Rev. Rul. 63-232

The Internal Revenue Service has re-examined its position with regard to the deductibility of losses resulting from termite damage, as set forth in Revenue Ruling 59-277, C.B. 1959-2, 73.

Revenue Ruling 59-277 stated that the Service would follow the rule of George L. Buist, et ux. v. United States , 164 Fed. Supp. 218 (1958); Martin A. Rosenberg v. Commissioner , 198 Fed. (2d) 46 (1952); and Joseph Shopmaker et al. v. United States , 119 Fed. Supp. 705 (1953), only in those cases where the facts were substantially the same. The courts in these cases held that damage caused by termites over periods up to 15 months after infestation constituted a deductible casualty loss under section 165 of the Internal Revenue Code of 1954.

Revenue Ruling 59-277 further stated that in other cases, the Service would follow the rule announced in Charles J. Fay et al. v. Helvering , 120 Fed.(2d) 253 (1941); United States v. Betty Rogers, et al. , 120 Fed.(2d) 244 (1941); and Leslie C. Dodge et ux. v. Commissioner 25 T.C. 1022 (1956). In the latter cases the termite infestation and subsequent damage occurred over periods of several years.

An extensive examination of scientific data regarding the habits, destructive power and other factors peculiar to termites discloses that the biological background of all termites found in the United States is generally the same, with one notable exception. The subterranean or ground dwelling termite attacks only wood which is in contact with the ground, while the other types of termites attack wood directly from the air.

Leading authorities on the subject have concluded that little or no structural damage can be caused by termites during the first two years after the initial infestation. It has been estimated that under normal conditions, if left unchecked, depending upon climate and other factors, an infestation of three to eight years would be required to necessitate extensive repairs. Even under extreme conditions, the period would be from one to six years. See `Our Enemy the Termite' by Thomas Elliott Snyder; `Termite and Termite Control' by Charles A. Kofoid; `Insects Their Ways and Means of Living' by Robert Evans Snodgrass; and other authorities.

Such authorities agree that termite infestation and the resulting damage cannot be inflicted with the suddenness comparable to that caused by fire, storm or shipwreck.

Accordingly, it is the position of the Service, based on the scientific data available in this area, that damage caused by termites to property not connected with the trade or business does not constitute an allowable deduction as a casualty loss within the meaning of section 165(c)(3) of the Code. Such damage is the result of gradual deterioration through a steadily operating cause and is not the result of an identifiable event of a sudden, unusual or unexpected nature. Further, time elapsed between the incurrence of damage and its ultimate discovery is not a proper measure to determine whether the damage resulted from a casualty. Time of discovery of the damage, in some situations, may affect the extent of the damage, but this does not change the form or the nature of the event, the mode of its operation, or the character of the result. These characteristics are determinative when applying section 165(c)(3) of the Code.

The Internal Revenue Service will no longer follow the decisions of Buist, Rosenberg , and Shopmaker, supra . The only real distinction between those cases and the decisions of Rogers, Fay , and Dodge, supra , is the time in which the loss was discovered.

Under the authority contained in section 7805(b) of the Code, Revenue Ruling 59-277, C.B. 1959-2, 73, is revoked for all taxable years beginning after November 12, 1963.