                  T.C. Summary Opinion 2003-168



                     UNITED STATES TAX COURT



                 PAMELA S. COOPER, Petitioner v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 8859-02S.             Filed December 17, 2003.


     Pamela S. Cooper, pro se.

     Jeffrey C. Venzie, for respondent.



     PANUTHOS, Chief Special Trial Judge:   This case was heard

pursuant to the provisions of section 7463 of the Internal

Revenue Code in effect at the time the petition was filed.   The

decision to be entered is not reviewable by any other court, and

this opinion should not be cited as authority.    Unless otherwise

indicated, subsequent section references are to the Internal
                                  - 2 -

Revenue Code in effect for the years in issue, and all Rule

references are to the Tax Court Rules of Practice and Procedure.

     Respondent determined deficiencies in petitioner’s Federal

income taxes and additions to tax as follows:

                                              Addition to Tax
         Year           Deficiency            Sec. 6651(a)(1)
     1
      1995               $1,380                     $532
      1998               12,968                    3,242
       1
         The Court permitted respondent to amend his answer to assert
     a claim for an increased deficiency for 1995 in the amount of
     $7,651 and an increase in addition to tax in the amount of
     $1,725.75. Thus, the deficiency in dispute for 1995 is $9,031 and
     the addition to tax in dispute for that year is $2,257.75. The
     increase in deficiency and addition to tax is based on
     respondent’s claim that the notice of deficiency for 1995
     incorrectly assumed that $7,651 was assessed. Respondent asserts
     that the assessment had been erroneously abated prior to issuance
     of the notice of deficiency.

     The issues for decision are:       (1) Whether petitioner is

entitled to all or any part of a claimed casualty loss deduction,

and (2) whether the petitioner is liable for the additions to tax

for late filing pursuant to section 6651(a)(1), as determined by

respondent.     Additional adjustments in the notice of deficiency

are computational in nature and will flow from our resolution of

the casualty loss issue.

Background

     Some of the facts are stipulated, and they are so found.

The stipulation of facts and the attached exhibits are

incorporated herein by this reference.        At the time of filing her

petition, petitioner resided in Tinton Falls, New Jersey.
                                - 3 -

     Petitioner purchased her home in Tinton Falls, New Jersey,

in 1985, where she continued to reside until sometime in 1995.

The existing washing machine in the house was conveyed to

petitioner at the time of purchase.

     On the morning of August 26, 1994, petitioner went to see

her insurance agent about miscellaneous insurance matters.      At

the meeting, she was advised that her homeowner’s policy had

expired.    She purchased a new homeowner’s policy with Mercer

Mutual Insurance Company (Mercer or insurance company) that

morning.    When petitioner arrived home on the evening of August

26, she discovered that her home was flooded.      The cause of the

flood was identified as a split in the hose connecting from the

sink to the washing machine.    As a result, the house which is on

a concrete slab, became water soaked.      Carpets and furniture were

destroyed.    Mold and mildew began to appear throughout the house

within a few days.    Petitioner and her daughter had to

temporarily move out of the house.      Petitioner, who described

herself as a collector, had many boxes and other items stored in

her home.    Petitioner incurred expenses to remove water-soaked

items from the house and for general cleanup and repair.      The

cleanup and repair process took many months and was delayed, at

least in part, because of disputes between petitioner and her

insurance company.
                                  - 4 -

     In December 1994, petitioner filed a claim for insurance

loss with Mercer.    The cause and origin of the loss was described

as “washing machine hose had a small split”.         Petitioner listed

the amount of the loss as “Partial loss and damage claimed and

estimated (as of 12/2/94) $38,040.73        Cost of loss is still

mounting because of loss of use, lack of storage space, lack of

funds, inconvenience.”     Attached to the claim form are numerous

pages of schedules of listed property.        A hand-written list

prepared about the same time reflected the following categories

and amounts of claimed loss:

            Total Estimates and Partial List as of 12/2/94
              (3 months after flooding–-still no payment)

               List            Estimate or Cost              Total
     Part   ALoss of work                                   $4,334.58
     Part   BLoss of vacation                                4,482.00
     Part   CLoss of use                                     1,954.00
     Part   DMeals out                                       2,184.00
     Part   ETransporting                                      964.55
     Part   FSalvage                                         1,023.00
     Part   GStorage (so far)                                1,052.64
     Part   HLoss of property                                7,387.00
     Part   IDamaged goods      $500.00                        500.00
     Part   JAppliances        1,562.00                      1,562.64
     Part   KRepair to home    7,039.46                      7,039.46
     Part   LMove vs. Trailer
              & storage boxes 1,600.00                        1,600.00
     Part M Carpet             3,957.50                       3,957.50
                                                          1
          Total Partial Claim as of 12/2/94                 $38,040.73
       1
         We note that the correct total is $38,041.37, which varies by an
     immaterial amount of $0.64 from what petitioner had calculated and
     listed as her total partial claim.
                                - 5 -


     Mercer initially refused to pay any insurance benefits in

response to petitioner’s claim.   The insurance company questioned

whether the flood and resulting damage occurred prior to the

policy’s taking effect.   Petitioner brought suit against Mercer

in 1995, in the Superior Court of New Jersey.      On July 31, 1998,

petitioner received a payment of $12,500 from Mercer in

settlement of her lawsuit and claim.      The record does not reflect

how the $12,500 amount was computed.

     Petitioner also had been having financial difficulties since

approximately 1989.   She stopped paying her mortgage and was

being threatened with foreclosure.      In 1993, the Metropolitan

Savings Bank commenced foreclosure proceedings on petitioner’s

residence.    On April 27, 1995, the property was sold for $108,750

by the Sheriff of Monmouth County, New Jersey.

Tax Returns

     Petitioner filed her 1994 Federal income tax return on

December 7, 1996.   On Form 4684, Casualties and Theft, petitioner

reported a total casualty loss in the amount of $102,7411 as a

result of the flood on August 26, 1994.      After statutory

reductions, petitioner deducted on Schedule A--Itemized

Deductions, the amount of $95,311.

The copy of petitioner’s 1995 Federal income tax return in the



     1
        Amounts reflected on the tax returns have been rounded to
the nearest full dollar amount.
                                - 6 -

record is stamped received by respondent on December 7, 1998.

Respondent’s records do not reflect a 1995 tax return filed prior

to that date.    On her 1995 Federal income tax return, petitioner

claimed a casualty loss deduction in the amount of $47,472, which

was a carryover from the 1994 return.       Petitioner filed her 1998

Federal income tax return on January 3, 2000.       Petitioner had

requested and been granted an extension to file until August 15,

1999.    There is no record of any further request or granting of

an extension.    Attached to the Federal income tax return is Form

4684, Casualty and Thefts.    On her 1998 return, petitioner

reported a total casualty and theft loss of $138,479 and claimed

a loss deduction of $130,851.    On the Form 4684, petitioner

calculated the casualty loss as follows:

                               Real         Personal
                             Property       Property
        Cost                 $100,000       $216,330
        Insurance
           reimbursement      10,000          –--
        Fair market value
          before casualty    142,000         112,059
        Fair market value
          after casualty     100,000           5,580
                             $42,000        $106,479
        Less insurance       (10,000)          ---
                             $32,000        $106,479
        Total                                           $138,479
        Less $100                                          (100)
        Less 10% of adjusted gross income                  7,528
        Claimed loss deduction                          $130,851
                                - 7 -

     Petitioner allocated $10,000 of insurance reimbursement to

the real property.   At about the same time as the filing of the

1998 return, petitioner also filed a Form 1045, Application for

Tentative Refund.    Petitioner sought to carry back the casualty

loss claimed on the 1998 return to the 1995 through 1997 tax

years.   The application for tentative refund was denied by

respondent.   Also, during the year 2000, petitioner submitted2 a

Form 1040X, U.S. Amended Individual Income Tax Return, for 1994.

In the Form 1040X, petitioner sought to reverse the claimed

casualty loss deduction of $95,311 on the theory that it was now

being claimed on the 1998 return and carried back to 1995.

     Respondent’s position is that petitioner has not established

that the failure of the washing machine hose, and subsequent

damage, constitute a casualty within the meaning of section 165.

Respondent does not dispute that if a casualty occurred, 1998

would be the proper year to claim the loss.   Respondent further

argues that even if a casualty occurred, that petitioner has not

presented sufficient evidence to prove the amount of the

casualty.

Discussion


     2
        The record does not reflect whether the Form 1040X for
1994 was filed, or whether a remittance was sent with the amended
return. Given respondent’s position in this matter, we assume
that petitioner did not receive the benefit of the casualty loss
deduction claimed on the 1994 return as originally filed and
after consideration of the Form 1040X revising the claimed
casualty loss deduction.
                                 - 8 -

     Deductions are a matter of legislative grace, and generally

the taxpayer bears the burden of proving entitlement to any

deduction claimed.    Rule 142(a); INDOPCO, Inc. v. Commissioner,

503 U.S. 79, 84 (1992).    The burden of proof has not shifted to

respondent pursuant to section 7491(a).    While the examination of

the tax returns in issue commenced after July 22, 1998,

petitioner has not satisfied any of the criteria of section

7491(a)(2)(A) and (B).3

Casualty Loss

         Section 165(a) and (c)(3) allows an individual a deduction

for loss of property not connected with a trade or business or a

transaction entered into for profit if the loss arises from fire,

storm, shipwreck, or other casualty and was not compensated for

by insurance or otherwise.    “Other casualty” is defined as a loss

proximately caused by a sudden, unexpected, or unusual event,

excluding the progressive deterioration of property through a

steadily operating cause or by normal depreciation.     Maher v.

Commissioner, 680 F.2d 91, 92 (11th Cir. 1982), affg. 76 T.C. 593

(1981); Coleman v. Commissioner, 76 T.C. 580, 589 (1981).     There


     3
        As previously noted, respondent asserts an increased
deficiency and increased addition to tax for 1995. While Rule
142(a) provides that the burden of proof shall be on respondent
to the extent that there is an increase in deficiency, the
claimed increase results from a computational issue, the
abatement of an assessment by respondent. Petitioner does not
dispute the claimed corrected computation of the deficiency.
Thus, the burden of proof remains with petitioner to establish
the existence of and amount of the casualty loss.
                                - 9 -

must be a causal connection between the alleged casualty and the

loss claimed by the taxpayer.     Kemper v. Commissioner, 30 T.C.

546, 549-550 (1958), affd. 269 F.2d 184 (8th Cir. 1959).

     A casualty loss not connected with a trade or business or a

transaction entered into for profit is deductible under section

165(h) only to the extent (1) the loss exceeds $100, and (2) the

net casualty loss exceeds 10 percent of the adjusted gross income

of the taxpayer.   The amount of the casualty loss from a partial

destruction of property is the lesser of the taxpayer’s adjusted

basis of the property or the difference in the property’s fair

market value immediately before and after the casualty.     Sec.

1.165-7(b)(1), Income Tax Regs.    The amount of the loss is

reduced by any insurance recovery and salvage value.     Sec.

165(a); sec. 1.165-1(c)(4), Income Tax Regs.    To establish the

amount of the loss, the relevant fair market values of the

property “shall generally be ascertained by competent appraisal”

conducted in a manner to ensure that any casualty loss deduction

“be limited to the actual loss resulting from damage to the

property.”   Sec. 1.165-7(a)(2)(i), Income Tax Regs.   As an

alternative, the taxpayer may use the cost of repairs to prove

the casualty loss (the cost of repairs method).    See sec. 1.165-

7(a)(2)(ii), Income Tax Regs.

     Whether damage qualifies as a casualty typically turns on

whether the damage satisfies the suddenness requirement, which

denotes an accident, a mishap, some sudden invasion by hostile

agency rather than progressive deterioration of property through
                                - 10 -

steadily operating cause.     Fay v. Helvering, 120 F.2d 253 (2d

Cir. 1941), affg. 42 B.T.A. 206 (1940).    In considering whether

termite damage qualified as a casualty, we have held that the

“suddenness” of the loss itself (the lapse of time between the

precipitating event and the loss proximately caused by that

event) is a determining factor.     Maher v. Commissioner, 76 T.C.

593, 599-600 (1981), affd. 680 F.2d 91 (11th Cir. 1982); Pryor v.

Commissioner, T.C. Memo. 1987-80.

     Respondent, relying upon the cases relating to progressive

deterioration, suggests that the failure of the hose connection

and ensuing damage to the house and personal property do not

constitute a casualty, because the deterioration occurred during

an extended period of time.    In this regard, it would appear

appropriate to separate (1) the damage to the washing machine

hose from (2) the consequential water damage resulting from the

failure of the hose.   We conclude that the damage to the washing

machine hose resulted from progressive deterioration.    The

washing machine was included with the purchase of the house in

1985.   Thus, the washing machine and hose connection were at

least 9 years old when the hose failed.    It is not unusual that a

rubber hose would deteriorate over a period of years and

ultimately fail.   We conclude that the failure of the washing

machine hose was the result of progressive deterioration and not

the result of a sudden event.    Thus, the failure of the hose does
                                - 11 -

not constitute a casualty within the meaning of section

165(c)(3).

     Our inquiry, however, does not end there.    The damage to

petitioner’s home and personal belongings directly resulted from

the failure of the washing machine hose.    The water damage to

petitioner’s house and personal belongings was the result of an

identifiable event, sudden in nature.    The failure of the hose

was the precipitating event, and the flooding immediately

thereafter was proximately caused by the event.    The damage

resulting from the flood in the house is a casualty within the

meaning of section 165(c)(3).    The Commissioner has recognized

the distinction between damage to equipment, which was gradual,

and consequential damage resulting from failure of the equipment.

In Rev. Rul. 70-91, 1970-1 C.B. 37, the Commissioner held as

follows:

          A taxpayer suffered rust and water damage to his
     rugs, carpets, and drapes when the water heater in his
     one-story dwelling burst from normal deterioration
     (rust and corrosion) over a period of time and flooded
     a portion of the house with water. The taxpayer had no
     insurance to reimburse him for these losses.

          Held, since the rust and corrosion of the water
     heater itself was gradual and progressive, its loss is
     not a casualty within the meaning of section 165(c)(3)
     of the Internal Revenue Code of 1954.

          Held further, the rust and water damage to the
     rugs, carpets, and drapes caused by the bursting of the
     water heater was the result of an identifiable event,
     sudden in nature, fixing a point at which the loss to
     the damaged property can be measured, and was also
     unexpected or unusual in the context in which the
     damage occurred. Therefore, such damage is a casualty
     within the meaning of section 165(c)(3) of the Code,
     and the taxpayer is entitled to a nonbusiness casualty
                                - 12 -

     loss deduction. The amount of the damage is the lesser
     of either (1) the difference between the fair market
     value of the property immediately before and
     immediately after the casualty, or (2) the adjusted
     basis of the property. That amount reduced by $100 is
     allowable as a casualty loss deduction.

     The Commissioner has neither revoked nor modified Rev. Rul.

70-91, supra.4    Revenue rulings are not binding on this Court, or

other Federal courts for that matter.      Rauenhorst v.

Commissioner, 119 T.C. 157, 171 (2002).     However, they may serve

to bind the Commissioner in cases in which a longstanding revenue

ruling that has not been revoked or modified is relevant to our

disposition of the case.     Id. at 173.   Under such circumstances,

we have treated the revenue ruling as a concession by the

Commissioner.    Id. at 171-173.

     Such treatment of Rev. Rul. 70-91 is warranted in the

present case.    We conclude that the dichotomy expressed in the

revenue ruling comports with the casualty loss provisions of

section 165.     Based on this conclusion, we hold that petitioner

is entitled to a casualty loss deduction for water damage to her

house and personal belongings to the extent substantiated.5

Substantiation of Loss

     Petitioner presented varied disorganized records to

substantiate the loss.    Likewise her testimony was often vague


     4
        Indeed, the Commissioner has relied upon it in issuing a
private letter ruling. See Priv. Ltr. Rul. 8341012 (July 7,
1983).
     5
        Any claimed loss to the washing machine hose connection
would not be allowable, nor does the record reveal a separate
claim for such loss.
                              - 13 -

and confusing.   Nevertheless, we are satisfied that she suffered

a loss and do our best to reconstruct the amount of the loss.    In

this connection, the claimed loss falls into two categories:

(1) Real property (the house), and (2) personal property.

     With respect to the real property loss, petitioner claims

that the fair market value of the house immediately before the

casualty was $142,000 and that the fair market value immediately

after the casualty was $100,000.    Petitioner testified that she

received an appraisal of the house before the casualty; however,

she did not present it to the Court.   Ordinarily an appraisal is

required.   Sec. 1.165-7(a)(2)(i), Income Tax Regs.   As previously

indicated, the regulations also permit the cost of repairs as

evidence of the amount of loss.    Sec. 1.165-7(a)(2)(ii), Income

Tax Regs.   However, this must be the cost of repairs actually

made, not merely an estimate of the cost.    Lamphere v.
Commissioner, 70 T.C. 391, 395 (1978).    Further, the sale of the

house by foreclosure in 1995 for $100,000 (the same amount

reflected as the cost basis in 1984) does not provide us with a

means of determining the amount of any loss.   There is not

sufficient evidence in this record to allow petitioner any loss

with respect to the house itself.

     We now consider the amount of the loss with respect to

personal property.   Petitioner claimed a loss of $106,479.6


     6
        We note that petitioner submitted not less than four
separate and different schedules of claimed loss. We have
reviewed and considered all the schedules of claimed loss in this
                                                   (continued...)
                               - 14 -

Petitioner’s schedule of loss on the 1998 return reflects the

fair market value of personal property before the casualty as

$112,059 and the fair market value after the casualty as $5,580.

We are satisfied that petitioner did incur some loss.   Most of

petitioner’s personal belongings, including clothing,

furnishings, carpeting, and books, were completely destroyed.     We

accept petitioner’s assertion as to the fair market value after
the casualty, namely $5,580.   We, however, do not accept

petitioner’s assertion as to the fair market value before the

casualty and instead do our best to approximate a reasonable

value.   Cohan v. Commissioner, 39 F.2d 540, 544 (2d Cir. 1930).

Further, petitioner is not entitled to a deduction for moving or

storage costs since such expenditures do not represent a loss of

property value.   Millsap v. Commissioner, 46 T.C. 751, 762

(1966), affd. 387 F.2d 420 (8th Cir. 1968).   Accordingly, the




     6
      (...continued)
record in an attempt to make some rational sense of petitioner’s
confusing records.
                                   - 15 -

following represents our conclusion as to the amount of

petitioner’s loss:

                                       Fair Market Value Before
                                         the Casualty or Other
                   Item                Cost Related to Casualty

         Personal item including
            clothing                            17,500
         Furniture                              20,000
         Miscellaneous                           3,000
         Carpet                                  5,500
           Total                               $46,000


         Fair market value
            before casualty                    $46,000
         Fair market value
            after casualty                       5,580
              Balance                          $40,420
              Less insurance                   (12,500)
          Casualty Loss                        $27,920

     We conclude that petitioner is entitled to a casualty loss

in the amount of $27,920, as computed above, prior to any

statutory reductions.     Sec. 165(h).

Additions to Tax Under Section 6651(a)(1)
     Section 6651(a)(1) imposes an addition to tax of 5 percent

per month of the amount of tax required to be shown on the

return, not to exceed 25 percent, for failure to timely file a

return.     The addition to tax under section 6651(a)(1) is imposed

unless the taxpayer establishes that the failure was due to

reasonable cause and not willful neglect.7      The record does not


     7
        Sec. 7491(c) provides that the Commissioner has the
burden of production in any Court proceeding with respect to
                                                   (continued...)
                             - 16 -

establish that the failures to timely file returns for 1995 and

1998 were due to reasonable cause and not willful neglect.

     Reviewed and adopted as the report of the Small Tax Case

Division.

     To reflect the foregoing,

                                           Decision will be entered

                                      under Rule 155.




     7
      (...continued)
liability for an addition to tax. Further, respondent has the
burden of proof with respect to the increased addition to tax for
1995. Rule 142(a). Respondent has established that the tax
returns for 1995 and 1998 were not timely filed.
