Internal Revenue Service
Revenue Ruling

TaxLinks.com   sm

 Rev. Rul. 73-41

1973-1 C.B. 74

Sec. 165

IRS Headnote

The payment of a judgment for damages due the lessor for the lessee's failure to surrender leased residential property in good condition because of extensive fire damage is a casualty loss; I.T. 3850 superseded.

Full Text

Rev. Rul. 73-41 /1/

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in I.T. 3850, 1947-1 C.B. 20.

The question presented is whether an amount paid by a lessee to a lessor, under the circumstances described below, is deductible under section 165(c)(3) of the Internal Revenue Code of 1954.

In 1969, the taxpayer entered into an agreement to lease real property which he used as his personal residence. The lease provided that, at its expiration, the lessee would quit and surrender the premises "in as good order and condition as reasonable use and wear thereof will permit, damage by the elements expected."

In 1970, shortly before the expiration of the lease, the property was severely damaged by fire, and the lessee failed to surrender the property in good order and condition. There was no insurance from which the lessee could benefit. The lessor asserted a claim for damages against the lessee who denied liability. Thereafter, a suit was instituted against the lessee. The parties subsequently entered into a stipulation of settlement, and in 1971 a judgment was entered based on such stipulation. The amount of the judgment was paid in 1971.

Section 165(a) of the Code provides that there shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.

Section 165(c)(3) of the Code allows individuals a deduction under section 165(a) of the Code for losses of property not connected with a trade or business to the extent that each loss exceeds $100 if such loss arises from fire, storm, shipwreck or other casualty, or from theft.

In the instant case, liability under the lease for damage to the property was first denied by the lessee. Thereafter, pursuant to the terms of a stipulation entered into by and between the lessor and lessee in connection with a suit by the lessor for damages, judgment was rendered for the lessor.

Inasmuch as the damage in this case, involving residential property, resulted from fire, the loss sustained upon payment of the judgment was directly attributable to the fire. Accordingly, it is held that the amount in excess of $100 paid by the lessee is deductible under section 165(c)(3) of the Code for the taxable year in which the judgment was paid.

I.T. 3850 is superseded, since the position set forth therein is restated under current law in this Revenue Ruling.

/1/ Prepared pursuant to Rev. Proc. 67-6, 1967-1 C.B. 576.