Rev. Rul. 79-174

ISSUE

Under the circumstances described below, is a loss from the death of trees as a result of attack by insects a casualty loss within the meaning of section 165(c) of the Internal Revenue Code of 1954?

FACTS

In 1976, a taxpayer owned a residential lot on which 40 ornamental pine trees were growing. The trees were in healthy condition on July 1, 1976. By July 10, 1976, all of the trees were dead. Death was attributable to a mass attack of southern pine beetles. Beetle attacks in epidemic proportions were unknown in the vicinity of the taxpayer's residential lot prior to the attack that killed the trees.

The southern pine beetle is a flying insect that normally attacks living pine trees. The female beetle bores into a tree and enters the cambium tissue beneath the bark. It then emits an attractant that leads other beetles to the tree in a mass attack. The beetles construct tunnels in the cambium tissue and deposit their eggs. These tunnels intersect and in a short time completely girdle the tree. This cuts off the food supply to the higher parts of the tree and kills the tree. In the instant case, the cambium layer of each tree was completely girdled within 5 to 10 days after the arrival of the female beetle.

LAW AND ANALYSIS

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

Section 165(c) of the Code provides that in the case of an individual, the deduction is limited to (1) losses incurred in a trade or business, (2) losses incurred in any transaction entered into for profit, though not connected with a trade or business, and (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. In respect of property not connected with a trade or business, a loss shall be allowed only to the extent that the amount of loss to such individual arising from each casualty, or from each theft, exceeds $100.

Court decisions and revenue rulings have established standards for the application of the above provisions, and have developed the overall concept that the term "casualty" as used in such provisions refers to an identifiable event of a sudden, unexpected, or unusual nature. Damage or loss resulting from progressive deterioration of property through a steadily operating cause would not be a casualty loss. See Matheson v. Commissioner, 54 F.2d 537 (2nd Cir. 1931), XI-2 C.B. 392 (1932) and Rev. Rul. 76-134, 1976-1 C.B. 54.

Revenue Ruling 57-599, 1957-2 C.B. 142, holds in part that a loss arising from the death of trees as a result of an attack by insects does not constitute an allowable deduction as a casualty loss within the meaning of section 165(c)(3) of the Code. The loss was denied on the grounds that the death of the trees resulted from progressive deterioration, and, therefore, the element of suddenness was lacking.

To be sudden, an event must be of a swift and precipitous nature and not gradual or progressive. See Rev. Rul. 72-592, 1972-2 C.B. 101. Whether an event is sudden must be determined from all the surrounding facts and circumstances. In the instant case, the cambium layers of the ornamental trees were completely girdled within 5 to 10 days after the arrival of the female beetle. Once the girdling occurred the trees were dead and their value as ornamentals was lost at that point. On the basis of these facts the element of suddenness is satisfied. See Nelson v. Commissioner, T.C.M. 1968-35, and Black v. Commissioner, T.C.M. 1977-337.

In addition to being sudden in nature, the event must also be unusual or unexpected before it can qualify as a casualty within the meaning of section 165(c)(3) of the Code. Since there were no known attacks in epidemic proportions of southern pine beetles in the area of the taxpayer's residence, the event was both unusual and unexpected. HOLDING

A casualty loss deduction is allowable to the taxpayer to the extent provided by section 165(c)(3) of the Code and the regulations thereunder.

EFFECT ON OTHER REVENUE RULINGS

Rev. Rul. 57-599 is modified to remove any implication that fatal damage to ornamental trees by insect infestation can never be of a sufficiently sudden nature to meet the required elements of a casualty loss under section 165(c)(3) of the Code.