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development by Flagstaff Ranch. After the unsuccessful zoning
meeting in November 1997, PCB and Cherry executed mutual
cancellation instructions for escrow on the 1996 purchase
agreement. On its 1997 return, FRGC deducted the $669,126 that
was expended on the project as an abandonment loss under section
165(a).
Section 165(a) permits a deduction for any loss sustained
during the taxable year and not compensated for by insurance or
otherwise. The loss must be evidenced by a closed and completed
transaction, fixed by identifiable events. Sec. 1.165-1(b), (d),
Income Tax Regs. A loss incurred in a business, or in a
transaction entered into for profit, and arising from the sudden
termination of the usefulness in such business or transaction of
any nondepreciable property, in a case where such business or
transaction is discontinued or where such property is permanently
discarded from use therein, shall be allowed a deduction under
section 165(a) for the taxable year in which the loss is actually
sustained. Chevy Chase Land Co. v. Commissioner, 72 T.C. 481,
487 (1979); sec. 1.165-2(a), Income Tax Regs. The regulations
also provide that the loss must be bona fide and that substance,
not mere form, shall govern in determining a deductible loss.
Sec. 1.165-1(b), Income Tax Regs. To be entitled to an
abandonment loss, a taxpayer must show: (1) An intention on the
part of the owner to abandon the asset and (2) an affirmative act
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