T.C. Memo. 1995-552
UNITED STATES TAX COURT
LAKEWOOD ASSOCIATES, ROBERT G. MOORE, TAX MATTERS PARTNER,
Petitioner v. COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 24656-93. Filed November 21, 1995.
Douglas E. Kahle, for petitioner.
John C. McDougal, for respondent.
MEMORANDUM OPINION
PANUTHOS, Chief Special Trial Judge: This matter
originally came before the Court on respondent's Motion for
Judgment on the Pleadings filed pursuant to Rule 120(a).1 During
1
Unless otherwise indicated, Rule references are to the
Tax Court Rules of Practice and Procedure, and section references
are to the Internal Revenue Code in effect for the year in issue.
- 2 -
the course of a hearing conducted in this case, the parties made
certain factual representations to the Court going beyond the
matters alleged in the pleadings. Consistent with Rule 120(b),2
the Court advised the parties of its intention to treat
respondent's motion as a Motion for Summary Judgment and directed
the parties to file separate reports with the Court attaching
thereto any exhibits, affidavits, or other documentation
necessary to complete the record. See Rule 121(b) and (d). The
parties having complied with the Court's order, respondent's
Motion for Judgment on the Pleadings shall be treated herein as a
Motion for Summary Judgment. See Francis v. Commissioner, T.C.
Memo. 1988-30.
The issue for decision is whether respondent is entitled to
a summary judgment denying Lakewood Associates' claim to a loss
for 1989 related to a "taking" of certain real property.
Summary judgment is intended to expedite litigation and
avoid unnecessary and expensive trials. Florida Peach Corp. v.
Commissioner, 90 T.C. 678, 681 (1988). Summary judgment may be
2
Rule 120(b) provides:
(b) Matters Outside Pleadings: If, on a motion
for judgment on the pleadings, matters outside the
pleadings are presented to and not excluded by the
Court, the motion shall be treated as one for summary
judgment and shall be disposed of as provided in Rule
121, and all parties shall be given reasonable
opportunity to present all material made pertinent to
such a motion by Rule 121.
- 3 -
granted with respect to all or any part of the legal issues in
controversy--
if the pleadings, answers to interrogatories,
depositions, admissions, and any other acceptable
materials, together with the affidavits, if any, show
that there is no genuine issue as to any material fact
and that a decision may be rendered as a matter of law.
* * * [Rule 121(b).]
Sundstrand Corp. v. Commissioner, 98 T.C. 518, 520 (1992), affd.
17 F.3d 965 (7th Cir. 1994); Zaentz v. Commissioner, 90 T.C. 753,
754 (1988); Naftel v. Commissioner, 85 T.C. 527, 529 (1985). The
moving party bears the burden of proving that there is no genuine
issue of material fact, and factual inferences will be read in a
manner most favorable to the party opposing summary judgment.
Dahlstrom v. Commissioner, 85 T.C. 812, 821 (1985); Jacklin v.
Commissioner, 79 T.C. 340, 344 (1982).
The following is a summary of the relevant facts that do not
appear to be in dispute; they are stated solely for purposes of
deciding the pending motion and are not findings of fact for this
case. Fed. R. Civ. P. 52(a).
Background
Lakewood Associates (Lakewood or the partnership) is a
general partnership subject to the unified partnership audit and
litigation procedures set forth in sections 6221 through 6233.
See Tax Equity and Fiscal Responsibility Act of 1982 (TEFRA),
Pub. L. 97-248, sec. 402(a), 96 Stat. 648-667. At all relevant
times, Lakewood maintained its principal place of business at
- 4 -
Virginia Beach, Virginia. Sec. 7482(b)(1)(E). Robert G. Moore
(petitioner) is Lakewood's tax matters partner.
Lakewood was formed in the State of Virginia on August 12,
1987. During 1987, Lakewood acquired approximately 649 acres of
unimproved real estate located in Chesapeake, Virginia. Although
Lakewood acquired the property with a view towards profiting from
its development, efforts in this regard were halted when the
Federal Government issued its Wetlands Manual of 1989 (Wetlands
Manual).3 Under the Wetlands Manual, property falling within the
definition of protected wetlands is subject to the jurisdiction
of the Environmental Protection Agency and the United States Army
Corps of Engineers (COE).4
As a consequence of the release of the Wetlands Manual,
Lakewood engaged various environmental engineering consultants to
prepare wetland evaluations and provide advice regarding the
feasibility of developing the property. After determining that
approximately 75 percent of Lakewood's property constitutes
protected wetlands as defined in the Wetlands Manual, the
consultants advised Lakewood that, in accordance with the
Wetlands Manual, a permit would have to be obtained from COE
3
While not critical to the disposition of the pending
motion, it appears that the 1989 Wetlands Manual was abandoned
sometime in 1991 in favor of the readoption of the Wetlands
Manual of 1987.
4
Prior to 1989, the property in question was not
considered wetlands.
- 5 -
pursuant to the Clean Water Act, Pub. L. 95-217, sec. 404, 91
Stat. 1600 (see 33 U.S.C. sec. 1344 (1988)) prior to developing
the property.
When asked to opine as to the likelihood that COE would
grant Lakewood's application for a permit to develop the
property, the consultants generally agreed that Lakewood would
not be permitted to develop the land, and, in fact, COE probably
would never formally act on Lakewood's application. The
consultants' view in this regard is reflected in the following
statement:
Based on my review of the documentation, all the
signals from [COE] indicate that the permit would not
be issued, and it was not probable that Lakewood would
get a permit. The more probable result would be that
[COE] would require Lakewood to provide more and more
studies of alternative sites, endangered species
reconnaissance, and archeological surveys, until
Lakewood finally gave up, due to the rising costs. It
is my experience that this is the pattern in other
cases in which a residential developer applies to [COE]
for a permit to develop a large wetland area.
Based on this advice, Lakewood decided that it would not be
economically feasible to attempt to develop the property.
Lakewood reported a loss of $9,849,682 in respect of the
property on its 1989 partnership return. Respondent subsequently
examined Lakewood's 1989 return and disallowed the loss in its
entirety. Although an appraiser engaged by respondent to review
the matter found it unlikely that the property could be developed
in an economically feasible manner, respondent issued a notice of
- 6 -
final partnership administrative adjustment (FPAA) to Lakewood
stating in pertinent part:
Since it has not been established that a
condemnation, involuntary conversion or a disposition
based on a closed completed transaction occurred within
the meaning of the Internal Revenue Code, no loss is
allowable. In addition, it has not been established
that the designation of your property as wetlands or
the issuance of the wetlands manual and regulations
deprived you of all economic use of the property. If,
however, the issuance of the wetlands manual and
regulations is ultimately determined to constitute a
condemnation, an involuntary conversion, or other
allowable loss; any such loss must be reduced by the
partnership's right to reimbursement for such loss.
Since you have not established that such reimbursement
would not equal or exceed the partnership's basis in
the property, no loss is allowable.
In response to the FPAA, petitioner invoked this Court's
jurisdiction by filing a timely petition for readjustment of
partnership items.
As indicated, the matter is presently pending before the
Court on respondent's Motion for Summary Judgment. For purposes
of the present motion only, respondent: (1) Admits all of the
allegations of fact contained in the petition; and (2) concedes
that the issuance of the Wetlands Manual so restricted Lakewood's
ability to develop its property as to amount to a "taking" of the
property within the meaning of sections 1231 and 165. Assuming
there was such a taking, respondent maintains that she is
entitled to judgment as a matter of law on the theory that
Lakewood "had a co-extensive right to reimbursement from the
Federal Government which would reduce to zero the amount of the
- 7 -
otherwise allowable loss in the year the loss occurred."
Petitioner filed a response and a supporting memorandum of law in
opposition to respondent's motion.
Discussion
The issue for decision is whether, assuming the application
of the Wetlands Manual effected a "taking" of Lakewood's
property, respondent is entitled to summary judgment that
Lakewood is nonetheless precluded from reporting a loss relating
to such event on the ground that it possessed a claim for
reimbursement from the Federal Government with respect to which
there was a reasonable prospect of recovery.
Section 165(a) states the general rule that a deduction may
be reported for any loss sustained during the taxable year and
not compensated for by insurance or otherwise. Section 1.165-
1(d)(2)(i), Income Tax Regs., which concerns the year in which a
loss deduction may be reported, provides:
If a casualty or other event occurs which may result in
a loss and, in the year of such casualty or event,
there exists a claim for reimbursement with respect to
which there is a reasonable prospect of recovery, no
portion of the loss with respect to which reimbursement
may be received is sustained, for purposes of section
165, until it can be ascertained with reasonable
certainty whether or not such reimbursement will be
received. Whether a reasonable prospect of recovery
exists with respect to a claim for reimbursement of a
loss is a question of fact to be determined upon an
examination of all facts and circumstances. Whether or
not such reimbursement will be received may be
ascertained with reasonable certainty, for example, by
a settlement of the claim, by an adjudication of the
claim, or by an abandonment of the claim. When a
- 8 -
taxpayer claims that the taxable year in which a loss
is sustained is fixed by his abandonment of the claim
for reimbursement, he must be able to produce objective
evidence of his having abandoned the claim, such as the
execution of a release. [Emphasis added.]
In sum, section 1.165-1(d)(2)(i), Income Tax Regs., provides that
a loss is not sustained, i.e., recognized, for purposes of
section 165(a), if there exists a claim for reimbursement with
respect to the loss for which there is a reasonable prospect of
recovery, until it can be ascertained with reasonable certainty
whether or not such reimbursement will be received.
Respondent's Motion for Summary Judgment is premised on the
theory that Lakewood was guaranteed full compensation for the
loss resulting from the classification of its property as
wetlands. In particular, assuming the classification of
Lakewood's property as wetlands constitutes a "taking" of the
property, respondent contends that Lakewood is guaranteed to be
compensated by the Federal Government pursuant to the Fifth
Amendment to the U.S. Constitution which provides that "private
property [shall not] be taken for public use, without just
compensation."
Petitioner presents four alternative arguments in opposition
to respondent's motion. First, petitioner contends that, to the
extent respondent's motion is based on an admission of all
allegations of fact contained in the petition, respondent is
- 9 -
deemed to have conceded paragraph 8(l) of the petition which
states:
The possibility of recovery on a case brought
before the United States Claims Court is speculative
and the potential existence of a legal right to bring
such a claim is not the equivalent of an insurance
policy which serves to reduce the amount of otherwise
deductible loss which has been incurred by the
Partnership.
As petitioner sees it, an admission of this paragraph is contrary
to respondent's argument that Lakewood had a guaranteed right of
reimbursement from the Federal Government.
Petitioner's second argument is that respondent's motion
should be denied on the ground that the question of whether
Lakewood enjoyed a reasonable prospect of recovery against the
Federal Government is a question of fact as opposed to a question
of law. Specifically, petitioner cites the portion of section
1.165-1(d)(2)(i), Income Tax Regs., that provides that whether a
taxpayer has a reasonable prospect of recovery with respect to an
event causing a potential loss is a question of fact to be
determined upon an examination of all the facts and
circumstances.
Petitioner's third argument is based on this Court's
decision in Hills v. Commissioner, 76 T.C. 484 (1981), affd. 691
F.2d 997 (11th Cir. 1982). In Hills, we allowed the taxpayers to
claim a theft loss of $660, notwithstanding that the taxpayers
had an insurance policy that would otherwise have covered the
- 10 -
loss, where the taxpayers decided not to file a claim with the
insurance company for fear that the policy would not be renewed.
Relying on the reasoning underlying our decision in Hills,
petitioner contends that Lakewood is not required to seek a
judicial remedy as a prerequisite to recognizing the loss in
question.
Finally, petitioner maintains that respondent's motion
should be denied on the ground that Lakewood's prospects of
recovery against the Federal Government are speculative at best.
In short, petitioner asserts that Lakewood would have to apply to
COE for a permit to develop the regulated wetlands and have that
application denied before being permitted to commence an action
in the U.S. Court of Federal Claims. Petitioner further contends
that he is prepared to prove at trial that, based upon current
COE practices, Lakewood's permit application might never be
formally denied, thus denying Lakewood access to the Court of
Federal Claims.
Based upon our review of the pleadings and the other
materials making up the record in the case, and having fully
considered the parties respective positions, we are persuaded
that respondent's Motion for Summary Judgment should be denied.
Section 1.165-1(d)(2)(i), Income Tax Regs., provides that when an
event occurs that may result in a loss, yet there exists a claim
for reimbursement on the loss with respect to which there is a
- 11 -
reasonable prospect of recovery, no loss may be reported until it
can be ascertained with reasonable certainty whether or not such
reimbursement will be received. Section 1.165-1(d)(2)(i), Income
Tax Regs., further provides that whether a reasonable prospect of
recovery exists with respect to a claim for reimbursement of a
loss is a question of fact to be determined upon an examination
of all facts and circumstances.
Respondent argues that, assuming Lakewood suffered a
"taking" in this case, Lakewood necessarily possessed a
"reasonable prospect of recovery" as contemplated under section
1.165-1(d)(2)(i), Income Tax Regs. Relying on affidavits
executed by Lakewood's environmental engineering consultants,
petitioner counters that, by virtue of COE's method of operation,
there is a genuine issue of fact whether Lakewood's property was
taken in such a manner as to eliminate any reasonable prospect of
recovery.
While there is a certain allure in the fundamental logic
underlying respondent's argument, on the whole we find
respondent's position to be overly simplistic. It is beyond
peradventure that the Federal Government is obliged to provide
just compensation where private property is taken within the
meaning of Fifth Amendment. See, e.g., Lucas v. South Carolina
Coastal Council, 505 U.S. 1003 (1992). Nevertheless,
respondent's abstract concession that Lakewood suffered a
- 12 -
compensable "taking" does not ensure or confirm that Lakewood
will in fact secure such a remedy given the administrative
realities of wetlands regulation. In light of petitioner's
allegations concerning COE's administrative practices, we
conclude that a genuine issue as to a material fact remains in
dispute with regard to Lakewood's prospects for a recovery.5 For
these reasons, we conclude that the question of whether Lakewood
sustained a loss within the meaning of section 165(a) in this
case is not ripe for disposition by summary judgment.
To reflect the foregoing,
An order denying respondent's
Motion for Summary Judgement
will be issued.
5
Because this matter is before us on respondent's motion
for summary judgment, the inferences that we draw from the
underlying facts are viewed in the light most favorable to
petitioner, the party opposing the motion. Dahlstrom v.
Commissioner, 85 T.C. 812, 821 (1985).