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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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