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Revenue Ruling 71-254, 1971-1 CB 78

Casualty losses., Revenue Ruling 71-254, 1971-1 CB 78, (Jan. 01, 1971)

Section 165 --Losses

26 CFR 1.165-7: Casualty losses.
The acquiescence in "Bessie Knapp et al.," regarding freeze damage to a citrus grove, was based on the interpretation that the taxpayer must prove physical damage to his land as a separate unit of property; however, the Court" s method of measuring the allowable loss is contrary to regulations and will not be followed.

Advice has been requested whether the acquiescence published in C.B. 1966-1, 2, in the case of Bessie Knapp et al., v. Commissioner, 23 T.C. 716 (1955), means that a casualty loss in connection with land used in a trade or business, or in any transaction entered into for profit, is allowable where a taxpayer fails to prove actual physical damage to the land as a separate unit of property. Advice has also been requested whether the method used by the Tax Court of the United States in determining the allowable loss is consistent with section 1.165-7(b)(1) of the Income Tax Regulations that were promulgated on January 16, 1960, T.D. 6445, C.B. 1960-1, 93.

In the Knapp case the Court held that a casualty loss was allowable as a result of damage caused by freezing weather to citrus tree groves and to the land on which they grew. The loss was measured by the percentage of the adjusted basis of the property which the decrease in its fair market value as a result of the freeze bore to its fair market value immediately before the freeze. Separate computations were made for the land and for the fruit trees (to the extent they were not previously claimed as expenses).

Section 1.165-7(b)(1) of the regulations provides that in the case of any casualty loss, whether or not incurred in a trade or business or in any transaction entered into for profit, the amount of loss to be taken into account is the lesser of (1) the difference in the fair market value of the property immediately before and immediately after the casualty, or (2) its adjusted basis. Section 1.165-7(b)(2) of the regulations provides that in the case of property used in a trade or business or in any transaction entered into for profit, a separate computation be made with respect to each identifiable property damaged or destroyed.

The acquiescence in the Knapp case was based on the interpretation that the Court's decision meant that the taxpayer must prove physical damage to the land as a separate unit of property. The Court held that "as a direct result of the freeze, the condition (and value) of the land was affected by the presence of the dead trees." See The Squirt Co. v. Commissioner, 423 F. 2d 710 (1970), Fred Rosenthal et al., v. Commissioner, 416 F. 2d 491 (1969), and Carloate Industries, Inc. v. United States, 354 F. 2d 814 (1966).

The method by which the Court computed the allowable loss in the Knapp case, insofar as it made a separate computation for the citrus trees and the land on which they grew, is consistent with section 1.165-7(b)(2) of the regulations. However, the Court's measurement of the allowable loss by using the percentage of the adjusted basis of the property which the decrease in its fair market value as a result of the freeze bore to its fair market value immediately before the freeze is contrary to section 1.165-7(b)(1) and will not be followed. See Rosenthal v. Commissioner; Alcoma Association, Inc. v. United States, 239 F. 2d 365 (1956).