Heyn v. Comm'r of Internal Revenue

• Decision Date: 09 June 1966
• Docket Number: Docket No. 5998-64.
• Citation: 46 T.C. 302
• Parties: HARRY HEYN, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT
• Court: U.S. Tax Court

46 T.C. 302

HARRY HEYN, PETITIONER,

v.COMMISSIONER OF INTERNAL REVENUE, RESPONDENT

Docket No. 5998-64.

Tax Court of the United States.

Filed June 9, 1966.

Howard B. Crittenden, Jr., for the petitioner.

Harry M. Asch, for the respondent.

Held, an earthslide occurring during the course of excavation of a building site was a ‘casualty’ within the meaning of section 165(c)(3), I.R.C. 1954. Amount of deductible loss determined.

The Commissioner determined a $7,955.17 deficiency in petitioner's income tax for 1960. At issue is whether petitioner sustained a deductible casualty loss by reason of an earthslide, and if so in what amount.

FINDINGS OF FACT

The stipulated facts together with accompanying exhibits are incorporated herein by this reference.

Harry Heyn, a resident of Sausalito, Calif., filed his individual income tax return for the calendar year 1960 with the district director of internal revenue, San Francisco, Calif.

Prior to 1960, Heyn purchased a lot for $18,000 in Sausalito on the corner of Josephine Street and Atwood Avenue for use as a building site. He owned the property throughout 1960 and has continued to do so to the present time.

The property is roughly triangular in shape and is a hillside lot sloping in a southerly direction. It extends 92.42 feet along Atwood Avenue, its northern boundary, and 64.93 feet along Josephine Street, its southeastern boundary. The property at its lowest point on Josephine Street is approximately 30 feet lower than at its highest point on Atwood Avenue.

The building which was to be erected and which in fact was subsequently erected on the lot is a two-story structure, consisting of two apartments on the lower level which have been used for rental purposes and one apartment on the upper level which has been occupied by petitioner as his personal residence. There are also carports appurtenant to each level. Petitioner employed a licensed architect to draw the plans and specifications for the building. Also, licensed soils engineers as well as structural engineers were hired in connection with the contemplated construction.

Prior to any construction contract being entered into, the soils engineers inspected the property and rendered an opinion on the geologic and soil conditions as they would affect the support necessary for the building operation. They found that the basic geologic formation existing on petitioner's property was a massive fine-grained dense sandstone which was moderately to highly fractured. Moderately fractured sandstone is fairly unstable, and will not be stable in excavation cuts having a slope of 55 degrees. If water is present in such soil there is complete instability. They also found that the lot contained loose fill. Fill does not have a good support or bearing capacity unless it is compact. Springs are common in the type of geologic formation found on this property. The architect and structural engineers as well as the parties involved with the proposed construction were aware of evidence indications that water might be present on the property. There is a visible spring across the street from the property and within 50 yards of it, which was active and in existence during the years 1959 and 1960. The structural engineers were concerned about the bearing capacity or stability of the soil and in particular feared that a spring would impair the stability of a large portion of the construction site and might cause a slide. Because of the above problems of the steepness of the hillside lot and the possible reaction of water on the soil formation found on the property, the soils engineers recommended that adequate protection be provided during excavation and construction to prevent movement of the surface soils.

Prior to entering into the construction contract hereinafter referred to Heyn twice solicited bids for the construction work to be performed on his property. The lowest bid in the first set received was in the amount of approximately $105,000. The range of the second set of bids was between $90,000 and $100,000, one of which included a bid of $17,000 for the foundation.

On July 16, 1960, the petitioner executed a written contract for the construction of the structure on his property with the contracting firm of L. E. Weisenburg, Jr. It was a cost-plus contract with an estimated construction cost of $74,723. The contractor's fee was $7,659. In some circumstances this fee might be increased due to changes or it might have been reduced but not below $3,923. The contractor was to be paid as the job progressed at the rate of 5 percent of the costs as they were incurred. At that time it was expected that the excavation of the site would be done by use of a ‘modified mining technique’ whereby the contractor would excavate narrow trench areas, shore between them and then build his walls in those areas.

The agreement stated that the contractor was to ‘make such shoring during the course of the excavation and pouring of the concrete as may be required by any applicable law or ordinance.’ The applicable law was as follows:

UNIFORM BUILDING CODE 1955 Edition

Page 204, Sec. 2801, Excavations:

Any person making or causing an excavation to be made exceeding twelve feet (12') in depth below the grade, shall protect the excavation so that the adjoining soil will not cave in or settle, * * *

The agreement also stated that ‘many of the items' making up the total estimated cost of construction ($74,723) were ‘at the most, educated guesses or estimates, particularly concerning the excavation and foundation’ and that only when portions of the soil and rock had been excavated could it be determined whether or not the foundation could be built at an economical price in the manner specified. If it appeared that the method of excavation was uneconomical Heyn could elect to terminate the contract.

It was further provided that the concrete could be poured directly against the dirt embankment making up the excavation cut in lieu of framing prior to pouring. This is a type of construction where only one side of the wall into which one would be pouring concrete is formed. The embankment is the other side of the form. Time is of the essence in this construction method because of the necessity that the soil be stable enough to support the vertical cut of the embankment for a sufficient period of time to permit the concrete to be poured. It is not possible to pour concrete against a dirt embankment with a T-shaped foundation. Prior to the execution of the construction contract, the parties agreed that there would be an L-shaped foundation so that concrete could be poured directly against the dirt embankment, and the construction contract was written on that basis.

The City of Sausalito Building Ordinance No. 508, section 3, provides that whenever the site covered by a building permit application presents unusual problems in the opinion of the building official, a foundation plan and site check may be required. The City of Sausalito building inspector, the building official referred to in that ordinance, classified the application for a building permit on the Heyn property as an unusual building problem within the scope of the ordinance in question. He so classified the Heyn property because of the anticipated instability of the soil arising from the interaction of the water on the soil conditions and the steepness of the hillside lot.

About September 1, 1960, ground was broken at the site. Instead of excavating the site by use of the ‘modified mining technique’ as previously outlined, the entire area was excavated, resulting in an exposed vertical embankment. On September 13, 1960, the engineering geologist employed on behalf of Heyn inspected the construction site and in particular the vertical cut slopes of the excavation. At that time, the cut was from 14 feet to 16 feet in depth. He observed water slowly seeping through ‘openings in the northwest corner just above and at the bottom of the excavation.’ There had been no measurable rainfall in, on or around the city of Sausalito, Calif., during the months of June, July, August, and September, all of 1960, so that the water seepage could not have been caused by excessive rainfall. The engineering geologist was of the opinion that the cut slopes could not be expected to be stable for more than a few days without shoring. He called this to the attention of the contractor by telephone on September 14, 1960, and that conversation was confirmed by letter the following day.

On September 21, 1960, the engineering geologist again examined the excavation together with a representative of the contractor. Two 4 by 6 support timbers, about 8 feet apart, which had been placed against the vertical cut by the contractor the previous day were bowed under the load and a slide seemed imminent. The shoring was inadequate and the engineering geologist advised the contractor to increase the shoring. The record does not disclose that such advice was followed.

By September 22, 1960, the rough excavation was substantially completed. It resulted in an exposed vertical or 90-degree cut, generally running along Atwood Avenue. The cut at its greatest depth was approximately 20 feet deep measured from the existing ground level down to the floor level of the lower carport. The cut sloped from a maximum of approximately 20 feet to a minimum of approximately 10 feet.

At approximately 4 o'clock in the morning, on September 23, 1960, an earthslide occurred at the construction site which affected a portion of the embankment from the northerly side of the excavation including the vertical cut, at or about the point of the deepest excavation and on both sides of the corner. Approximately 200 cubic yards of earth fell as a result of the earthslide. This earth came from the vertical embankment and fell into the bottom of the excavation site.

The cause of the earthslide was the extensive excavation which produced a 20-foot vertical...