Lakewood Associates, Robert G. Moore, Tax Matters Partner - Page 17

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            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                         

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Last modified: May 25, 2011