109 T.C. No. 21




                 UNITED STATES TAX COURT



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



 Docket No. 24656-93.                Filed December 29, 1997.



      L, a partnership, purchased land on which it
 intended to build single-family residences. At the
 time of purchase, the land was zoned for agricultural
 use and one-third of the land was wetlands under
 Federal wetland regulations. In 1988, L applied for
 rezoning of the land to residential, and in 1989, L's
 rezoning application was denied. Also in 1989, new
 Federal wetland regulations were issued that resulted
 in about 75 percent of the land’s being classified as
 wetlands. L is required to obtain a permit under the
 Clean Water Act of 1977, Pub. L. 95-217, sec. 67(a)
 (commonly called a section 404 permit), 91 Stat. 1566,
 1600, 33 U.S.C. sec. 1344 (1994), before beginning the
 residential project on the wetland portion of the land.
 L did not apply for a permit in 1989, and L did not
 sell or abandon the property. The land remains zoned
 for agricultural use. L claimed a loss deduction under
 sec. 165, I.R.C., in 1989 for the decrease in property
 value of the land based on its inability to use the
                                 - 2 -


     land for residential development because of the Federal
     wetland regulations.
          Held: There has not been a realization event that
     fixes the decrease in property value in a closed and
     completed transaction, and L is not entitled to a loss
     deduction under sec. 165(a), I.R.C.


     Douglas E. Kahle, for petitioner.

     John C. McDougal, for respondent.



     GERBER, Judge:     Respondent issued a notice of final

partnership administrative adjustments to Lakewood Associates for

taxable year 1989.    The issue for our consideration is whether

Lakewood Associates is entitled to a loss deduction under section

1651 in 1989 for a decrease in the value of real property alleged

to have been caused by restrictions imposed on its ability to

develop the property by Federal wetland regulations that were

issued in that year.2

                           FINDINGS OF FACT3

     Lakewood Associates (Lakewood) is a Virginia general

partnership with its principal place of business in Virginia

     1
      All section references are to the Internal Revenue Code in
effect for the year in issue, and all Rule references are to the
Tax Court Rules of Practice and Procedure, unless otherwise
indicated.
     2
      In an earlier opinion, respondent’s motion for summary
judgment was denied. See Lakewood Associates v. Commissioner,
T.C. Memo. 1995-552.
     3
      The parties’ stipulation of facts and the attached exhibits
are incorporated by this reference.
                               - 3 -


Beach, Virginia, at the time the petition was filed.   In 1987,

Lakewood purchased approximately 632 acres of unimproved real

estate located on Elbow Road in Chesapeake, Virginia, to

construct single-family homes in a residential development to be

called Elbow Lake Estates (Elbow Lake property).   Lakewood

purchased the property from R.G. Moore Building Corp. (Moore

Corp.) for a purchase price of $8,860,000 and granted Moore Corp.

a 55-percent general partnership interest in the Lakewood

partnership.   Lakewood intended to develop the property in

conjunction with an adjacent 59.7-acre property, the Boy Scout

Tract, owned by Lakewood's tax matters partner, Robert G. Moore.

Mr. Moore has been a real estate developer and contractor for

over 40 years.

     At the time Lakewood acquired the property, it was zoned for

agricultural use.   On February 8, 1988, Lakewood applied for

rezoning of the Elbow Lake property from an agricultural district

to a single-family residential district.   Following a public

hearing, a staff report to the Chesapeake Planning Commission

recommended that the Commission deny Lakewood's proposed rezoning

because the proposed residential development would create traffic

and education demands that could not be met by Lakewood's or the

city's budget.   In addition, the staff report cited problems with

the planned sewer system on the property, which did not meet city

requirements, and the local government's inability to serve the
                                - 4 -


residents of the proposed development.     Based on the staff's

recommendation, in September 1988, the Planning Commission

recommended to the Chesapeake City Council (City Council) that

Lakewood's rezoning application be denied.     In October 1988,

however, the City Council approved Lakewood's rezoning

application contingent on certain proffers.

       Residents of Chesapeake, Virginia, mounted a petition drive

against the rezoning and, after obtaining the required 15 percent

of voters’ signatures, requested that the City Council repeal the

approved rezoning of Lakewood's Elbow Lake property.     The City

Council voted not to repeal the rezoning.     On March 7, 1989, a

voter referendum was held on whether or not to rezone the Elbow

Lake property as mandated by the Chesapeake City Charter.     The

proposed rezoning was defeated by the voter referendum with over

95-percent voting against rezoning the property for residential

use.    The referendum was subsequently upheld by the Virginia

Supreme Court in an opinion filed April 20, 1990, in which the

court found that the referendum provisions of the City Charter

apply to zoning ordinances.    R.G. Moore Bldg. Corp. v. Committee,

, 

 (1990).     Lakewood did not make any

subsequent attempts to rezone the Elbow Lake property from the

time of the voter referendum defeating the residential zoning to

the time of trial.
                                 - 5 -


     The Elbow Lake property is bordered by a swamp and contains

wetlands that are protected from development by Federal law.

Protected wetlands are subject to the jurisdiction of the

Environmental Protection Agency (EPA) and the U.S. Army Corps of

Engineers (Corps).     To develop protected wetlands, a real estate

developer must obtain a permit from the local division of the

Corps under the Clean Water Act of 1977, Pub. L. 95-217, sec.

67(a) (commonly called a section 404 permit), 91 Stat. 1566,

1600, 33 U.S.C. sec. 1344 (1994), before commencing any

construction that causes discharge of dredge or fill material on

wetlands.4    See 33 U.S.C. sec. 1344 (1994).   In 1987, the Corps

published a manual defining protected wetlands, Federal Manual

for Identifying and Delineating Jurisdictional Wetlands (1987

Manual).     The Norfolk Division of the Corps, which has local

oversight of the Chesapeake, Virginia, area, followed the 1987

Manual to identify wetlands and to process section 404 permit

applications.     Use of the 1987 Manual by a local division of the

Corps was not mandatory.

     In late 1987 through 1988, Lakewood employed Douglas S.

Davis, a wetlands scientist and consultant, to determine the

     4
      People associated with environmental wetlands issues
popularly refer to the required permit as a sec. 404 permit.
Sec. 404 refers to the section of the Federal Water Pollution
Control Act Amendments of 1972, Pub. L. 92-500, sec. 404, 86
Stat. 816, 884, that previously provided for the permit
requirement and was replaced by sec. 67(a) of the Clean Water Act
of 1977, Pub. L. 95-217, sec. 67(a), 91 Stat. 1566, 1600.
                                - 6 -


portion of the Elbow Lake property that constituted protected

wetlands under the 1987 Manual.   In a preliminary report prepared

in February 1988, Mr. Davis identified approximately one-third of

the property as wetlands.   The Corps performed an on-site

investigation of the property in early spring of 1988 and advised

Mr. Davis that it was necessary to measure the level of ground

water to determine whether additional wetlands exist on the

interior of the property.   After completing the ground water

monitoring, Mr. Davis prepared an addendum to the preliminary

report which found that the water levels on the property met the

parameters of protected wetlands.

     In January 1989, the Corps adopted a new wetlands manual

(1989 Manual), effective as of March 1989, that superseded the

1987 Manual.    The 1989 Manual amended the definition of protected

wetlands, substantially increasing the area of land considered to

be protected wetlands and over which the Corps asserted

jurisdiction.   Use of the 1989 Manual by a local division of the

Corps was mandatory.   In August 1990, Lakewood engaged the

engineering firm of Langley and McDonald to determine the amount

of wetlands on the Elbow Lake property under the 1989 Manual.

Langley and McDonald determined that wetlands covered

approximately 74 percent of the property pursuant to the 1989

Manual.
                                 - 7 -


     In November 1989, the Corps also entered into a Memorandum

of Agreement (MOA) with the EPA that establishes the procedures

to be used by the Corps staff in reviewing section 67(a) (section

404) CWA permit applications.    Specifically, the MOA articulated

the policy and procedure necessary to satisfy section 404 so that

the local field offices of the Corps would be using consistent

standards in processing permit applications.      The MOA provided a

three-step process for obtaining a section 404 permit:      (1)

Avoidance, (2) minimization, and (3) compensatory mitigation.      In

the first stage, avoidance, the applicant must avoid any impact

on protected wetlands, for example, by developing around the

wetland area or using an alternative site for development whether

or not owned by the applicant.    In the minimization stage, the

applicant must minimize the impact on wetlands from the proposed

development and must justify the extent that the development will

impact wetlands.   Third, in the compensation stage, the applicant

is required to offset the impacted wetlands, for example, by

creating wetlands to replace those being impacted by the

development project.

     The MOA did not change the substantive regulatory

requirements for obtaining a section 404 permit as the three

above requirements had been a part of the regulatory scheme since

at least 1984.   However, the MOA provided that the requirements

must be met in the above sequence.       The effect of the MOA was to
                                 - 8 -


reduce the Corps' flexibility in processing section 404 permit

applications and to make it more difficult and costly for real

estate developers to obtain permits.      The MOA was originally to

take effect on December 15, 1989, but the effective date was

postponed to February 7, 1990.    An application for a section 404

permit that was filed in 1989 would not have been subject to the

MOA.

       Lakewood first filed an application for a section 404 permit

for the Elbow Lake property on January 28, 1991, pursuant to the

terms of the 1989 Manual.   The permit application proposed a

residential subdivision consisting of 433 lots of which 321 lots

were to be situated on wetlands as defined in the 1989 Manual.

Lakewood's application did not contain the required information

for the Corps to process the application, such as a map of the

precise boundaries on the wetlands on the property.      The Corps

was unable to process the application and requested additional

information from Lakewood in two letters on April 29 and June 24,

1991.    In a August 16, 1991, letter, the Corps notified Lakewood

of its intent to withdraw administratively      Lakewood's

application in 30 days if Lakewood did not respond to the Corps'

previous requests for information.       Thereafter, on September 15,

1991, the Corps administratively withdrew Lakewood's permit

application.    Lakewood decided not to pursue the application

because it had been advised by wetland experts that it would be
                                - 9 -


unable to obtain a permit for development of the Elbow Lake

property under the 1989 Manual requirements.    As a consequence,

Lakewood did not want to incur the expense of completing the

permit application.

     In 1991, the Corps ceased use of the 1989 Manual per

statutory requirements in the Energy and Water Development

Appropriations Act of 1992, Pub. L. 102-104, 105 Stat. 510

(1991).    As of September 1991, the Corps reverted to using the

1987 Manual, which became mandatory for local divisions of the

Corps.    All permit applicants with applications pending at that

time and subject to the 1989 Manual were given the option to

resubmit their applications under the 1987 Manual.    Lakewood met

with representatives of the Corps in 1992 and 1993 regarding

delineation of wetlands on the Elbow Lake property under the 1987

Manual.

     Lakewood's adjusted basis in the Elbow Lake property was

$13,268,320.    On its 1989 income tax return, Lakewood treated the

issuance of the 1989 Manual as a regulatory taking, or

condemnation, of the Elbow Lake property and claimed an ordinary

loss deduction under sections 165 and 1231(a) with respect to the

property in the amount of $9,849,682.    The amount of the claimed

loss deduction represents approximately 74 percent of Lakewood's

adjusted basis in the property, which is the portion of the Elbow

Lake property determined to be protected wetlands under the 1989
                              - 10 -


Manual.   Lakewood's tax matters partner Robert G. Moore who owned

the Boy Scout Tract adjacent to the Elbow Lake property also

claimed a section 165 loss deduction in 1989 with regard to the

Boy Scout Tract due to the issuance of 1989 Manual.

                            OPINION

     The issue for our consideration is whether Lakewood is

entitled to a loss deduction in 1989 because of the issuance of

the 1989 Wetlands Manual and MOA.     Petitioner argues that

Lakewood is entitled to a deduction in the amount of the decrease

in value of the Elbow Lake property as a result of being

prevented from developing the property for residential use under

the Federal wetland regulations.    Petitioner contends that

Lakewood's inability to use its property for the purpose Lakewood

intended when it purchased the property constitutes an

involuntary conversion of property.     Accordingly, petitioner

contends that Lakewood is entitled to a loss deduction under

section 165.   On its 1989 tax return, Lakewood characterized the

loss as a governmental taking of property upon the issuance of

the 1989 Manual and the execution of the MOA.     On brief, however,

petitioner contends that a constitutional taking of the property

is not required in this case to establish a deductible loss under

section 165.

     Section 165(a) permits a deduction for any loss sustained

during the taxable year and not compensated for by insurance or
                              - 11 -


otherwise.   Section 1231(a) governs the characterization of gains

and losses from sales, exchanges, and involuntary conversions of

real and depreciable property used in a trade or business and

permits a taxpayer, in certain circumstances, to characterize

recognized losses incurred from such transactions or occurrences

as an ordinary loss rather than a capital loss subject to the

limitations on deductibility under section 165(f).

     For purposes of section 165(a), a loss must be evidenced by

a closed and completed transaction and fixed by an identifiable

event.   Sec. 1.165-1(b), Income Tax Regs.    The mere diminution in

value of property is not sufficient to establish a loss for

purposes of section 165(a).   United States v. White Dental

Manufacturing Co., 

 (1927).      To deduct a decrease in

value of property, there must be some event that fixes the fact

of the loss and the amount thereof.    Petitioner contends that an

involuntary conversion of property is an identifiable event that

gives rise to a section 165 loss deduction.     Petitioner contends

that an involuntary conversion of property occurs when a

"taxpayer's property, through some outside force or agency beyond

his control, is no longer useful or available to him for his

[purposes]" quoting C.G. Willis, Inc. v. Commissioner, 

, 476 (1964), affd. 

 (3d Cir. 1965), which

involved nonrecognition of gain upon an involuntary conversion

under section 1033.   Petitioner also quotes a similar definition
                              - 12 -


of an involuntary conversion in Grant Oil Tool Co. v. United

States, 

, 

, 395 (1967), which provides

that an involuntary conversion of property occurs for purposes of

the section 1231(a) gain and loss characterization rules when

property is "[rendered] * * * useless for the purpose[s] for

which it was intended" regardless of whether the property is in

fact physically destroyed.

     Petitioner argues that an involuntary conversion occurred

upon the issuance of the 1989 Manual and the execution of the MOA

for purposes of section 165 because Lakewood could no longer use

the Elbow Lake property for residential development as it had

intended. Respondent does not dispute that under the 1989 Manual

the amount of protected wetlands on the Elbow Lake property

increased or that the 1989 Manual and MOA made it more difficult

to obtain a section 404 permit.   Respondent argues that the

advent of the 1989 Manual and MOA are not identifiable events

that establish a closed and completed transaction for loss

recognition purposes under section 165.

     Respondent presents a series of independent arguments

against Lakewood's claimed loss deduction for the decrease in

value alleged in this case.   Respondent's principal position is

that the agricultural zoning of the Elbow Lake property prevented

Lakewood's intended residential use of the property.

Accordingly, respondent maintains that Lakewood would not have
                              - 13 -


been able to build single-family residences on the Elbow Lake

property even in the absence of the stricter Federal wetlands

regulations contained in the 1989 Manual and MOA.   We agree with

respondent's first argument to the extent that, in substantial

part, it was the zoning limitation that restricted the intended

use of the property.   In that regard, the 1989 Manual and the MOA

would have had a relatively small effect, if any, on the property

when used for agricultural purposes.   In any event, petitioner

has not advanced an alternative theory or provided us with a

factual predicate for a finding that the 1989 Manual and the MOA

caused a reduction in value for agricultural purposes.

     Lakewood faced two obstacles to its residential development

project:   (1) Local zoning law, and (2) Federal wetland

regulations.   The Elbow Lakes property was zoned as an

agricultural district at the time Lakewood acquired it.    In 1988,

Lakewood applied for rezoning of the property from agricultural

to residential.   After the City Council initially approved the

rezoning, the rezoning was overwhelmingly defeated in a voter

referendum in 1989, the year that Lakewood claimed the loss

deduction on the property.   Lakewood has not applied for rezoning

of the property to residential since this unsuccessful attempt,

and the Elbow Lake property had retained its agricultural zoning

up to the time of trial.
                               - 14 -


     Petitioner presented the expert testimony of a real estate

appraiser, Bruce Hatfield, to the effect that the value of the

property decreased in 1989 from about $11 million to $1 million

as a result of the 1989 Manual and MOA.     Mr. Hatfield's valuation

is based on his conclusion that the highest and best use of the

Elbow Lake property is residential development and that the

property could be rezoned from agricultural to residential.      The

fair market value of property is a question of fact for which the

burden of proof is on petitioner.    Symington v. Commissioner, 

, 896 (1986).   The fair market value of property is based

on the highest and best use for the property on the date of

valuation regardless of whether the property is actually being

used for that purpose or the land owner intended to put the

property to that use.   Frazee v. Commissioner, 

, 563

(1992); Stanley Works v. Commissioner, 

, 400 (1986).

Rather, "The realistic, objective potential uses" of the property

control.   Stanley Works v. Commissioner, supra at 400.    The

highest and best use is a reasonable and probable use of the

property in the near future.    Frazee v. Commissioner, supra.

Restrictions on a land owner's right to use the property are

relevant in determining whether the identified highest and best

use of the property is reasonable.      Stanley Works v.

Commissioner, supra at 402.    Accordingly, petitioner must prove

that it was reasonable and probable that the Elbow Lake property
                               - 15 -


could be rezoned for residential development within reasonable

proximity to the year in issue.

     Mr. Hatfield examined the growth patterns and population

shifts in the Chesapeake, Virginia, area and determined that the

Elbow Lake property could be part of the ongoing residential

development in that area.    He believed that the property could be

rezoned for residential purposes because property located in

close vicinity to the Elbow Lake property had been rezoned from

agricultural to residential shortly after Lakewood's application

for rezoning was defeated.   Petitioner's expert attributed the

ability of the Chesapeake, Virginia, citizens to defeat the

residential rezoning of the Elbow Lake property to luck,

testifying that opponents of the rezoning were able to obtain the

required 15 percent of voters’ signatures for the petition

because they collected the signatures of voters at polling sites

during a general election.   The expert did not assert any special

expertise in zoning issues and merely concluded that since other

property had been rezoned, the chances for rezoning the Elbow

Lake property were good.    Mr. Hatfield did not discount the value

of the property prior to the 1989 Manual and MOA for the

possibility that the property could not be rezoned for

residential use.

     Despite the expert's opinion, we cannot ignore the

agricultural zoning of the Elbow Lake property and Lakewood's
                                - 16 -


failed attempt to rezone the property for residential purposes

during the year in issue.   The Planning Commission and staff

opposed residential zoning of the property, recommending to the

City Council to deny the rezoning request.   In 1989, Lakewood's

proposed rezoning of the Elbow Lake property was overwhelmingly

defeated by 95 percent of the voters in the referendum.

Petitioner has not presented a persuasive reason to believe that

the City Council would ignore this near-unanimous, clear public

objection to residential zoning of the Elbow Lake property and

approve a subsequent rezoning application for the property.

Moreover, at the time of trial, the Elbow Lake property was still

zoned for agricultural use.   We conclude that a change in the

zoning of the Elbow Lake property was not probable at the time of

the claimed deduction or within a reasonable period of time

thereafter.   Lakewood's proposed development of the Elbow Lake

property was prohibited in 1989 because of the local zoning

ordinance, which predates the 1989 Manual, regardless of the 1989

Manual and MOA.   Accordingly, the 1989 Manual and MOA did not

cause the $9 million reduction in the value of the Elbow Lake

property claimed by Lakewood.

     We find that the continued agricultural zoning of the Elbow

property resulted in a $1 million value of the property in 1989.

In that regard, we must determine whether Lakewood is entitled to

deduct either the difference between the basis and $1 million or
                                - 17 -


any reduction in value caused by Government land use regulations.

     The mere diminution in value of property does not create a

deductible loss.   An economic loss in value of property must be

determined by the permanent closing of a transaction with respect

to the property.   A decrease in value must be accompanied by some

affirmative step that fixes the amount of the loss, such as an

abandonment, sale, or exchange.    The barrier to Lakewood's

intended use for the property because of zoning regulations is

the lack of a closed and completed transaction for purposes of

section 165.   When Lakewood purchased the Elbow Lake property, it

acquired certain rights with respect to the property.    Lakewood's

right to use the property was limited because the Elbow Lake

property was then zoned for agricultural use.    After the zoning

application was defeated, Lakewood had not been denied a right

that it previously possessed.    Lakewood paid an amount for the

Elbow Lake property in excess of the $1 million agricultural use

value under the belief that the property could be rezoned for

residential development.   Such an assumption, whether reasonable

or not, is not grounds for a loss deduction under section 165

when the assumption is proved to be in error.    Land use

regulations are akin to market conditions that are constantly

subject to change.   If we treated an adverse zoning decision or

land use regulation as a loss realization event, it would then be

necessary to treat increases from these sources as a taxable gain
                                - 18 -


to the property owner.     Rather, we hold that until the Elbow Lake

property is sold, abandoned, or otherwise disposed of in a

completed transaction, Lakewood is not entitled to a loss

deduction.   Until such a time, it is impossible to determine

accurately whether in fact Lakewood suffered a loss on the

property or the amount of the loss.      Because Lakewood continued

to own the property, there was not a closed and completed

transaction with regard to the Elbow Lake property in 1989 that

triggered loss recognition for the $9 million decline in value.

     Moreover, allowing Lakewood to deduct the diminution in

value caused by land use regulations would be inconsistent with

the other grounds for a loss deduction that exist under section

165; i.e., abandonment and obsolescence.      Section 165 provides

for a loss deduction for obsolescence of nondepreciable property

used in a trade or business where the property is permanently

discarded from use by the taxpayer.      Sec. 1.165-2, Income Tax

Regs.   In addition, a deduction is permitted for an abandonment

loss where the taxpayer intends to abandon the property and has

taken an affirmative act of abandonment.      Citron v. Commissioner,

, 208 (1991).    Lakewood has not permanently discarded

or abandoned the Elbow Lake property.     Rather, Lakewood filed a

permit application in January 1991, after the year in issue.        In

1992, Lakewood renewed discussions with the Corps regarding the

determination of wetlands on its property.     In 1993, Lakewood
                              - 19 -


provided a delineation of wetlands to the Corps as required for

the permit, and the Corps confirmed the delineation.   These

actions show that Lakewood has not abandoned the property.     The

property has continued to be held by Lakewood for future use or

sale.   We hold that there was not a loss realization event with

respect to the zoning laws.

     To characterize the loss as ordinary under section 1231,

petitioner at very least, would have to show that land use

regulations constitute an involuntary conversion.   Section

1.1231-1(e), Income Tax Regs., defines involuntary conversion of

property as follows:

           the conversion of property into money or
           other property as a result of complete or
           partial destruction, theft or seizure, or an
           exercise of the power of requisition or
           condemnation, or the threat or imminence
           thereof. Losses upon the complete or partial
           destruction, theft, seizure, requisition, or
           condemnation of property are treated as
           losses upon an involuntary conversion whether
           or not there is a conversion of the property
           into other property or money * * *

Government land use regulations, such as local zoning law or

Federal wetland regulations, rarely constitute a condemnation of

property under eminent domain powers.   See Lucas v. South

Carolina Coastal Council, 

 (1992); United States v.

Riverside Bayview Homes, Inc., 

 (1985); Agins v. City

of Tiburon, 

 (1980).   Condemnation requires property

to be taken against the taxpayer's will by a public or quasi-
                              - 20 -


public entity exercising the power of eminent domain.     Koziara v.

Commissioner, 

, 1006-1007 (1986), affd. 

(6th Cir. 1988).   A condemnation or involuntary conversion of

property as defined under section 1231 has not occurred in this

case.

     Considering the question of the effect of the 1989 Manual

and the MOA, it was possible that they adversely affected the

value of the Elbow Lake property for agricultural use, causing a

reduction in value of the property below the $1 million

determined by petitioner's expert.     Petitioner, however, only

argues that the newly issued Federal wetland regulations

prevented Lakewood's use of the Elbow Lake property for

residential development and contends that the value of the land

is $1 million based on agriculture as the highest and best use of

the property.

     At trial, petitioner presented four wetlands experts who

provided credible and convincing testimony that it was highly

unlikely that Lakewood would be granted a section 404 permit by

the Corps to develop single-family residences on the Elbow Lake

property.   One expert, Bernard Goode, who was employed as an

engineer by the Corps for 34 years, believed that there was a

"very low likelihood" that under the 1989 Manual, the Corps would

grant a section 404 permit to Lakewood for the proposed

residential development or that Lakewood's residential project
                                - 21 -


could have been developed in an economically feasible manner.

Mr. Goode's testimony was corroborated by the other expert

witnesses who testified that it would be "virtually impossible"

to obtain a section 404 permit or to develop the Elbow Lake

property after the 1989 Manual.    Conversely, petitioner's experts

also believed that Lakewood could have obtained a section 404

permit under the terms of the 1987 Manual and could have

developed the Elbow Lake property for residential purposes in an

economically feasible manner.    Petitioner has not argued that

Lakewood could not use the Elbow Lake property for agricultural

use because of the terms of the 1989 Manual and the MOA or that

the Federal regulations affected Lakewood's use in any way other

than preventing real estate development.       Petitioner has chosen

not to argue that there was a partial regulatory taking of the

Elbow Lake property that would constitute a realization event for

the loss in value of the property.       Moreover, petitioner's own

expert witness testified that the property was not worthless as

agricultural property after 1989.    Accordingly, we find that

Lakewood is not entitled to the loss deduction claimed.5

     On July 10, 1997, after the briefs were filed in this case,

respondent filed a motion to reopen the record to permit the


     5
       Although we are not factually compelled to address the
question of whether the Federal wetland regulations cause a tax
recognizable event, it appears that the result would be no
different from that of a zoning limitation.
                               - 22 -


introduction of a certified copy of a petition filed by Lakewood

Associates on April 28, 1997, in the U.S. Court of Federal

Claims.   The petition seeks compensation in the amount of $10

million under the Fifth Amendment takings clause for the

regulatory taking of the Elbow Lake property as a result of the

issuance of the 1989 Manual.     On brief, petitioner had maintained

that Lakewood had abandoned any claim for reimbursement under the

Fifth Amendment for the loss in value of the Elbow Lake property

caused by a regulatory taking.    The petition that respondent

seeks to enter into evidence relates to the issue of whether

Lakewood would have a reasonable prospect to recovery for any

loss that it sustained due to the 1989 Manual and the MOA.       Due

to our holding in this case, we need not address the merits of

respondent's motion to reopen the record and deny it as moot.

     To reflect the foregoing,

                                      Decision will be entered

                                 for respondent.