Hadaway v. Commissioner ( 1928 )

JOHN B. HADAWAY, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.

Hadaway v. Commissioner

Docket No. 12717.

United States Board of Tax Appeals

13 B.T.A. 986; 1928 BTA LEXIS 3136;

October 12, 1928, Promulgated

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Loss. - Where ground is prepared and planted for the raising of cranberries and where its value is completely destroyed by overflow or seepage of water from natural causes, the cost of preparation and planting is a deductible loss.

F. O. Graves, Esq., and H. W. Kenway, Esq., for the petitioner.

Brice Toole, Esq., and Philip A. Carroll, Esq., for the respondent.

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MILLIKEN

Petitioner asks a redetermination of a deficiency in income tax for the year 1921 in the amount of $293.89. It is contended that the respondent erred in disallowing as a deduction the sum of $2,000 alleged loss resulting from the abandonment of a cranberry bog which became worthless and unprofitable due to the rising and overflow of water.

FINDINGS OF FACT.

Petitioner is an individual and resides at 120 Elmwood Road, Swampscott, Mass. He is a grower of cranberries and has been so engaged for over 40 years. At the time of giving his deposition herein he had 56 acres of cranberry bog under cultivation.

In 1909 the petitioner and his manager, H. B. Loring, purchased for $450 a tract of 16 acres on the west side of Island Creek Pond in the town of Duxbury, Mass., for the purpose of converting it into a bog for the raising of cranberries. Part of the tract was upland and part lowland. Four acres of the lowland lying nearest the pond were first prepared for cultivation, and subsequently about 5 1/2 acres were prepared, but we are only concerned with the 4-acre tract.

At the time the property was acquired, the 4-acre tract above mentioned was practically all fresh meadow land. During 1909 and 1910, the bog was prepared first by clearing off the bushes, turfing the meadow, and plowing the hard bottom. The land was then graded and ditched and covered with a layer of sand from 4 to 8 inches deep, preparatory to setting out the cranberry vines or bushes. In order to properly drain or hold water as occasion might require, a dam approximately 500 feet long was constructed next to the Island Creek Pond. The entire 4 acres were planted in cranberries in 1910. It takes from 4 to 7 years for cranberries to bear profitably.

The cost of preparing and planting this tract was $2,231.12. The project was never profitable so far as these 4 acres were concerned and receipts were always less than expenses. In 1916 and following years, due to some unknown cause, the water level in Island Creek Pond and other ponds in the vicinity rose about 10 inches, resulting in too much moisture from overflow or seepage in the cranberry bog for successful production. Water rising in the bog caused grass to grow, which gradually crowded out the cranberry vines or bushes so that by the year 1921 they were practically extinct and the land had reverted to meadow land, was worthless, and was abandoned as a cranberry bog. To prevent the spread of the grass and water to adjoining bogs, another dam was built, but no deduction was asked therefor.

When the original 16 acres were purchased there was an agreement between petitioner and his manager, H. B. Loring, that the latter was to have an interest in the bogs made thereon, and that petitioner would advance Loring's share of the expense. This petitioner did, but was never repaid by Loring. Loring died in 1919, and at that time owed petitioner $1,300 and in 1920 whatever equity Loring had was conveyed to petitioner in satisfaction thereof.

Petitioner has offered to sell the abandoned 4 acres for $100, but has found no purchasers. Current operating expenses are not included in the $2,000 deduction requested, which represents capital investment in the preparation of the ground and planting of the vines or bushes and was all contributed by the petitioner.

OPINION.

MILLIKEN: The Board has held in the cases of , and , that, where orchards and vineyards are attacked by disease and are destroyed to prevent further spread thereof, the cost of bringing them to productivity was a capital expenditure and the loss occasioned by the disease and destruction was deductible from income-tax purposes. It was further held in the former case that the deduction allowable should be reduced by depreciation of original cost during the period of actual production calculated according to the expected useful life.

We see no difference in legal effect between destruction by disease and destruction to prevent spread of disease, and destruction by natural causes such as overflows as in the instant case. In either event, if the result is to destroy the property and prevent its use for the purpose intended, it is a loss. In the instant case there was never any productivity of any consequence, although some cranberries of little value were gathered from time to time. Shortly after the bog reached the producing stage in 1916, the water trouble began and the bog gradually declined until in 1921 the vines completely disappeared and it was a complete loss and was abandoned. Petitioner made frequent efforts to rectify the condition and did not discontinue same or abandon the bog as worthless until 1921.

The sum of $2,000 claimed should be allowed as a deduction from petitioner's income for 1921. We have found as a fact that the cost of preparing and planting the 4-acre tract was $2,231.12. However, petitioner only claims a loss of $2,000 and counsel in brief filed only claims a loss of $2,000. We therefore limit the deduction to the loss as claimed.

We have not been furnished with the terms of the agreement between petitioner and his manager, Loring, relative to the interest or equity Loring was to have, but whatever it was, it was dependent on his payment of his share of the expense. As Loring paid nothing and petitioner advanced and paid the entire sum of $2,231.12, he is entitled to the deduction as claimed.

Judgment will be entered under Rule 50.