Bailey v. Commissioner, Docket No. 15530-81.
| Decision Date | 17 November 1983 |
| Docket Number | Docket No. 15530-81. |
| Citation | 1983 TC Memo 685,47 TCM (CCH) 321 |
| Parties | G.J. Bailey and Pauline A. Bailey v. Commissioner. |
| Court | U.S. Tax Court |
John W. Michener, Jr., for the petitioners. James W. Lessis, for the respondent.
Memorandum Findings of Fact and Opinion
The Commissioner determined a deficiency of $31,470.87 in the petitioners' Federal income tax for 1974. After a concession by the petitioners, the issue for decision is whether the petitioners sustained a deductible casualty loss during 1974 as a result of soil slippage in their backyard.
Some of the facts have been stipulated, and those facts are so found.
The petitioners, G.J. and Pauline A. Bailey, husband and wife, were legal residents of Fort Worth, Tex., at the time they filed their petition in this case. They filed their joint Federal income tax return for 1974 with the Internal Revenue Service Center, Austin, Tex. Mr. Bailey will sometimes be referred to as the petitioner.
In 1966, the petitioners had a house constructed for them in Fort Worth, Tex., and they continued to reside in such house when they commenced this case. The lot upon which such house is located slopes gradually downward toward the rear. The house is between 100 and 150 feet from a creek which forms the rear boundary of the property.
During 1971, a small portion of the petitioners' backyard slipped away, and they had such damage repaired. Sometime in the fall or winter of 1973-1974, the ground behind the petitioners' house again began to separate and fall away. During a period of 6 to 8 weeks beginning in December 1973 and ending in 1974, large portions of the backyard fell away, eventually exposing the foundation of their house. During this period, the level of the ground was reduced approximately 3 feet. On two occasions, the property behind the petitioners' house dropped 12 to 18 inches overnight. Such damage was more severe than that which occurred during 1971.
Early in 1974, the petitioner contracted with a construction company to have the backyard repaired. They had three retaining walls installed and the backyard regraded. One wall ran the length of the property parallel to the creek; two smaller walls were built closer to the house. The petitioners paid $510 for the fill dirt necessary to regrade the backyard and a total of approximately $21,500 for the construction of the walls, for regrading the surface, and for other work. Since the retaining walls were built, there has been no recurrence of the type of damage sustained by the petitioners in 1973-1974.
On their Federal income tax return for 1974, the petitioners claimed a casualty loss deduction, after subtracting the $100 limitation, of $16,025.25. The Commissioner disallowed the casualty loss deduction in full.
OpinionThe primary issue for decision is whether the petitioners sustained a casualty loss within the meaning of section 165(c) of the Internal Revenue Code of 19541 as a result of soil slippage in their backyard. The petitioners have the burden of proving the occurrence of the casualty. Rule 142(a), Tax Court Rules of Practice and Procedure;2Welch v. Helvering 3 USTC ¶ 1164, 290 U.S. 111 (1933); Heyn v. Commissioner Dec. 27,981, 46 T.C. 302 (1966).
Section 165 allows a deduction for losses incurred in the taxable year that are not compensated for by insurance or otherwise, but section 165(c) limits the losses deductible by an individual. An individual is allowed a deduction for losses incurred in a trade or business, incurred in a transaction entered into for profit, or arising "from fire, storm, shipwreck, or other casualty, or from theft." Sec. 165(c)(3). The term "other casualty" contemplates events which are of the same general nature as a fire, storm, or shipwreck (Durden v. Commissioner Dec. 13,672, 3 T.C. 1 (1944); Fay v. Commissioner Dec. 11,231, 42 B.T.A. 206 (1940), affd. per curiam 41-2 USTC ¶ 9494 120 F. 2d 253 (2d Cir. 1941)) and requires that the events which give rise to the loss be sudden, unexpected, or unusual in nature (Kemper v. Commissioner Dec. 23,023, 30 T.C. 546 (1958), affd. 59-2 USTC ¶ 9570, 269 F. 2d 184 (8th Cir. 1959); Durden v. Commissioner, supra). A casualty does not include the "progressive deterioration of property through a steadily operating cause." Fay v. Commissioner, 120 F. 2d at 253; Durden v. Commissioner, 3 T.C. at 3.
In the numerous cases involving the shifting or sinking of land, we have applied the same principles and have consistently required that the taxpayer establish that the damage to the real property occurred in a sudden, unexpected, or unusual manner (Heyn v. Commissioner, supra; Harris Hardwood Co.v. Commissioner Dec. 15,737, 8 T.C. 874 (1947)), rather than as a result of gradual erosion (Durden v. Commissioner, supra). Additionally, neither damage resulting from faulty construction (Tank v. Commissioner Dec. 22,813, 29 T.C. 677 (1958), revd. on other grounds 59-2 USTC ¶ 9673, 270 F. 2d 477 (6th Cir. 1959); Matheson v. Commissioner Dec. 5732, 18 B.T.A. 674 (1930), affd. 2 USTC ¶ 830 54 F. 2d 537 (2d Cir. 1931)), nor precautionary measures undertaken to avoid future casualty losses (Austin v. Commissioner Dec. 37,258, 74 T.C. 1334 (1980)), are deductible as an "other casualty."
In Grant v. Commissioner Dec. 8613, 30 B.T.A. 1028 (1934), we were concerned with damage caused by the sinking of the taxpayer's lakefront property. Although the Court in Grant was unable to determine the exact cause of the damage to the taxpayer's property, the taxpayer's evidence indicated that the sinking of his land was due to the movement of two large masses of red clay that lay under the property. The Court did determine that the sinking of the land was unexpected and not the ordinary movement of lakefront property. The Court therefore concluded that the slippage was the "unusual effect of several causes and conditions" and allowed the casualty deduction. 30 B.T.A. at 1035.
In Heyn v. Commissioner, supra, this Court allowed a casualty loss deduction for damage caused by a landslide. The Commissioner argued that the landslide was not a casualty within the meaning of section 165(c)(3) because it resulted from the "anticipated hazards of building on * * * a steep hillside lot with an unstable soil condition, and * * * faulty shoring provided by the contractor." 46 T.C. at 307. In rejecting the Commissioner's contentions, we determined that the landslide in question "involved a sudden and violent movement of a large mass of earth that was cataclysmic in character, and was similar in nature to a fire, storm, or shipwreck." 46 T.C. at 307-308. We emphasized that the finding of a "casualty" was not precluded by the fact that an event was foreseeable or might have been prevented. 46 T.C. at 308. We further stated that the possibility of prevention, or the foreseeability of an event, or the fact that negligence may have contributed to the event's occurrence, were factors to be examined, but that no single factor is dispositive of the question whether a casualty within the meaning of section 165(c) has occurred.
In the present case, the petitioners contend that the damage to their backyard is similar to the kind of soil movement that we have previously recognized as a casualty in such cases as Heyn v. Commissioner, supra. The Commissioner, on the other hand, contends that Heyn involved events occurring at a precise moment and that the damage sustained by the petitioners in the present case resulted from gradual erosion rather than from a casualty.
On the facts presented in this case, we believe that the soil slippage in the petitioners' backyard did not represent gradual soil erosion. Although the backyard damage occurred over a period of 6 to 8 weeks, it was not the result of gradual erosion. On the contrary, the petitioner testified that the ground fell away as if "cut by a knife." In this period of time, the elevation in the petitioners' backyard dropped approximately 3 feet. Such damage to property that had otherwise been relatively stable for at least the past 8 years, involving unidentified causes and occurring over a relatively short period of time, constitutes a casualty within the meaning of section 165(c).
Having concluded that the movement of soil in the petitioners' backyard is properly characterized as a casualty within the meaning of section 165, we must also determine the amount of the loss sustained by the petitioners. Heyn v. Commissioner, supra; Grant v. Commissioner, supra. The petitioners have the burden of proving the amount of any deductible casualty loss. Rule 142 (a); Heyn v. Commissioner, supra.
The petitioners spent approximately $21,500 for the work done in their backyard. Of this figure, the petitioners contend that $16,125.25 was spent in restoring the backyard to its pre-casualty state. In his brief, the Commissioner contends that the petitioners sustained a casualty loss of no more than $510, the amount the petitioners paid for fill dirt to regrade their backyard.
The regulations under section 165 provide that the deduction attributable to a casualty loss is the lesser of the property's adjusted basis or the diminution in the property's value caused by the casualty. Sec. 1.165-7 (b)(1), Income Tax Regs. The Commissioner concedes that the adjusted basis of the property exceeded the claimed loss. The diminution in the value of the property may be evidenced by competent appraisals of the property or by the cost to repair it. Sec. 1.165-7(a) (2), Income Tax Regs. However, if the taxpayer uses the latter measure of damage, he must show that the amounts spent were necessary to restore the property to its condition immediately preceding the casualty, that such amounts were not excessive, that such repairs did no more than care for the damage sustained, and that the value of the property after the repairs did not increase as a result of the repairs. Sec. 1.165-7(a)...
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