Rev. Rul. 66-9

Advice has been requested concerning the amount allowable for a casualty loss due to destruction of timber by a hurricane.

A taxpayer owns several tracts of timberland which he holds for investment. Some of the tracts were acquired by gift or inheritance. The taxpayer acquired other tracts by occasional purchases and exchanges over a period of years. The timberland was not acquired for resale in the course of any business.

A hurricane destroyed or damaged some of the timber on five different tracts of the taxpayer's land. The damage included breakage and uprooting of standing timber varying in severity from tract to tract. Some of the damaged timber was salvaged and some of it was unfit for salvage.

Section 165(a) of the Internal Revenue Code of 1954 provides that there shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.

Under section 165(c)(2) of the Code in the case of an individual a deduction is allowed for losses incurred in any transaction entered into for profit.

Section 1.165-7 of the Income Tax Regulations outlines the manner of determining the amount of a casualty loss allowable as a deduction. Section 1.165-7(b) of the regulations provides:

(b) AMOUNT DEDUCTIBLE.-(1) GENERAL RULE.-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 for purposes of section 165(a) shall be the lesser of either-

(i) The amount which is equal to the fair market value of the property immediately before the casualty reduced by the fair market value of the property immediately after the casualty; or

(ii) The amount of the adjusted basis prescribed in [Section] 1.1011-1 for determining the loss from the sale or other disposition of the property involved. However, if property used in a trade or business or held for the production of income is totally destroyed by casualty, and if the fair market value of such property immediately before the casualty is less than the adjusted basis of such property, the amount of the adjusted basis of such property shall be treated as the amount of the loss for purposes of section 165(a).

(2) AGGREGATION OF PROPERTY FOR COMPUTING LOSS.-(i) A loss incurred in a trade or business or in any transaction entered into for profit shall be determined under subparagraph (1) of this paragraph by reference to the single, identifiable property damaged or destroyed. * * *

In the case of a casualty loss to timber, the `property involved' and the `single, identifiable property' destroyed is the quantity of timber which is rendered unfit for use by reason of the casualty. The amount of the casualty loss allowable is limited to the adjusted basis prescribed in section 1.1011-1 of the regulations for determining the loss from the sale or other disposition of that quantity of timber. The adjusted basis of the quantity of timber destroyed is determined by multiplying the unit adjusted basis by the quantity of timber destroyed.

In Oregon Mesabi Corporation v. Commissioner , 39 B.T.A. 1033 (1939), acquiescence, C.B. 1944, 22, the United States Board of Tax Appeals (now the Tax Court of the United States) held that timber killed by a fire was not thereby made worthless. Deduction for loss was allowed for the quantity of timber found by fair and reasonable estimates to have been destroyed. The court pointed out that timber which may be salvaged is not destroyed, but will present the usual problems of depletion when it is salvaged.

Gain or loss from the sale or other disposition of the timber which was not destroyed by the hurricane should be determined by deducting at the time of sale or other disposition the adjusted basis of the quantity of timber involved from the amount received for that timber. The adjusted basis of the quantity of timber rendered worthless for practical purposes is allowable as a deduction for casualty loss by hurricane if the loss is not compensated for by insurance or otherwise.

Accordingly, the amount allowable as a deduction for casualty loss due to destruction of timber by hurricane may not exceed the adjusted basis for determining loss from the sale or other disposition of the quantity of timber which by fair and reasonable estimates is found to be unfit for use by reason of the hurricane. Such adjusted basis does not include any portion of the basis (or adjusted basis) attributable to the land, other improvements, or to any timber not rendered worthless by the hurricane.