Docket No. 55125.
Jack White, Esq., for the petitioner. Raymond Whiteaker, Esq., for the respondent.
LOSS SUSTAINED ON COLLAPSE OF TANK— YEAR OF DEDUCTION.— Petitioner sustained a loss from the collapse, in the taxable year ended June 30, 1950, of an oil storage tank. Facts known in that taxable year reasonably indicated that the collapse was due to a cause other than perils covered by an insurance policy held by the petitioner, and that it was not due to faulty construction by the erector of the tank. Held, that the loss was not compensated for by insurance or otherwise and the loss deduction may not be deferred to the taxable year ended June 30, 1951. Jack White, Esq., for the petitioner. Raymond Whiteaker, Esq., for the respondent.
This proceeding is brought to contest the respondent's determination of deficiencies in income and excess profits taxes for the taxable year ended June 30, 1951, in the amount of $10,167.65. Several adjustments to income were made by the respondent in determining the deficiencies. The only adjustment placed in issue is the disallowance of a deduction in the amount of $18,775.20 claimed as a loss resulting from the collapse of an oil storage tank in the preceding fiscal year. The ultimate issue is whether the deduction for the admitted loss may properly be deferred to the taxable year succeeding the year in which the tank collapsed, by reason of the petitioner's claims for reimbursement against an insurance company and the contractor who erected the tank.
FINDINGS OF FACT.
Some of the facts were stipulated and are found as stipulated.
The petitioner is a South Carolina corporation with its principal office and plant at North Charleston, South Carolina. Its income tax returns are prepared on the basis of a fiscal year ending June 30, and on an accrual method of accounting. Its return for the fiscal year ended June 30, 1951, was filed with the collector of internal revenue for the district of South Carolina.
The business of the petitioner is the operation of a petroleum terminal. On May 20, 1950, the petitioner was using for the storage of oil at its terminal at North Charleston, 10 oil tanks which had a total storage capacity of 225,000 barrels. On that date a newly constructed tank collapsed. That tank was being tested and had not been used for storage purposes. The tank had been constructed by the Chicago Bridge & Iron Company. The tank was of welded steel construction, 60 feet in diameter and 40 feet high and had a capacity of 20,000 barrels.
The construction crew which was employed by the Chicago Bridge & Iron Company completed its work on the tank in the afternoon of May 19, 1950. In the late afternoon of that day the petitioner commenced testing the tank by running water into it by gravitation from an adjacent tank that had recently been completed. By the gravitation process the water flowed into the new tank to a depth of 24 feet by about 8 p.m., on May 19. An inspection of the tank was made at that time. At that time some rain was falling on the petitioner's property and a moderate wind was blowing from the north or northwest. A second inspection of the water level in the tank was made about 8:30 p.m., when the force of the wind had abated to some extent and it was found at that time that the water had remained at the 24-foot level. Following the second inspection, an employee of the petitioner started a centrifugal pump which pumped water into the tank from a nearby river, the level of which was some 3 feet below at the bottom of the tank. The pumping continued until about 6:45 a.m., on May 20. At that time an inspection of the tank disclosed some buckling or caving in of the conical steel top and a slight listing of the tank in a southerly direction. By that time the tank had been filled with water and the inlet valve from the centrifugal pump was closed and the pump was cut off. The tank was then out of plumb by about 2 inches. At that time the base of the tank was settling on one side and it continued to settle until about 7 a.m., when the tank collapsed. When the tank collapsed the steel roof fell some distance away. The shell of the tank fell over in a folded condition and the base remained on the ground.
Engineers engaged by the petitioner to determine the cause of the collapse of the tank reported to the petitioner in writing on June 2 and June 3, 1950. They found that both the steel in the tank and the welding were satisfactory and according to specifications. It was found, however, that the soil forming the foundation lacked suitable bearing material. The report of June 2, 1950, contained the following conclusions:
After considering the above facts and the description of the failure as given by you, I believe that the failure was essentially a shear failure of the compressible soil forming the foundation. The fact that the settlement was so rapid and on one side is quite usual in a failure of this type. This sudden tipping placed secondary stresses on the tank, which caused its collapse. According to Lt. Myers, both the welding and steel were quite acceptable. I do not believe the tank failed before the extreme settlement, since you would have observed a large amount of water around the bottom of the tank if this had happened. The water was running out of the overflow hatch during the settling, proving that the tank was still holding the water.
The petitioner had constructed the earthen foundation upon which the tank was constructed. Under the contract with the Chicago Bridge & Iron Company the petitioner was obligated to prepare the foundation and to assume full responsibility for its ability to support the load of the tank and its contents. Any costs that might be incurred to correct damage to the tank through failure of the foundation were to be borne by the petitioner. Under the contract, title to all material that had been furnished by the Chicago Bridge & Iron Company remained in that company until fully paid for. At the time the tank collapsed the petitioner had made only an initial payment on the contract price of $16,250. Another payment was due upon completion of construction, and a final payment when the work had been tested or inspected and found to be in accordance with the specifications.
At the time of the collapse of the tank on May 20, 1950, the petitioner carried insurance on its properties in the amount of $253,500. The insurance policy contained a 100 per cent co-insurance clause. It covered, insofar as here pertinent, loss by windstorm.
On July 17, 1950, the petitioner filed with the insurance company a claim of loss on account of the collapsed tank in the amount of $32,191.88. In the claim filed, no specific statement was made that the loss was due to windstorm. The cause and origin of loss were stated to be ‘collapse of tank after erection when filled with water to test the same.’ The amount of loss claimed included the contract price of the tank of $16,250, plus various other items, such as engineering costs, loss of rent, cost of pipe and valves, and cost of foundations. On September 11, 1950, a discovery hearing was held in the matter. The insurance company denied all liability under the insurance policy and so advised the petitioner through counsel on October 27, 1950, and again on April 2, 1951. Counsel for the petitioner advised against a lawsuit against the insurance company.
The petitioner also claimed damages for faulty construction of the tank from the Chicago Bridge & Iron Company. This claim was settled on January 29, 1951, by a credit in the amount of $5,417 allowed by the Chicago Bridge & Iron Company. This claim was settled on January 29, 1951, by a credit in the amount of $5,417 allowed by the Chicago Bridge & Iron Company.
In its return for the fiscal year ended June 30, 1951, the petitioner claimed a loss on account of the collapse of the tank in the amount of $18,775.20. The Commissioner disallowed the claimed loss for the fiscal year ended June 30, 1951, but allowed a deduction for such loss in the fiscal year ended June 30, 1950.
The loss sustained by the petitioner on account of the collapse of the tank was not sustained within the petitioner's fiscal year ended June 30, 1951.
Section 23(f) of the Internal Revenue Code of 1936 permits corporations to deduct from gross income the amount of ‘losses sustained during the taxable year and not compensated for by insurance or otherwise.’ There is no dispute in this case as to the fact of either a loss having been sustained or as to the amount of it. The difference between the parties is only as to the year in which the deduction is allowable under the statute. The respondent has allowed it for the year in which the storage tank collapsed. The petitioner contends that in that year there were sufficient grounds for concluding that the amount of the loss would be recovered in full from the insurance company or the construction company, or both, wherefore the loss was ‘compensated for’ in that year, and the deduction should be allowed in the following year when the loss to it was ascertainable.
The statute contemplates the deduction of losses which are fixed by some identifiable event. United States v. White Dental Co., 274 U.S. 398. ‘The general requirement that losses be deducted in the year in which they are sustained calls for a practical, not a legal test.’ Lucas v. American Code Co., 280 U.S. 445. The standard for determining the year for deduction is a flexible, practical one, varying according to the circumstances of each case. Boehm v. Commissioner, 326 U.S. 287.
The petitioner cites several cases in which it has been held that loss deductions were properly allowable in the year in which settlement was effected with an insurer subsequent to the year of the occurrence of the event which gave rise to the loss. See Allied Furriers Corporation, 24 B.T.A. 457; Commissioner v. Harwick, 184 F.2d 835; Rose Licht, 37 B.T.A. 1096. In the Licht case we stated in part:
We believe that the phrase ‘compensated for by insurance,‘ as used in the statute, should be given ‘practical construction,‘ but each case must be decided upon its separate facts. Where an insured person has a claim under insurance policies in force that is subject to reasonable prospects of success upon pursuing the claim, we believe it may be concluded that a loss is ‘compensated for’ by insurance. However, in questions such as we have here, the burden of proof is upon the taxpayer, seeking a deduction for income tax purposes, to prove that his claim under insurance policies is substantial enough to be adjusted in whole or in part, within a reasonable time. The rule, long established, is that deductions for losses must be taken in the year in which the casualty occurred. * * *
In each of these cases where the loss was allowed in the year of settlement the petitioner had what appeared to be a tenable claim against his insurer warranting the belief that the claim was ‘compensated for’ at the time of the occurrence of the event which gave rise to the loss.
The respondent, on the other hand, contends that the prospect of recovery from an insurer may be so uncertain as to require the conclusion that the loss was not ‘compensated for’ and that the loss is deductible in the year of the occurrence of the event that gave rise to the loss even though it may later develop that the taxpayer receives partial compensation, citing Cahn v. Commissioner, 92 F.2d 674.
It is our view that the cited cases differ in a very material respect from the instant case and that none of them is directly in point. In each of the cited cases the taxpayer had a contract with an insurer which purported to afford coverage for the kind of loss that had been sustained. Here the petitioner's contract with the insurance company related to loss by windstorm. While one of the petitioner's witnesses testified that on the night of May 19, when the tank had been filled with water to a depth of 24 feet, ‘it was blowing and raining very hard’ for a brief period, there is no evidence to show any connection between the elements on that day and the collapse of the tank on the following morning. In fact, prior to the end of the taxable year ended June 30, 1950, the petitioner had been advised by engineers whom it had retained that the collapse was due to the failure of the earthen foundation which had been constructed by the petitioner, and their report does not attribute the collapse as being in any degree due to wind or other weather conditions. While it is true that the petitioner, in the taxable year following the taxable year in which the collapse occurred, did file a claim with the insurance company, it is to be noted that in the claim there is no specific statement that the damage was caused by windstorm. The insurance company denied liability and paid no part of the claim, and the petitioner's attorney recommended against suing the insurance company. The reasons for denial of liability do not appear. In this connection it may be noted that even had the damage been caused by some peril covered by the insurance policy on the petitioner's property, there is considerable doubt whether this tank had become its property, and was covered by the policy, in view of the provision of the contract with the construction company that the title should remain in the construction company until payment was fully made. At the time of the collapse the petitioner had made only an initial payment. Under all the circumstances, we do not believe that it would have been reasonable to conclude, in the year of the collapse, that the loss was covered by the insurance policy.
Nor do we think that in that year it could reasonably have been concluded that the petitioner's loss would be compensated for by the construction company. The retained engineers had advised the petitioner that the steel and the welds were satisfactory and that the collapse was due to failure of the soil forming the earthen foundation constructed by the petitioner. Petitioner's contract with the construction company placed responsibility on the petitioner for any loss due to any fault in the foundation. Although the evidence shows that the contractor granted petitioner a credit in the follow taxable year, the reason for such credit is not shown.
On brief, the petitioner's counsel calls attention to the testimony of an officer of the petitioner to the effect that he believed that the insurance policy covered tanks in process of construction, and that the petitioner was protected from loss either under the insurance policy or contractor's liability, or both. This belief, it is argued, supports the contention that in the year the collapse occurred there was a reasonable expectation of reimbursement. Such a subjective test is not decisive of the question of the year in which a loss is sustained. There must also be taken into consideration all the facts known or knowable on June 30, 1950, and the inferences reasonably to be drawn therefrom. Boehm v. Commissioner, supra.
Accordingly, applying the practical test called for by the decided case, in the light of all the facts and circumstances in this case, we hold that the loss was not compensated for by insurance or otherwise in the taxable year ended June 30, 1950. Inasmuch as the loss was not compensated for, the amount thereof represents a loss sustained at that time, and the petitioner has not shown any reason for postponing the deduction to any later year.
The respondent did not err in denying the deduction on account of the loss for the fiscal year ended June 30, 1951.
Decision will be entered for the respondent.