Broido v. Comm'r of Internal Revenue, Docket No. 66361.

• Decision Date: 31 July 1961
• Docket Number: Docket No. 66361.
• Citation: 36 T.C. 786
• Parties: LOUIS BROIDO AND LUCY KAUFMAN BROIDO, PETITIONERS, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
• Court: U.S. Tax Court

36 T.C. 786

LOUIS BROIDO AND LUCY KAUFMAN BROIDO, PETITIONERS,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Docket No. 66361.

Tax Court of the United States.

Filed July 31, 1961.

Louis Broido and Sanford Becker, CPA, for the petitioners.

Victor H. Frank, Jr., Esq., for the respondent.

1. In 1949, the area in which petitioner's summer residence was located experienced a severe drought. Held, that petitioner has failed to show that he sustained a loss therefrom, and it is unnecessary to decide whether the drought so experienced was a casualty within the meaning of section 23(e)(3) of the Internal Revenue Code of 1939.

2. On his 1949 income tax return, petitioner deducted $5,768.14 as a nonbusiness bad debt under section 23(k)(4) of the 1939 Code, which amount was the face amount of a demand note, dated October 14, 1929, which he had received from his brother in part payment for a part of petitioner's interest in a family business. Held, that petitioner has failed to prove the existence of a subsisting debt which became worthless in 1949.

The respondent determined deficiencies in income tax against the petitioners for the taxable years 1949, 1950, and 1951 of $3,212.04, $7,366.55, and $1,645.16, respectively. The questions for decision are whether the petitioners are entitled to a casualty loss deduction for 1949, by reason of damage to residential property from drought, and, if so, the amount of the loss, and whether they are entitled to a nonbusiness bad debt deduction in 1949 of payments made by petitioner Louis Broido to his sister-in-law in respect of a note made by his brother, on which petitioner was an endorser. The years 1950 and 1951 are involved only to the extent that our determination as to 1949 discloses a capital net loss carryover.

FINDINGS OF FACT.

Some of the facts have been stipulated and are found as stipulated.

Petitioners are husband and wife, and residents of New York City. They filed joint income tax returns for the years involved with the director of internal revenue for the third district of New York.

In August of 1941, petitioners purchased approximately 20 acres of land in Easton, Fairfield County, Connecticut, at a cost of approximately $37,000. On an area of approximately 6 acres, which was surrounded by a stone wall, were a farmhouse, a guesthouse, and a structure which originally had been a barn. Also within the wall-enclosed area were a rose garden, two vegetable gardens, and extensive lawns. The property outside the wall consisted of a field, an orchard, and a wooded area.

The residence, or main house, was a frame structure built in 1827 and ‘modernized’ in 1938. It consisted of a living room, dining room, kitchen, and a maid's room and bath on the first floor, and three bedrooms and two baths on the second floor. The guesthouse was of stone construction, and contained a living room, bedroom, and bath. The barn had been remodeled into a studio, bedroom and bath, a kitchen, a garage, and a storage room. On the grounds within the stonewall-enclosed area were approximately 25 varieties of shrubs, such as hydrangeas, andromeda, lilac, and English yew. Also, there were raspberry and blueberry bushes, and in some areas strawberries. Of flowers, there were annuals of the usual type found in the country and some 15 varieties of perennials.

Because of three wells located on the premises, the petitioners referred to the property as Three Wells. These wells had been dug and were 20 to 22 feet in depth. One was adjacent to a corner of the main house, one was located in the gardens, about 300 feet from the house, and the third was near the barn. The well at the corner of the house and the one in the garden were connected by underground pipes to a pumphouse and served the residence and the guesthouse. The pipes from the pumphouse connected with the two wells well toward the bottom of the wells. The other well served the barn.

Petitioner and his family customarily lived at Three Wells from May to October of each year. During the week the petitioner commuted to his work in New York City. Between October and May, heat was maintained in the residence and on occasions weekends were spent there.

Until 1949, the wells had consistently supplied petitioners with ample water for the living quarters, all domestic uses, and for the grounds. During the summer of 1949, the area in which the petitioners' property was located suffered a drought which was severe and unusual for the area. In August, the water level in the wells dropped below the pipes connecting with the pumphouse and water could be obtained only by means of buckets being lowered. The water thus obtained was brackish, and was not usable for all purposes. Petitioners obtained bottled water for drinking purposes and transported cans of water for other household use from artesian wells of neighbors. There was no water for lawns or gardens. By August, the drought had caused the lawns to burn out, the plants in the vegetable garden to wither, and the condition of the flowers and shrubs became very bad. Because of the conditions at Three Wells in 1949, the petitioners returned to their home in New York City on Labor Day.

In the area in which the petitioners' property was located, there was less rainfall during the month of June 1949 than in any month since 1894, the first year for which there was a recording of the rainfall for that area.

In Connecticut, the major fluctuations in the level of ground water are chiefly the result of differences in the amount and distribution of precipitation. Usually the water levels show a rise during the early months of the year, with the peak being reached in April. Thereafter, the levels decline through the growing and harvesting season and begin to rise again in November. During 1949 the water levels followed that general pattern, but, due to unusual climatic conditions, the overall range in fluctuations from the peak to the minimum was greater than normal.

Beginning in November of 1948, the precipitation was above normal and continued so through January of 1949, thereby causing the water levels to rise rapidly throughout the first of 1949. The maximum levels were reached at approximately the end of April and were close to the highest on record. The seasonal lowering of the water table began in May despite above-normal precipitation. Generally, however, the levels were above average at the end of the month. Beginning in June, due to the influence of the record drought, water levels receded rapidly, and by the end of October had reached stages which, in general, were below normal and in some cases were at record or near-record low levels. Precipitation continued below normal for the remainder of 1949, but the general decline was halted in November, and water levels in some wells began to rise by the end of the year. The rise did not offset the effect of the summer's drought and the year ended with the water levels in many cases lower than those which had been recorded at the end of the preceding year. Generally, however, the water table at the end of 1949 was only slightly below normal in most sections of Connecticut, despite the drought, which would not have been the case if there had not been a ‘greater-than-normal’ amount of ground water in storage at the beginning of the drought to offset the deficiency in precipitation in 1949.

The Bridgeport Hydraulic Company is a public corporation, which owns, maintains, and operates reservoirs and a public water supply system in Fairfield County. One of these reservoirs, known as Hemlocks, is at one point approximately 1 mile northeast of petitioners' property. It owns and maintains three other reservoirs, all of which are within 10 miles of petitioners' property. According to the records of the company, the total precipitation at Hemlocks Reservoir in 1949 was 39.15 inches. From May to December, inclusive, it was 22.56 inches, and from June to December, inclusive 16.38 inches. For June 1949 through May of 1950, the precipitation, according to the company's records, was 34.40 inches.

With respect to the four reservoirs owned by Bridgeport Hydraulic Company, the records disclosed that the average rainfall for the years from 1894 to 1956, inclusive, was 47.57 inches.¹

Due to lack of water, the flowers, plants, shrubs, and lawns on petitioner's property ‘were all dried out and ceased growing,‘ and required ‘expensive’ treatment in the spring of 1950 ‘to bring them back.’ The lawns had to be resodded and reseeded. Petitioner carried no insurance covering losses by drought.

The nearest connection for public water to petitioner's property was approximately 8,000 feet. The cost for obtaining water from such public supply was regarded by petitioner as prohibitive.²

In the winter of 1949-1950, petitioner employed an experienced well driller to sink a deep well on his property. It was concluded that the best place for the well was at the corner of the house where one of the existing wells was located. Proceeding to drill at that location, the driller ran into great difficulty. At a depth of 150 feet, he suggested that the drilling be stopped and the well relocated at some other place. Petitioner dislikes stopping things he has started, so he directed him to proceed with the drilling. When the 200-foot depth was reached, the driller again suggested that the drilling be stopped. Petitioner again directed that he proceed, and at 225 feet, water having a flow of about 17 gallons per minute was reached. The water so reached contained a substantial quantity of iron and a purifier was a necessity. After reaching water, petitioner began the installation of a pumphouse at the site of the drilled well. From 3 feet below the surface, solid rock was encountered, and a space for the pumphouse to a depth to permit a man to stand had to be chipped out by hand. A tank with a 1,000-gallon capacity was installed at the pumphouse. The total cost for the well, the...