Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 54-85

1954-1 C.B. 58

Sec. 165

IRS Headnote

Losses sustained to residential property as a result of subsoil shrinkage during a period of drought constitute casualty losses within the meaning of section 23(e)(3) of the Internal Revenue Code.

Full Text

Rev. Rul. 54-85

Advice is requested whether losses sustained to residential property as a result of subsoil shrinkage during a period of drought constitute casualty losses under section 23(e)(3) of the Internal Revenue Code.

Section 23 of the Internal Revenue Code provides that in computing net income there shall be allowed as deductions:

(e) LOSSES BY INDIVIDUALS.-In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise- * * *

(3) of property not connected with the trade or business, if the loss arises from fires, storms, shipwreck, or other casualty, or from theft * * *

Court decisions and rulings of the Internal Revenue Service have established standards for the application of section 23(e) of the Code. They have developed the concept that a `casualty' as that term is used in section 23(e) of the Code must include an identifiable event fixing a point at which loss to the owner of the damaged property can be measured, and must also be unexpected or unusual in the context in which it occurs. Rev. Rul. 79, C.B. 1953-1, 41; Harry Johnston Grant v. Commissioner , 30 B.T.A. 1028. This concept of what is a casualty excludes damage or loss resulting from progressive deterioration through a steadily operating cause. See Hugh M. Matheson et al. v. Commissioner , 54 Fed.(2d) 537, Ct. D. 510, C.B. XI-2, 392 (1932); Charles J. Fay v. Helvering , 120 Fed.(2d) 253; and Ray Durden v. Commissioner , 3 T.C. 1.

It is understood that in a considerable group of cases there has been a relatively rapid and severe subsoil shrinkage resulting from unusually severe drought which has weakened either vertical or lateral support for building foundations. Such conditions are understood to have produced extensive cracking of walls and other serious damage to buildings in the area which can be attributed neither to faulty construction nor to such gradual settlement or subsidence as may normally occur over a period of years.

In view of the above, it is held that such losses sustained with respect to residential buildings constitute `casualty' losses within the meaning of section 23(e)(3) of the Code. The burden of providing that any damage to property is of the character indicated in the preceding paragraph and the amount of the resulting loss rests on the individual taxpayer.

The amount allowable as a `casualty' loss is the difference between the value of the property immediately preceding the casualty and its value immediately after the casualty, but not in excess of an amount equal to the adjusted basis of the property, reduced by any insurance or compensation received. See I.T. 4032, C.B. 1950-2, 21. Improvements to the property destroyed or damaged should be considered as an integral part of the entire property and no separate basis apportioned thereto in determining the loss sustained. See G.C.M. 21013, C.B. 1939-1 (Part 1), Harry Johnston Grant v. Commissioner, supra .