the year of such abandonment or termination based on the amount

of accelerated depreciation claimed on the L&C Properties and on

the amount realized on such sale or exchange.   Also, the above

interest and depreciation deductions that were claimed for 1988,

1989, and 1990 with respect to L&C Springs' ownership interest in

the L&C Properties would not be allowable for any period of time

after such abandonment or termination occurred.


                         FINDINGS OF FACT

     On May 5 and June 30, 1980, Tanglewood Properties, Inc.

(Tanglewood), purchased from the Clinton Family Trust for a total

stated consideration of $2.1 million, subject to three existing

mortgages securing the land and buildings, an ownership interest

in a Florida land trust that owned the L&C Properties and the

related land.   The L&C Properties were located in Miami and in
                               - 4 -

Miami Springs, Florida, just north of Miami International

Airport.

     From 1980 through 1983, Burton Kanter (Kanter), and from

1983 through 1991, Lawrence A. Freeman, served as president of

Tanglewood.   From 1983 through 1991, Lloyd J. Boggio (Boggio)

served as vice president of Tanglewood.

     Tanglewood's $2.1 million stated purchase price for the L&C

Properties was reflected by cash, by short-term notes guaranteed

by Kanter, and by a $1.6 million wrap-around mortgage note that

Tanglewood issued in favor of the Clinton Family Trust.

     The record does not reflect the history of the ownership of

the L&C Properties by the Clinton Family Trust, specifically when

and for what consideration the Clinton Family Trust acquired the

L&C Properties.

     On October 29, 1981, L&C Springs was formed under the laws

of the State of Illinois as a tax-oriented limited partnership

for the purpose of purchasing from Tanglewood an interest in the

L&C Properties.

     At the time the petitions were filed, L&C Springs' principal

place of business was located in Chicago, Illinois.
                                 - 5 -

     L&C Springs’ two original general partners were Solomon A.

Weisgal Investment Associates (SAWIA)2 and Century Capital Corp.

(Century Capital).3

     L&C Springs' limited partners included, among others, First

Rate Investments, a partnership composed of members of Kanter's

family and trusts established for the benefit of members of

Kanter's family.

     As of 1981 and throughout the years in issue, Tanglewood was

a wholly owned subsidiary of The Holding Co., a Delaware

corporation, with its principal place of business in Chicago,

Illinois.4    The same few individuals (namely, Kanter, Solomon A.

Weisgal (Weisgal), and Boggio) who controlled Tanglewood and The

Holding Co. also controlled L&C Springs and the activities of L&C

Springs.     The transactions entered into between Tanglewood and

2
     As of 1981, SAWIA's general partner was the Solomon A.
Weisgal Revocable Trust, Solomon A. Weisgal, co-trustee, and the
limited partners were all members of or entities for the benefit
of Solomon A. Weisgal's immediate family.
3
     Century Capital Corp. was a Delaware corporation, the
beneficial owners of which were entities for the benefit of
Solomon A. Weisgal's immediate family and a trust for the benefit
of Sharon Meyers, president of First Rate Investments (a limited
partner of L&C Springs).
4
     From 1977 through 1982 and from 1990 through 1991, Burton W.
Kanter served as president of The Holding Co. From 1977 through
1982, Solomon Weisgal served as vice president of The Holding
Co., and from 1982 through 1986, he served as president of The
Holding Co. From 1987 through 1989, Joshua Kanter, son of
Burton W. Kanter, served as president of The Holding Co. The
shareholders of The Holding Co. constituted, in large part,
trusts for the benefit of Burton W. Kanter, Solomon Weisgal, and
their family members.
                                 - 6 -

L&C Springs and the management companies relating to the L&C

Properties were not conducted in an arm's-length manner.

     In order to finance L&C Springs' purchase of the L&C

Properties, SAWIA and Century Capital, as L&C Springs' general

partners, promoted investment in L&C Springs through private

placement memoranda distributed primarily to friends and family

of Kanter and Weisgal.   These memoranda described generally the

significant economic risks associated with investments in L&C

Springs and explained the significant tax benefits that the

investors, as limited partners, were expected to claim on their

individual income tax returns.

     L&C Springs’ private placement memorandum specifically

indicated that the projected rental revenue from the L&C

Properties would not be sufficient to cover expenses and to pay

off L&C Springs' debt obligations and that the only way an

investment in L&C Springs would be profitable would be if the

apartments were converted into condominium units and sold or if

the L&C Properties were sold for a substantial gain.

     Under L&C Springs' partnership agreement, during each of the

years 1981 through 1986, each limited partner was obligated to

make additional annual capital contributions to L&C Springs in

amounts based on each limited partner’s ownership interest.    The

total amount of the additional capital contributions that L&C

Springs was to receive from its limited partners equaled

$1,035,000.
                                - 7 -

     At the time investments in L&C Springs were being promoted,

the apartment units in the L&C Properties maintained a high

occupancy rate due to employees of Eastern, National, and Pan

American Airlines who were based at the Miami International

Airport.

     On October 30, 1981, L&C Springs entered into an agreement

with Tanglewood to purchase for a stated consideration of $2.8

million Tanglewood's ownership interest in the Florida land trust

that held title to the L&C Properties and that held title to the

underlying land.    L&C Springs' stated $2.8 million purchase price

for the L&C Properties was reflected solely by a seller-financed,

nonrecourse $2.8 million promissory wrap-around note from L&C

Springs (the L&C Note) in favor of Tanglewood.

     At the time of the above transaction, Tanglewood's $1.6

million mortgage note and the three existing mortgages relating

to its 1980 purchase of the L&C Properties were not paid off.

Those mortgages remained outstanding and were wrapped by the $2.8

million L&C Note.   In other words, L&C Springs' payments to

Tanglewood on the $2.8 million L&C Note were intended to be used

by Tanglewood to make payments due on Tanglewood's $1.6 million

mortgage note.

     Effective simultaneously with the above transaction, L&C

Springs exercised an option set forth in the L&C purchase

agreement to reduce the stated purchase price for, and to alter

significantly the nature of, its ownership interest in the
                              - 8 -

Florida land trust and in the L&C Properties.   Under that option,

the stated purchase price for L&C Springs’ interest in the L&C

Properties was reduced from $2.8 million to $2,450,000 (reflected

by a nonrecourse promissory note), and L&C Springs immediately

reconveyed to Tanglewood ownership of the underlying land and

effectively ownership of the apartments and other improvements

associated with the L&C Properties.   L&C Springs, through the

Florida land trust, retained only nominal title to the L&C

Properties and a 15-year leasehold interest in the land, in the

apartments, and in other improvements on the land.   For the 15-

year lease of the underlying land, L&C Springs agreed to make

separate, fixed lease payments of $36,000 each year.

     In effect, for the reduced stated purchase price of

$2,450,000, L&C Springs retained, through the Florida land trust,

only a 15-year leasehold interest in the L&C Properties.

     Under the lease agreement that L&C Springs and Tanglewood

entered into, during the last year of the 15-year lease of the

land (namely, from January 1, 1995 through July 1, 1996), L&C

Springs, through the Florida land trust, had an option to

purchase from Tanglewood the L&C Properties and the related land.

     L&C Springs' $2,450,000 debt obligation agreed to in

connection with the reduced purchase price for L&C Springs' 15-

year leasehold interest in the L&C Properties was due to be paid

to Tanglewood with four annual principal payments to Tanglewood

of $50,000 each, due on July 1 of 1982, 1983, 1984, and 1985, and
                                - 9 -

with a balloon payment due on January 31, 1987, of $2,250,000,

plus accrued interest.

     Under a collateral agreement of December 15, 1981, that was

entered into between Tanglewood and L&C Springs, upon default on

L&C Springs' $2,450,000 debt obligation, Tanglewood had the right

to terminate L&C Springs' leasehold interest in the L&C

Properties, and upon any foreclosure of its leasehold interest,

L&C Springs waived any right under Illinois State law of

redemption of its leasehold interest in the L&C Properties.

     L&C Springs hired Clinton, Boggio & Associates (CB&A) to

manage the L&C Properties.   Boggio was president of CB&A and he

personally managed the L&C Properties and, with Weisgal and

Kanter, participated in all significant business decisions

regarding the L&C Properties.

     The relationship between "Clinton" of CB&A and the Clinton

Family Trust (which owned the L&C Properties prior to the sale to

Tanglewood) is not explained in the record.

     Generally, rental income collected from the L&C Properties

was used to cover CB&A's management service fees, operating

expense of the L&C Properties, real estate taxes, and liability

insurance coverage.

     In November of 1983, Tanglewood refinanced with California

Federal Savings & Loan (Cal Fed) for $1.8 million the underlying

senior three mortgages outstanding and secured by the L&C

Properties.   As a result of this refinancing, $300,000 in excess
                               - 10 -

cash should have been made available to Tanglewood to use in

connection with the management and the expenses relating to the

L&C Properties.   This $300,000, however, was not so used.   It was

transferred to a management company controlled by Kanter.

     In 1985, Tanglewood again refinanced with Cal Fed for

$1,952,500 the underlying senior $1.8 million mortgages

outstanding and secured by the L&C Properties.    As part of this

refinancing, Tanglewood represented to Cal Fed that Tanglewood

alone was the owner of the L&C Properties.    No mention was made

of an interest of L&C Springs in the L&C Properties.    The funds

from this second refinancing were used to retire the mortgage

with Cal Fed.



     As a result of this refinancing, it appears that $140,000 in

excess cash should have been made available to Tanglewood to use

in connection with the management and the expenses relating to

the L&C Properties.   This $140,000, however, was not so used.     It

was sent directly to Kanter.

     By January 31, 1987, L&C Springs had made each of the four

annual $50,000 payments due Tanglewood on L&C Springs' $2,450,000

debt obligation, representing total payments of $200,000.

     On January 31, 1987, however, L&C Springs did not make the

$2,250,000 balloon payment of principal on the L&C Note that L&C

Springs owed to Tanglewood.    After this default on January 31,

1987, L&C Springs made no further payments on the L&C Note to
                             - 11 -

Tanglewood, and L&C Springs made no further payments of real

estate taxes due on the L&C Properties.

     Neither in 1987 nor at any time thereafter did Tanglewood

take any foreclosure action against L&C Springs' leasehold

interest in the L&C Properties, nor did Tanglewood take any other

formal action to recover the $2,250,000 stated balance due on the

L&C Note.

     After January 31, 1987, on its books and records, L&C

Springs continued to accrue unpaid interest on the $2,250,000

principal balance due on the L&C Note, and rental income received

from the L&C Properties, after operating expenses, was turned

over to Tanglewood and Cal Fed and was used to pay down

Tanglewood’s senior debt obligation to Cal Fed.   No portion of

such net rental income paid to Cal Fed appears to have been

applied to reduce the principal amount of the balance owed on the

L&C Note.

     From approximately 1985 forward, rental activities relating

to the L&C Properties operated at an annual cash deficit of at

least $63,000.

     During 1988, 1989, and 1990, Eastern, National, and Pan

American Airlines each encountered financial difficulties.     By

1990, layoffs of airline employees had occurred, and the

occupancy rate of the L&C Properties declined.

     In 1988, Tanglewood defaulted on its mortgage loan payments

owed to Cal Fed, and Cal Fed commenced foreclosure proceedings.
                              - 12 -

A loan was obtained by Kanter in the amount of $108,141 and the

funds therefrom were loaned to Tanglewood to cure Tanglewood's

mortgage loan default and to pay other expenses.   As a result,

Cal Fed's foreclosure proceedings against Tanglewood were

withdrawn.

     In 1989, L&C Springs ceased paying to Tanglewood the rent

owed for the lease of the land associated with the L&C

Properties.   By December of 1990, L&C Springs had unpaid but

accrued rent of $51,000 owed to Tanglewood relating to the land.

     On July 1, 1989, Tanglewood again defaulted on its mortgage

debt obligation to Cal Fed.   Tanglewood unsuccessfully made some

efforts to again refinance its debt obligation with Cal Fed.    L&C

Springs obtained no additional funds from L&C Springs' limited

partners and from outside lenders, and Tanglewood's default was

not cured.

     In 1989, SAWIA sold for $1 to Century Capital its general

partnership interest in L&C Springs.

     In November of 1989, Cal Fed again commenced foreclosure

proceedings against Tanglewood with regard to the L&C Properties.

In the foreclosure proceedings, Tanglewood represented that it

alone owned the L&C Properties, and no disclosure was made either

of the Florida land trust’s or of L&C Springs' leasehold interest

therein.

     On April 26, 1990, and May 1, 1990, in the above foreclosure

proceedings, Cal Fed obtained final judgments of foreclosure on
                               - 13 -

the L&C Properties.    All rental income from the L&C Properties

was ordered to be turned over directly to Cal Fed and court-

ordered sales of the L&C Properties were scheduled for May 24 and

May 29, 1990.

        On May 16, 1990, pursuant to decisions made by Boggio,

Kanter, and Weisgal, Tanglewood filed a Chapter 11 bankruptcy

petition in the U.S. Bankruptcy Court for the Southern District

of Florida for the purpose of triggering an automatic stay of the

scheduled foreclosure sales of the L&C Properties.    By filing for

bankruptcy, the individuals controlling Tanglewood and L&C

Springs hoped to delay for as long as possible the realization of

ordinary income and capital gain by L&C Springs and its limited

partners that would be triggered upon a foreclosure sale of the

L&C Properties.

       In disclosure statements prepared by Boggio and provided by

Tanglewood to the Bankruptcy Court in connection with

Tanglewood's bankruptcy proceedings, Tanglewood represented

itself as the owner of the L&C Properties.

       In these bankruptcy proceedings, general reference was made

to a Florida land trust, but in financial statements filed on

behalf of Tanglewood, the $2,250,000 stated debt obligation of

L&C Springs to Tanglewood with regard to the L&C Properties was

not listed as an asset of Tanglewood, nor reflected in any other

way.
                             - 14 -

     On October 29, 1990, Cal Fed and Tanglewood executed an

agreement (October 1990 Agreement) in which Tanglewood agreed to

dismissal of its bankruptcy proceedings in exchange for Cal Fed's

agreement to reschedule the foreclosure sale of the L&C

Properties until after February 15, 1991.   Under the October 1990

Agreement between Cal Fed and Tanglewood, management and control

of the L&C Properties were turned over to Cal Fed, including all

security deposits, receivables, contracts, and books and records

relating to the L&C Properties and rental income received.

Tanglewood’s bankruptcy was dismissed on November 1, 1990.

     By November 1, 1990, Cal Fed had obtained control over the

L&C Properties and possessed all of the burdens and benefits of

ownership of the L&C Properties.

      As indicated, in spite of L&C Springs' 1987 default on the

L&C Note, Tanglewood never initiated proceedings to terminate L&C

Springs’ leasehold interest in the L&C Properties.

     The October 1990 Agreement effectively conveyed to Cal Fed

L&C Springs' remaining 6-year leasehold interest in the L&C

Properties (as of 1990, the remaining term on L&C Springs' 15-

year leasehold was 6 years), terminated L&C Springs' underlying

ground lease relating to the L&C Properties, and relieved L&C

Springs of its obligation to Tanglewood on the L&C Note.   Under

the October 1990 Agreement, it was represented that no right of

redemption would be exercised to interfere with foreclosure of

the L&C Properties.
                              - 15 -

     As of November 1, 1990, the fair market value of the L&C

Properties and the related land was no more than $1,750,000.

     In February and June of 1991, foreclosure sales of the L&C

Properties occurred with Cal Fed the highest bidder and ultimate

purchaser.

     From 1981 through 1991, employees of SAWIA maintained the

books and records relating to income and expenses of L&C Springs

and the L&C Properties, and SAWIA and other accountants prepared

and filed L&C Springs' Federal partnership income tax returns.

     For 1981 through 1986, years not in issue, Weisgal and other

accountants filed Federal partnership income tax returns on

behalf of L&C Springs, reflecting substantial net operating

losses of L&C Springs, accrued interest expenses on the L&C Note

to Tanglewood, and accelerated depreciation expenses relating to

the L&C Properties.   These substantial claimed tax benefits were

passed through to L&C Springs' limited partners.

     For 1987, 1988, 1989, and 1990, Weisgal or other accountants

also prepared and filed on behalf of L&C Springs, Federal

partnership income tax returns reflecting, among other items,

accrued interest on the L&C Note and depreciation expenses

relating to the L&C Properties.   These claimed interest and

depreciation expenses for just 1988, 1989, and 1990, totaled

approximately $1,285,011.   On none of L&C Springs’ partnership

income tax returns for those years was income or gain reported

relating to cancellation of the L&C Note or a termination or
                              - 16 -

abandonment of L&C Springs’ ownership interest in the L&C

Properties.

     On L&C Springs' books and records for 1990 and 1991 and on

L&C Springs' 1990 and 1991 Federal partnership income tax

returns, rental income relating to the L&C Properties was

reported only up until November 1, 1990.   After November 1, 1990,

only Cal Fed received and reported rental income from the L&C

Properties.

     On November 15, 1991, final closing entries were made in L&C

Springs' books and records, and the L&C Springs partnership was

apparently dissolved as of that date.

     From the date of the initial investment by L&C Springs in

the L&C Properties, the investors in L&C Springs received tax

advice from Kanter that upon any sale, foreclosure, or

abandonment of L&C Springs' interest in the L&C Properties income

would be realized by L&C Springs in connection with the discharge

of L&C Springs' $2,250,000 debt obligation to Tanglewood.

     For L&C Springs' short taxable year January 1 to

November 15, 1991, a Federal partnership income tax return on

behalf of L&C Springs was filed on which was reported a taxable

gain under sections 1001, 1231, 1245, and 1250 relating to the

termination of L&C Springs' leasehold interest in the L&C

Properties.   Based on that gain, total distributive income to the

general and limited partners of L&C Springs was reported on L&C
                              - 17 -

Springs’ 1991 Federal partnership income tax return of

$2,321,014.

     On L&C Springs' 1991 Federal partnership income tax return,

it was indicated that, because "the apartment buildings in Miami

Springs, Florida, are in bankruptcy" the records necessary to

report L&C Springs' net operating losses and other expenses could

not be located, and therefore no net operating losses or

depreciation expenses were reported and deducted relating to the

L&C Properties.   It does not appear from the record that L&C

Springs ever filed an amended 1991 Federal partnership income tax

return claiming any 1991 net operating losses, accrued interest,

or depreciation expenses relating to the L&C Properties.

     The following schedule reflects net losses and related

interest and depreciation expenses relating to the L&C Properties

as claimed by L&C Springs for 1987 through 1990.


                             As Claimed By L&C Springs
                Income       Interest      Depreciation
     Year       (Loss)       Expense         Expense

     1987     $(278,646)    $(250,075)      $(164,855)
     1988      (328,373)     (254,413)       (168,350)
     1989      (350,570)     (264,858)       (167,707)
     1990      (301,033)     (261,961)       (167,722)


     On audit for 1987, not now before the Court, respondent, on

April 5, 1991, issued an FPAA to L&C Springs charging L&C Springs

with $2,250,000 in ordinary income on the ground that L&C Springs

effectively abandoned to Tanglewood its ownership interest in the
                              - 18 -

L&C Properties and that L&C Springs realized discharge of

indebtedness income relating thereto.   Respondent also disallowed

L&C Springs' accrued interest expense and depreciation expense

deductions that were claimed on L&C Springs' 1987 Federal

partnership income tax return.

     At docket No. 13915-91, L&C Springs filed a petition with

this Court contesting the above partnership adjustments made by

respondent with respect to L&C Springs for 1987.   After

negotiations between the parties, respondent conceded each of the

above adjustments for 1987.   On February 18, 1993, a decision was

entered by this Court in docket No. 13915-91 reflecting the above

settlement of the parties and ordering that the partnership items

of L&C Springs be accepted as claimed on L&C Springs' Federal

partnership income tax return for 1987.

     As explained, for 1988, 1989, and 1990, respondent issued

protective FPAA’s charging L&C Springs with the same $2,250,000

in income on the ground that, in either 1988, 1989, or 1990 L&C

Springs effectively abandoned or transferred to Tanglewood its

ownership interest in the L&C Properties and that such

abandonment or transfer triggered a realization of the full

$2,250,000 principal amount of the L&C Springs’ debt obligation

to Tanglewood.   On brief, respondent concedes that the $2,250,000

should be reduced by L&C Springs’ adjusted tax basis of its

ownership interest in the L&C Properties.   Respondent also

disallowed L&C Springs' accrued interest expense and depreciation
                               - 19 -

expense deductions that were claimed on its 1988, 1989, and 1990

Federal partnership income tax returns.


                               OPINION

     Under the authority of Commissioner v. Tufts, 461 U.S. 300

(1983), the parties do not dispute that, in the year in which L&C

Springs' ownership interest in the L&C Properties was terminated

and L&C Springs was thereby relieved of its debt obligation to

Tanglewood, the amount of L&C Springs' $2,250,000 nonrecourse

debt obligation relating to the L&C Properties is to be treated,

under sections 1001, 1221(2), 1231, 1245, and 1250, as part of

the amount of income realized by L&C Springs (to be reduced by

L&C Springs' adjusted tax basis in its leasehold interest in the

L&C Properties).    See Estate of Delman v. Commissioner, 73 T.C.

15, 32-33 (1979).

     Also as indicated, the parties agree that for periods of

time after L&C Springs' ownership interest in the L&C Properties

was terminated all interest and depreciation deductions claimed

by L&C Springs should be disallowed.

     A formal sale or exchange of property constitutes an

identifiable event that will trigger realization of gain or loss

relating to a taxpayers' ownership interest in property.      Secs.

165(f), 1001.   Other events, however, may also constitute an

identifiable event that will trigger realization of gain or loss

relating to ownership of property.      An involuntary foreclosure
                              - 20 -

sale of real property, a tax forfeiture of real property, a

conveyance of real property to a mortgagee by quitclaim deed in

lieu of foreclosure, a decline in the value of real property

below the amount of nonrecourse debt associated with the property

combined with a conveyance of the property by quitclaim deed to

the mortgagee, an abandonment of property subject to nonrecourse

debt, relief from indebtedness associated with property, and

extinguishment of a taxpayer's right of redemption following a

foreclosure sale of property may all be treated as a sale or

exchange triggering realization of gain or loss relating to

property.   Commissioner v. Tufts, supra at 308-309; Helvering v.

Nebraska Bridge Supply & Lumber Co., 312 U.S. 666 (1941);

Helvering v. Hammel, 311 U.S. 504, 511 (1941); Yarbro v.

Commissioner, 737 F.2d 479, 485-486 (5th Cir. 1984), affg. T.C.

Memo. 1982-675; Laport v. Commissioner, 671 F.2d 1028, 1033-1034

(7th Cir. 1982), affg. T.C. Memo. 1980-355; R. O'Dell & Sons Co.

v. Commissioner, 169 F.2d 247, 248 (3d Cir. 1948), affg. 8 T.C.

1165 (1947); Lockwood v. Commissioner, 94 T.C. 252, 260 (1990);

Allan v. Commissioner, 86 T.C. 655, 659-660 (1986), affd. 856

F.2d 1169 (8th Cir. 1988); Middleton v. Commissioner, 77 T.C.

310, 320-321 (1981), affd. per curiam 693 F.2d 124 (11th Cir.

1982); Freeland v. Commissioner, 74 T.C. 970, 981-983 (1980);

Belcher v. Commissioner, T.C. Memo. 1965-1; sec. 1.1001-2(a),

Income Tax Regs.
                               - 21 -

     Also, it has been specifically held that abandonment of a

beneficial interest in a Florida land trust subject to a

nonrecourse debt may constitute a sale or exchange and may

trigger realization of gain or loss associated with an interest

in the land trust.    Arkin v. Commissioner, 76 T.C. 1048, 1055-

1056 (1981).   In Arkin, in 1974, the year following the

taxpayer's acquisition of an ownership interest in a Florida land

trust, the value of the underlying property associated with the

land trust declined dramatically.   The taxpayer notified one of

the banks holding a mortgage loan on the underlying property and

each of the beneficiaries of the land trust of his intention to

abandon his interest in the land trust.   In subsequent years,

creditors holding superior mortgages on the underlying property

foreclosed on the property and sold it at a foreclosure sale.      We

held that the taxpayer's actions regarding his interest in the

land trust constituted an abandonment in 1974 of his interest in

the land trust, that such abandonment constituted a sale or

exchange, and that the loss realized constituted a capital loss

under section 165(f), not an ordinary loss deduction under

section 165(a) and (c)(2).    Id. at 1053-1056.

     Based on the evidence before us, we conclude that L&C

Springs' ownership interest in the L&C Properties was, for

Federal income tax purposes, effectively terminated as of

November 1, 1990.    Certainly, by November 1, 1990, L&C Springs,

and all individuals associated with L&C Springs and Tanglewood
                             - 22 -

and the other entities involved in this transaction had for all

intents and purposes (apart from L&C Springs' reporting of the

income in question for 1991) treated L&C Springs as having no

continuing substantive ownership interest in the L&C Properties.

Effectively, as of November 1, 1990, L&C Springs' ownership

interest in the L&C Properties was not regarded as viable by the

parties, had no value, and was effectively extinguished.

     The October 1990 Agreement between Tanglewood and Cal Fed

transferred all attributes of ownership (except nominal title) of

the L&C Properties from Tanglewood to Cal Fed.   It effectively

relieved L&C Springs of its $2,250,000 debt obligation to

Tanglewood and disposed of L&C Springs' leasehold interest in the

L&C Properties.

     Neither in 1987, 1988, 1989, 1990, nor in any later year,

did Tanglewood seek to collect the defaulted $2,250,000 debt

obligation due from L&C Springs.   Tanglewood's financial

disclosures in its bankruptcy proceeding in 1990 did not disclose

L&C Springs’ stated debt obligation to Tanglewood as an asset of

Tanglewood.

     The credible evidence indicates that L&C Springs' tax return

treatment of the termination of its ownership interest in the L&C

Properties as not having occurred until 1991 constituted simply

an attempt, by the various individuals associated with L&C

Springs and Tanglewood, to defer, for income tax purposes,
                               - 23 -

realization of L&C Springs' income relating to relief on its

$2,250,000 nonrecourse indebtedness to Tanglewood.

       Petitioners contend that Tanglewood’s and Cal Fed’s

postponement until 1991 of the foreclosure sale was based on the

hope that additional funds might be raised by L&C Springs to

avoid the foreclosure sale.    This contention is not credible.

L&C Springs defaulted on its indebtedness to Tanglewood as early

as 1987.    It was apparent in October of 1990, and earlier, that

no additional funds would be available and that a foreclosure

sale was inevitable.

        In 1989, L&C Springs ceased paying Tanglewood rent due on

the land relating to the L&C Properties.    As of the end of

October of 1990, CB&A had turned over all management of the

properties to Cal Fed and to a management company working for Cal

Fed.    By December of 1990, L&C Springs no longer reported rental

income from the L&C Properties.

       Petitioners rely on cases involving recourse debt and argue

that no sale or exchange occurs until a foreclosure sale occurs

and until a taxpayer's right of redemption of the foreclosed

property expires.    See R. O'Dell & Sons Co. v. Commissioner,

supra; Eisenberg v. Commissioner, 78 T.C. 336 (1982).     Where,

however, recourse debt is involved (as distinguished from

nonrecourse debt that is involved in the instant cases)

abandonment or other disposition of the underlying property will

not trigger a sale or exchange because the debt is not
                              - 24 -

necessarily extinguished.   The possibility of a deficiency

judgment against the debtor exists based on the recourse nature

of the debt obligation, and the amount of the gain or loss cannot

be fixed until the foreclosure sale takes place.   Commissioner v.

Green, 126 F.2d 70, 71-72 (3d Cir. 1942); Aizawa v. Commissioner,

99 T.C. 197, 200-202 (1992), affd. without published opinion 29

F.3d 630 (9th Cir. 1994); Lockwood v. Commissioner, 94 T.C. 252,

260 (1990).

     Petitioners do not sufficiently appreciate the nonrecourse

nature of L&C Springs' $2,250,000 debt obligation and the many

facts in these cases indicating that, certainly by November of

1990, all of the individuals and entities associated with this

transaction treated L&C Springs, for all purposes other than tax,

as having no continuing viable ownership interest in the L&C

Properties.

     Petitioners fail to take into account that, under the

collateral agreement, L&C Springs expressly waived any right of

redemption.   Further, petitioners have not cited any Florida law

that would provide that a mere holder of a leasehold interest in

buildings and improvements would have a right of redemption

following a foreclosure sale of the underlying land.

     In summary, although the October 1990 Agreement was between

Tanglewood and Cal Fed, the individuals in control of Tanglewood

were also in control of L&C Springs.   Under the October 1990

Agreement, Cal Fed was given control and management of the L&C
                              - 25 -

Properties and the underlying land, and Cal Fed received the

benefits of ownership.   As of November 1, 1990, no additional

funding was available, and the individuals involved with

Tanglewood and L&C Springs knew that no further funds would

become available and agreed that a foreclosure sale would occur

and that no right of redemption was available.   Only formal,

nominal title to the property was withheld from Cal Fed until

1991.   By November 1, 1990, L&C Springs had effectively abandoned

its leasehold interest in the L&C Properties and the related

land, and L&C Springs was relieved by such abandonment of its

nonrecourse debt obligation to Tanglewood.

     Based on the above analysis, L&C Springs is required to

realize, as of November 1, 1990, income associated with the

termination of its interest in the L&C Properties and with the

relief from its $2,250,000 debt obligation to Tanglewood on the

L&C Note.   Also, any interest expense deductions and depreciation

deductions claimed by L&C Springs for periods of time after

October 31, 1990, are to be disallowed.5


                                    Decisions will be entered

                               under Rule 155.

5
     Petitioners’ counsel represent that L&C Springs should have
a limited right under mitigation to open up L&C Springs’ 1991
taxable year to remove the gain reported for 1991 relating to the
transaction that we treat herein as taxable in 1990. Our opinion
herein, however, is not dependent upon correction of petitioners’
treatment of this item for 1991.
