Opinion
Docket No. 57525.
1957-06-26
THE CITIZENS BANK OF WESTON, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.
Robert A. Littleton, Esq., for the petitioner. James A. Scott, Esq., for the respondent.
Robert A. Littleton, Esq., for the petitioner. James A. Scott, Esq., for the respondent.
Prior to a flood in June 1950, petitioner stored all of its banking records in the basement of its building. The basement was inundated during the flood and petitioner's records were destroyed, but no physical damage to the building occurred. Petitioner has not used the basement for the storage of records since the flood of 1950 for fear that another flood may some day occur which would again destroy its records. On its income tax return for 1950, it deducted a substantial loss based on the alleged decline in the fair market value of its bank building as a result of the flood. The respondent disallowed the deduction. Held, the alleged decline in the fair market value of the building resulted in no deductible loss in 1950.
This proceeding involves a deficiency in income tax for the year 1950 in the amount of $27,319.40.
The sole issue is whether the petitioner is entitled to a deduction of $76,005.07 for a casualty loss which it allegedly sustained as a result of the flooding of its property during the year 1950.
Some of the facts were stipulated.
FINDINGS OF FACT.
The stipulated facts are so found and are incorporated herein by this reference.
Petitioner is a West Virginia banking corporation with its principal place of business in the town of Weston, West Virginia. It filed a corporate income tax return on a cash basis for the calendar year 1950 with the former collector of internal revenue for the district of West Virginia.
Petitioner conducts its banking operations in a building located on Main Avenue in the town of Weston. Petitioner constructed the building in 1930. It is a 1-story stone structure with a full basement made of reinforced concrete. The building also has a mezzanine floor.
The adjusted basis of the land and building on June 24, 1950, was as follows:
+----------------------------------------------------------------+ ¦Cost of building ¦$194,147.18 ¦ ¦ +--------------------------------+-------------------+-----------¦ ¦Less: Depreciation ¦50,296.96 ¦ ¦ +--------------------------------+-------------------+-----------¦ ¦ ¦ ¦$143,850.22¦ +--------------------------------+-------------------+-----------¦ ¦Add: Cost of land ¦ ¦109,500.00 ¦ +----------------------------------------------------+-----------¦ ¦Adjusted basis of land and building on June 24, 1950¦253,350.22 ¦ +----------------------------------------------------------------+
Petitioner constructed its building with the intention of using the basement for the storage of its business records and did so use the basement for that purpose until on or about June 24, 1950.
The town of Weston is located on the West Fork River. On June 24 and 25, 1950, the river flooded approximately 25 feet above its normal level. Main Avenue was inundated and the basement of petitioner's building was flooded. Petitioner carried no flood damage insurance. Its records were destroyed and it sustained a loss which it deducted, and which the respondent allowed, for supplies and equipment ruined by the flood. The only damage to the building itself, as a result of the flood, is a slight dampness which persists in the walls of the basement, and which causes the paint to scale. The heating plant for the building is located in the basement and was in full use up to the time of the hearing. After the flood in 1950, petitioner ceased to use the basement for the purpose of storing its records because it fears another flood may occur which would again destroy such records. Except for the heating plant, the basement is not used at all.
The flood of 1950 was the worst flood which residents of the town of Weston remembered since the flood of 1888. The West Fork River has flooded since 1950 but has never reached a level sufficient to cause a flooding of petitioner's basement.
On its income tax return for 1950, the petitioner claimed a ‘LOSS FROM CASUALTY— BY FLASH FLOOD’ in the amount of $76,005.07. It arrived at the loss deduction claimed on the basis of the alleged decline in the depreciated fair market value of its property immediately before and after the flood. The respondent denied the deduction of the loss so claimed.
OPINION.
RICE, Judge:
The petitioner bases its claim for a deductible loss on the ground that the utility of its basement was completely destroyed by the flood which occurred in 1950 because ‘it is no longer safe or advisable to use the basement as a banking facility until the flood waters of West Fork River are controlled by a high dam and/or a series of small dams' since another flood may occur at any time. It recognizes that no physical damage, as such, occurred to the building, but contends that its fair market value immediately after the flood was considerably less than its value immediately before the flood.
The respondent contends that the petitioner sustained no loss as a result of the flood of 1950 because there was no physical damage to its building, and that, even assuming its fair market value was less after the flood, there was still no resulting loss, recognizable for tax purposes.
In Williams Furniture Corporation, 45 B.T.A. 928 (1941), we permitted the taxpayer to deduct the loss occasioned by its abandonment of certain tank foundations which were rendered useless because of a fire which destroyed its manufacturing plant and necessitated moving its operations to another location. We said, at page 938:
As early as the Revenue Act of 1918 and continuing through all the subsequent revenue acts, the Commissioner in his appropriate regulations has allowed a deduction for ‘loss of useful value’ of capital assets, when through some change in business conditions the usefulness in the business of a capital asset is suddenly terminated so that the taxpayer discards it permanently from use in the business. This was intended as an exception to the rule requiring a sale or other disposition of property in order to establish a loss, and was made applicable to buildings ‘only when they are permanently abandoned or permanently devoted to a radically different use.’ * * *
Regulations 111, section 29.23(e)-3, which is applicable here, permits a similar deduction. Since losses sustained by a corporation are deductible under the general provisions of section 23(f), we think it matters not whether the loss arises directly from the physical destruction of property by a casualty or from the abandonment of property caused by the occurrence of a casualty, so long as a taxpayer can show that he has actually sustained a loss.
The petitioner here has failed to show that it sustained a deductible loss. We agree with the respondent that physical damage or destruction of property is an inherent prerequisite in showing a casualty loss. The petitioner concedes that there was no physical damage to its property which resulted in a loss, and it has not shown a permanent abandonment of its property occasioned by the flood. It has continued to use the main and mezzanine floors for banking purposes just as it did prior to the flood, and, in any event, petitioner has failed to show that it permanently abandoned even the basement of the building. Mere non-use is not enough to given rise to a recognized abandonment loss for tax purposes. Mid-State Products Co., 21 T.C. 696 (1954); W. B. Davis & Son, Inc., 5 T.C. 1195 (1945). Petitioner concedes that if an adequate flood control program for the West Fork River were adopted, its basement would be fully as usable as before.
It seems to us that the essence of petitioner's position here is that it is attempting to claim a loss because of the fluctuation in the value of its banking property. It sustained no loss because of casualty damage or destruction of its property; and it did not permanently abandon its property because of the casualty. Petitioner here has simply discontinued the use of its basement for storage of its records. It has done so even though the physical condition of the basement is admittedly the same as before the flood, and just as desirable for the storage of its records, except for the fear that another flood may some day occur. But the law does not permit current deductions for losses which may be sustained in the future any more than it permits deductions for losses claimed because of mere fluctuation in the value of the property. United States v. White Dental Co., 274 U.S. 398 (1927); Burdan v. Commissioner, 106 F.2d 207 (C.A. 3, 1939), affirming 37 B.T.A. 642 (1938).
At the hearing, petitioner introduced the testimony of several witnesses to the effect that all property located on Main Avenue in the town of Weston had depreciated in value as a result of the flood of 1950. That may be true, but the time for the petitioner or any other taxpayer to claim a loss is the time when that loss is actually sustained, as evidence by a completed and closed transaction, such as the sale of a building or its permanent abandonment. That did not happen here. As the Supreme Court long ago observed in Weiss v. Wiener, 279 U.S. 333, 335 (1929):
The income tax laws do note profess to embody perfect economic theory. They ignore some things that either a theorist or a business man would take into account in determining the pecuniary condition of the taxpayer. They do not charge for appreciation of property or allow a loss from a fall in market value unless realized in money by a sale. United States v. S. S. White Dental Co., 274 U.S. 398, 401. A stockholder does not pay for accumulated profits of his corporation unless he receives a dividend. That is the general principle upon which these laws go. It is true they allow for obsolescence of buildings, & c., where the loss is of materials, not of money; but there as elsewhere the loss must be actual and present, not merely contemplated as more or less sure to occur in the future. * * *
Decision will be entered for the respondent.