Hoppe v. Commissioner

Rudolf Lewis Hoppe and Ann Erna Hoppe, Petitioners, v. Commissioner of Internal Revenue, Respondent Hoppe v. Commissioner Docket No. 1725-62 United States Tax Court 42 T.C. 820; 1964 U.S. Tax Ct. LEXIS 66; July 28, 1964, Filed *66 Decision will be entered for the respondent. Dry rot damage discovered in 1959 held not deductible as a casualty loss under section 165(c)(3), I.R.C. 1954. E. G. Kilroe, 32 T.C. 1304, distinguished. Rudolf Lewis Hoppe, pro se. Eugene H. Ciranni, for the respondent. Raum, Judge. RAUM *820 The Commissioner determined a deficiency in petitioners' 1959 income tax in the amount of $ 1,222.96, as a result of his disallowance of a claimed casualty loss deduction in the amount of $ 5,752. The principal issue is whether a loss from dry rot in petitioners' home qualifies as a casualty loss under section 165(c)(3) of the 1954 Code; a subsidiary issue involves the amount of the loss. FINDINGS OF FACT Petitioners, *67 husband and wife, are residents of Richmond, Calif. They filed a joint Federal income tax return for the year 1959 with the district director of internal revenue, San Francisco, Calif. Their residence, a "frame-stucco" building at 1218 South 57th Street, Richmond, Calif., was constructed in 1948, and they have occupied it from 1948 to the present time. In 1956, in anticipation of selling their property, petitioners arranged to have it inspected by Terminix of Northern California, Inc., structural pest control inspectors duly licensed by the State of California, hereinafter referred to as Terminix. The inspection was made on September 21, 1956, by a branch manager and field representative of Terminix, Robert E. Ledbetter, a duly licensed structural pest control inspector, who, in behalf of Terminix, sent a report of his inspection to petitioners. The inspection disclosed fungus infestation and damage in the underpinning of the substructure of the building. The condition discovered in the building is known as dry rot. It is the result of a fungus that attacks and progressively destroys wood. *821 It starts when wood is exposed to moist warm conditions where ventilation is*68 poor. It develops over a period of time which can be short or long, depending upon whether conditions are favorable to moisture penetration. The foregoing inspection report contained the statement that "This report is confined to the substructure of the main building unless otherwise specified * * *. We assume no responsibility for damage or infestation that cannot be detected without excavating or opening timbers, walls, partitions, or other concealed areas." The term "substructure" was defined in the report as "that portion of the building below the subfloor level of the first main floor and includes the bases of wood walls and support columns or posts or any portion of the building in contact with the earth." The report indicated that the inspection covered the substructure, the wood porch and wood steps at rear of building, and the louvers. It also stated that the inspector found excessive moisture conditions and insufficient ventilation, and dry rot fungus infestation and damage in the underpinning of the substructure. The company recommended that 10 additional ventilators be installed, that joists and headers at the front wall be repaired, that decayed corner studs at the*69 left front be replaced and decayed nonfunctional sheathing be cut out; that damaged studs and plates at the two rear corners be repaired and damaged sheathing cut out; that two pieces of decayed subflooring at the rear corners be replaced; that loose top soils be cleared from back of garage partition wall; that the wing wall at the front porch area be rebuilt; and that the exterior areas be restuccoed as needed where the repairs were made. In paragraph 8 under the heading "Areas inaccessible or for other reasons not inspected" the report contained the statement that "No inspection was made inside of the closed finished plastered walls of the living area above the subfloor level." The work recommended by Terminix was performed, and, on September 30, 1956, it sent petitioners a certificate of completion certifying "that the work as recommended in our inspection report * * * has been satisfactorily completed." Petitioners did not thereafter sell their house. The climate of the area in which petitioners' residence is located has mild year-round temperatures, copious rains during the winter, and almost no rain during the summer. During January, February, March, and April of 1958 this*70 area was subjected to unusually heavy rainfall, and the entire State was designated a "disaster area" by the President on April 5, 1958. As a result of petitioners' experience in September 1956, petitioner Rudolf Hoppe thereafter personally inspected his house from time to *822 time. He confined his inspection to the underside of the building, making tests of the understructure with a hammer, a method recommended by the inspector of Terminix in 1956. He made such inspections from September 1956 through November 1959. He made a special inspection after the unusually heavy rainfall in the spring of 1958, but he did not discover any fungus infestation then or at any other time prior to November 15, 1959; nor would he have discovered any such infestation at that time if he had not started to remove his back porch, as hereinafter set forth. During the first part of November 1959 Hoppe entered into a contract with the West Coast Specialty Co., whereby it undertook for $ 1,064.56 to install a picture window and a sliding door, to replace four standard size windows, and to close off a rear door. The door and window frames were to be of anodized aluminum, and Hoppe was to do the work*71 of removing the back porch as part of the project. On November 15, 1959, Hoppe commenced the work of dismantling the back porch. When he removed the railing which was attached to the wood sheathing and some stucco, he discovered dry rot in the sheathing. He then removed the stucco all around the house and found dry rot fungus infestation under the roof ventilators, in the sheathing in all the walls, particularly within 2 to 3 feet of each side of the windows throughout the house down to the ground floor but not down into the basement area, and around the studs at each corner. No part of the dry rot thus discovered in November 1959 was in any of the new wood that replaced the decayed wood in 1956, nor was any of that dry rot in any portion of the house that was covered by the foregoing inspection report of September 1956 or was the subject of inspection in September 1956. The dry rot discovered in November 1959 was entirely above the substructure of the building. Upon discovery of the dry rot in November 1959 Hoppe engaged the West Coast Specialty Co. to repair the damage, in addition to performing the work already contracted for and in addition to installing aluminum windows throughout*72 the house. For all such work Hoppe paid the West Coast Specialty Co. a net amount of $ 5,080. This amount included a net total of $ 1,770.21 for the aluminum windows installed throughout the house, for other costs connected with glass and screens, as well as for the original contract charge for the picture window, sliding door, etc. The remainder of the $ 5,080 was paid for the repair of the dry rot infestation damage. In the joint return filed by petitioners for the year 1959, they claimed a deduction for a casualty loss in the amount of $ 5,752. The deduction was disallowed by the respondent. A stipulation of facts filed by the parties is included in these findings by reference. *823 OPINION Petitioners contend that they are entitled to a deduction for a casualty loss under section 165(c)(3) of the 1954 Code 1 in respect of the dry rot damage discovered in their house in November 1959. *73 Section 165(c) (3) speaks of losses arising from "fire, storm, shipwreck, or other casualty * * *." And the term "casualty" has been interpreted to mean "an accident, a mishap, some sudden invasion by a hostile agency; it excludes the progressive deterioration of property through a steadily operating cause." Fay v. Helvering, 120 F. 2d 253 (C.A. 2); United States v. Rogers, 120 F. 2d 244, 246, 122 F. 2d 485 (C.A. 9); Matheson v. Commissioner, 54 F. 2d 537, 539 (C.A. 2); Leslie C. Dodge, 25 T.C. 1022, 1026. Thus, the foregoing cases have denied deductions for losses due to such causes as termites, dry rot, and rust. An exception to this rule appears to have developed in recent years in the case of the "fast termite," where it has been held that termite damage may qualify as a casualty loss if it occurs within a relatively short period of time. Rosenberg v. Commissioner, 198 F. 2d 46 (C.A. 8); Joseph Shopmaker v. United States, 119 F. Supp. 705 (E.D. Mo.); Buist v. United States, 164 F. Supp. 218*74 (E.D. S.C.). And this Court has undertaken to follow this line of cases in E. G. Kilroe, 32 T.C. 1304, stating that the "term 'suddenness' is comparative, and gives rise to an issue of fact," noting that the claimed deductions for termite losses were disallowed in some cases while allowed in others (pp. 1306-1307). The alleged casualty before us involves dry rot rather than termites, but we do not understand either of the parties to suggest that anything here turns upon this difference. 2*75 Accordingly, the question before us under Kilroe is the factual one whether the dry rot discovered in petitioners' house in November 1959 was of comparatively recent origin *824 so as to qualify for the requisite degree of "suddenness." 3 Petitioners' position in substance is that the fungus infestation began as the result of the unusually heavy rains in January, February, March, and April of 1958; that the ensuing damage occurred over the following period of some 18 to 22 months; and that such period is sufficiently short to justify classifying the loss as characterized by the necessary "suddenness" to qualify as a "casualty." We might well hesitate to say that a period of some 3 months that we approved in Kilroe may be expanded to some 18 to 22 months without subjecting the whole theory of "comparative suddenness" to a reductio ad absurdum, but we do not reach that point because we cannot find that the dry rot in question had its beginning at the time of those rains in the first part of 1958 rather than at some substantially earlier date. Petitioners' contention that the fungus infestation began with those rains is based upon the assumption that their*76 house was free of dry rot after the September 1956 inspection and repair of the property as recommended in the inspection report. Although we had the impression at the time of the trial that there might be a basis for that assumption, a careful study of the record has satisfied us that the assumption is without foundation. The inspection report specifically states that it is "confined to the substructure" of the building "unless otherwise specified." And the report does not "otherwise" specify that it dealt with those portions of the house, above the first floor level, in which the damage now before us was sustained. The principal items in controversy are the sheathing and studs behind the external stucco walls, particularly within a few feet of the windows and under the roof ventilators. The area involved is entirely above the substructure. To be sure there was testimony by Hoppe that the inspector made some test holes in the stucco, but he did not testify that such holes were made at a level above the subfloor, and the inspector did not recall making any such holes. 4 It must be remembered that the burden is upon petitioners, and we are not convinced on this record that*77 the areas here involved were free of dry rot at the time of the 1956 inspection. In the circumstances, the 1958 rains might well have furnished merely additional moisture for a continuous process of decay that had already been in progress for some time. In view of the state of the record we cannot *825 find that petitioners have established the correctness of their assumption that the 1958 rains caused the damage in issue. It is therefore unnecessary to determine whether, had they carried their burden in this respect, there would otherwise have been compliance with the statutory requirement for deduction. Nor is it necessary to fix the amount of damage that would have been deductible, although our findings show that the amount deducted on petitioners' return plainly comprehended components that could not under any theory be classified as dry rot damage. *78 Decision will be entered for the respondent. Footnotes 1. SEC. 165. LOSSES. (a) General Rule. -- There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise. * * * * (c) Limitation on Losses of Individuals. -- In the case of an individual the deduction under subsection (a) shall be limited to -- * * * * (3) losses of property not connected with a trade or business, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft. * * *↩ 2. In United States v. Rogers, 120 F. 2d 244↩ (C.A. 9), the loss deduction was claimed for damage by "termites or dry rot." In denying the deduction the court said that "damage by termites or dry rot is not a sudden occurrence but is a development over a longer period of time" (p. 246). 3. In Kilroe the termite infestation was discovered in April 1955 where the property was found to have been free of termites in January 1955. In the Rosenberg case, 198 F. 2d 46, 51, the Court of Appeals for the Eighth Circuit said: "Comparatively speaking, an invasion of a colony of termites which destroys the timbers of a building in a month, three months, or a year, is a sudden destruction * * *." The termite invasion occurred within a period of 1 year in Rosenberg, 14 months in Shopmaker, and 9 months in Buist↩. 4. A former neighbor testified that he saw some test holes in the stucco, but it is far from clear that he intended his testimony to convey the thought that the holes were punched above the subfloor level. In any event, we could hardly rely upon such testimony to contradict the fair import of the inspection report.↩