Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 68-29

1968-1 C.B. 74

Sec. 165

IRS Headnote

Values of individual shade or ornamental trees computed by the use of a `shade tree evaluation' formula may not be used to determine the amount of a casualty loss to nonbusiness residential property. The use of such a formula produces a hypothetical value of individual trees that is not related to the fair market value of the property as a whole.

Full Text

Rev. Rul. 68-29

Advice has been requested whether the value of individual shade or ornamental trees computed by the use of a so-called `shade tree evaluation' formula may be used to determine the amount of a loss for damage to shade and ornamental trees on personal residential property resulting from a casualty.

Several different formulas for evaluating individual shade trees are in common use for various purposes. Some of the formulas provide for determining the value by multiplying the number of square inches in a cross-section of the tree at a certain height by a specified value. Others provide adjustments for such additional factors as height, species, location, and condition of the trees.

Section 165 of the Internal Revenue Code of 1954 provides in pertinent part that, in the case of an individual, there shall be allowed as a deduction any loss sustained during the year and not compensated for by insurance or otherwise of property not connected with a trade or business, if such losses arise from fire, storm, or other casualty. The deduction for each casualty loss in limited to that portion of the loss which is in excess of $100.

Section 1.165-7(b)(1) of the Income Tax Regulations provides that in the case of any casualty loss the amount of loss to be taken into consideration is the lesser of the decrease in fair market value of the property or the adjusted basis for determining loss from the sale or other disposition of the property involved.

Section 1.165-7(a)(2)(i) of the regulations provides that in determining the amount of loss deductible under this section, the fair market value of the property immediately before and immediately after the casualty shall generally be ascertained by competent appraisal. The deduction is limited to the actual loss resulting from damage to the property. However, section 1.165-7(a)(2)(ii) of the regulations provides that the cost of repairs to the property damaged is acceptable as evidence of the loss in value if the taxpayer shows that (a) the repairs are necessary to restore the property to its condition immediately before the casualty, (b) the amount spent for such repairs is not excessive, (c) the repairs do not care for more than the damage suffered, and (d) the value of the property after the repairs does not as a result of the repairs exceed the value of the property immediately before the casualty.

In determining the amount of a casualty loss to nonbusiness residential property, shade and ornamental trees are considered an integral part of the real property having no separate value. Therefore, any loss for damage to the trees resulting from a casualty must, to be allowable, be the result of an actual decrease in the value of the property as a whole. While the actual cost of replacing the trees is not necessarily conclusive in determining the amount of the loss, it may, where appropriate, serve as evidence of the decrease in value of the property.

The use of a `share tree evaluation' formula produces a hypothetical value of individual trees based upon the assumptions of the formula. The value so determined has no relationship to the fair market value of the property as a whole.

Accordingly, values of individual shade or ornamental trees computed by the use of a `shade tree evaluation' formula may not be used to determine the amount of a casualty loss to nonbusiness residential property for Federal income tax purposes.