*103 Decision will be entered under Rule 50.
1. In 1949, the area in which petitioner's summer residence was located experienced a severe drought. Held, that petitioner has failed to show that he sustained a loss therefrom, and it is unnecessary to decide whether the drought so experienced was a casualty within the meaning of section 23(e)(3) of the Internal Revenue Code of 1939.
2. On his 1949 income tax return, petitioner deducted $ 5,768.14 as a nonbusiness bad debt under section 23(k)(4) of the 1939 Code, which amount was the face amount of a demand note, dated October 14, 1929, which he had received from his brother in part payment for a part of petitioner's interest in a family business. Held, that petitioner has failed to prove the existence of a subsisting debt which became worthless in 1949.
*786 The respondent determined deficiencies in income tax against the petitioners for the taxable years 1949, 1950, and 1951 of $ 3,212.04, $ 7,366.55, and $ 1,645.16, respectively. The questions for decision are *787 whether*104 the petitioners are entitled to a casualty loss deduction for 1949, by reason of damage to residential property from drought, and, if so, the amount of the loss, and whether they are entitled to a nonbusiness bad debt deduction in 1949 of payments made by petitioner Louis Broido to his sister-in-law in respect of a note made by his brother, on which petitioner was an endorser. The years 1950 and 1951 are involved only to the extent that our determination as to 1949 discloses a capital net loss carryover.
FINDINGS OF FACT.
Some of the facts have been stipulated and are found as stipulated.
Petitioners are husband and wife, and residents of New York City. They filed joint income tax returns for the years involved with the director of internal revenue for the third district of New York.
In August of 1941, petitioners purchased approximately 20 acres of land in Easton, Fairfield County, Connecticut, at a cost of approximately $ 37,000. On an area of approximately 6 acres, which was surrounded by a stone wall, were a farmhouse, a guesthouse, and a structure which originally had been a barn. Also within the wall-enclosed area were a rose garden, two vegetable gardens, and extensive *105 lawns. The property outside the wall consisted of a field, an orchard, and a wooded area.
The residence, or main house, was a frame structure built in 1827 and "modernized" in 1938. It consisted of a living room, dining room, kitchen, and a maid's room and bath on the first floor, and three bedrooms and two baths on the second floor. The guesthouse was of stone construction, and contained a living room, bedroom, and bath. The barn had been remodeled into a studio, bedroom and bath, a kitchen, a garage, and a storage room. On the grounds within the stonewall-enclosed area were approximately 25 varieties of shrubs, such as hydrangeas, andromeda, lilac, and English yew. Also, there were raspberry and blueberry bushes, and in some areas strawberries. Of flowers, there were annuals of the usual type found in the country and some 15 varieties of perennials.
Because of three wells located on the premises, the petitioners referred to the property as Three Wells. These wells had been dug and were 20 to 22 feet in depth. One was adjacent to a corner of the main house, one was located in the gardens, about 300 feet from the house, and the third was near the barn. The well at the corner*106 of the house and the one in the garden were connected by underground pipes to a pumphouse and served the residence and the guesthouse. The pipes from the pumphouse connected with the two wells well toward the bottom of the wells. The other well served the barn.
Petitioner and his family customarily lived at Three Wells from May to October of each year. During the week the petitioner commuted *788 to his work in New York City. Between October and May, heat was maintained in the residence and on occasions weekends were spent there.
Until 1949, the wells had consistently supplied petitioners with ample water for the living quarters, all domestic uses, and for the grounds. During the summer of 1949, the area in which the petitioners' property was located suffered a drought which was severe and unusual for the area. In August, the water level in the wells dropped below the pipes connecting with the pumphouse and water could be obtained only by means of buckets being lowered. The water thus obtained was brackish, and was not usable for all purposes. Petitioners obtained bottled water for drinking purposes and transported cans of water for other household use from artesian wells*107 of neighbors. There was no water for lawns or gardens. By August, the drought had caused the lawns to burn out, the plants in the vegetable garden to wither, and the condition of the flowers and shrubs became very bad. Because of the conditions at Three Wells in 1949, the petitioners returned to their home in New York City on Labor Day.
In the area in which the petitioners' property was located, there was less rainfall during the month of June 1949 than in any month since 1894, the first year for which there was a recording of the rainfall for that area.
In Connecticut, the major fluctuations in the level of ground water are chiefly the result of differences in the amount and distribution of precipitation. Usually the water levels show a rise during the early months of the year, with the peak being reached in April. Thereafter, the levels decline through the growing and harvesting season and begin to rise again in November. During 1949 the water levels followed that general pattern, but, due to unusual climatic conditions, the overall range in fluctuations from the peak to the minimum was greater than normal.
Beginning in November of 1948, the precipitation was above normal *108 and continued so through January of 1949, thereby causing the water levels to rise rapidly throughout the first of 1949. The maximum levels were reached at approximately the end of April and were close to the highest on record. The seasonal lowering of the water table began in May despite above-normal precipitation. Generally, however, the levels were above average at the end of the month. Beginning in June, due to the influence of the record drought, water levels receded rapidly, and by the end of October had reached stages which, in general, were below normal and in some cases were at record or near-record low levels. Precipitation continued below normal for the remainder of 1949, but the general decline was halted in November, and water levels in some wells began to rise by the end of the year. The rise did not offset the effect of the summer's drought and *789 the year ended with the water levels in many cases lower than those which had been recorded at the end of the preceding year. Generally, however, the water table at the end of 1949 was only slightly below normal in most sections of Connecticut, despite the drought, which would not have been the case if there had*109 not been a "greater-than-normal" amount of ground water in storage at the beginning of the drought to offset the deficiency in precipitation in 1949.
The Bridgeport Hydraulic Company is a public corporation, which owns, maintains, and operates reservoirs and a public water supply system in Fairfield County. One of these reservoirs, known as Hemlocks, is at one point approximately 1 mile northeast of petitioners' property. It owns and maintains three other reservoirs, all of which are within 10 miles of petitioners' property. According to the records of the company, the total precipitation at Hemlocks Reservoir in 1949 was 39.15 inches. From May to December, inclusive, it was 22.56 inches, and from June to December, inclusive, 16.38 inches. For June 1949 through May of 1950, the precipitation, according to the company's records, was 34.40 inches.
With respect to the four reservoirs owned by Bridgeport Hydraulic Company, the records disclosed that the average rainfall for the years from 1894 to 1956, inclusive, was 47.57 inches. 1
*110 Due to lack of water, the flowers, plants, shrubs, and lawns on petitioner's property "were all dried out and ceased growing," and required "expensive" treatment in the spring of 1950 "to bring them back." The lawns had to be resodded and reseeded. Petitioner carried no insurance covering losses by drought.
The nearest connection for public water to petitioner's property was approximately 8,000 feet. The cost for obtaining water from such public supply was regarded by petitioner as prohibitive. 2
*790 In the winter of 1949-1950, petitioner employed*111 an experienced well driller to sink a deep well on his property. It was concluded that the best place for the well was at the corner of the house where one of the existing wells was located. Proceeding to drill at that location, the driller ran into great difficulty. At a depth of 150 feet, he suggested that the drilling be stopped and the well relocated at some other place. Petitioner dislikes stopping things he has started, so he directed him to proceed with the drilling. When the 200-foot depth was reached, the driller again suggested that the drilling be stopped. Petitioner again directed that he proceed, and at 225 feet, water having a flow of about 17 gallons per minute was reached. The water so reached contained a substantial quantity of iron and a purifier was a necessity. After reaching water, petitioner began the installation of a pumphouse at the site of the drilled well. From 3 feet below the surface, solid rock was encountered, and a space for the pumphouse to a depth to permit a man to stand had to be chipped out by hand. A tank with a 1,000-gallon capacity was installed at the pumphouse. The total cost for the well, the pumphouse, and the tank was $ 7,371.56.
*112 The well at the corner of the house was destroyed in the drilling of the deep well in 1949-1950. The other two wells were abandoned by petitioner as sources of water for his property. They were covered over and no check of the water levels in the two wells was made thereafter, to see how they compared with what they had been prior to the 1949 drought.
Prior to 1926, when he moved to New York City, petitioner lived in Pittsburgh, Pennsylvania, where his family lived and the family businesses were located. Petitioner, his father, and his two brothers owned the stock of West Pennsylvania Mortgage Company, referred to herein as Mortgage Company, which, in turn, owned all of the stock of Center Lumber Company. Mortgage Company was engaged in acquiring vacant property and financing the building of residences and other structures thereon. In so doing, it developed the business of the lumber company. After petitioner moved from Pittsburgh, his younger brother, Henry, became more active in the family businesses, and in 1929 petitioner sold a portion of his interest in the Mortgage Company to Henry, receiving part of the proceeds of the sale in the form of a promissory note for $ 5,768.14. *113 The note was dated October 14, 1929, and was payable 1 day after demand, "with interest from August 30, 1930." The earnings of the lumber business in 1929 were substantial. In 1926 and 1927, it had earned "almost one hundred thousand dollars" per year.
In the summer of 1930, petitioner was involved in some real estate transactions in New York and was in need of funds. He discussed *791 with Bella Broido, the widow of his elder brother, the taking over of Henry's note, and in July of 1930, he sold the note to Bella at face, receiving payment in cash. In selling the note to Bella he became an endorser thereon.
By 1932, the family investment in the mortgage and lumber businesses was lost. Petitioner's father had died in 1931. The lumber company was liquidated. The mortgage company ceased to do business, but has never been liquidated.
Henry never made any payments on the principal of or interest on the note which he gave to petitioner in 1929, and which petitioner sold to Bella Broido in 1930. Petitioner began paying interest on the note in 1931 and continued making interest payments through February 25, 1941.
On December 27, 1940, petitioner and Bella executed an agreement, *114 whereunder petitioner admitted his liability to Bella as endorser on the note and agreed to make principal payments at the rate of $ 50 per month, beginning 1 month after date. Bella agreed to waive further interest payments. Petitioner thereafter made payments to Bella from 1941 to 1949, inclusive, as follows:
| Year | Amount |
| 1941 | $ 600.00 |
| 1942 | 768.14 |
| 1943 | 600.00 |
| 1944 | 750.00 |
| 1945 | 400.00 |
| 1946 | 600.00 |
| 1948 | 500.00 |
| 1949 | 1.550.00 |
| Total | 5,768.14 |
After the 1949 payment, Bella endorsed the December 27, 1940, agreement as paid in full.
Bella never instituted legal proceedings on the note against either Henry or petitioner.
After the family businesses had ceased to operate, Henry, for a short time, operated a small cash-and-carry lumber business in Pittsburgh, but it was not a success. In 1940 or 1941, he obtained a position in Memphis, Tennessee, where he operated a yard for a company engaged in the scrap iron business. In 1943 he moved to New York, and for a period of time was employed by Gimbel Brothers. In 1951 or 1952, he was employed as president of Hammacher Schlemmer & Company, which operated a specialty store located in New York City on 57th Street between*115 Lexington and Third Avenues. His salary with Hammacher Schlemmer was substantial, and he has had substantial earnings since the beginning of his employment.
Henry was never in bankruptcy, and petitioner never made any effort to collect the note, either principal or interest.
On the joint return of the petitioners for 1949, a nonbusiness bad debt deduction was claimed for $ 5,768.14, which was the face amount of the note petitioner had received from Henry.
*792 On their 1950 joint return, petitioners claimed a deduction in the amount of $ 7,371.56 as a casualty loss sustained by them by reason of the damage to their property from the 1949 drought.
In his determination of the deficiencies, respondent disallowed the nonbusiness bad debt deduction of $ 5,768.14 claimed by petitioners on their 1949 return, and likewise disallowed the casualty loss deduction of $ 7,371.56 claimed by them on their 1950 return.
OPINION.
In section 23(e)(3) of the Internal Revenue Code of 1939, 3 provision is made for the deduction of losses of property not connected with the taxpayer's trade or business, where the loss arises from fire, storm, shipwreck, "or other casualty."
*116 The record shows that in 1949 there was a severe drought in the State of Connecticut, including the area in which petitioner's property was located. It is the contention of petitioner that the drought so experienced was a casualty within the meaning of section 23(e)(3), and that he sustained a loss of property arising therefrom.
In Maurer v. United States, 178 F. Supp. 223">178 F. Supp. 223, decided by the United States District Court for Kansas and reversed on another issue at 284 F.2d 122">284 F. 2d 122, and Buttram v. Jones, 87 F. Supp. 322">87 F. Supp. 322, decided by the United States District Court for the Western District of Oklahoma, it has been held that a drought was a casualty within the meaning of the statute, and that losses of property arising therefrom are deductible under section 23(e)(3).
This Court, on the other hand, has not as yet found it necessary to determine that a drought is, or is not, a casualty within the meaning of the statute, although the question was posed in James M. Kemper, 30 T.C. 546">30 T.C. 546, affd. 269 F. 2d 184, which involved a loss of shade and *117 ornamental trees on the taxpayer's residential property. In addition to evidence to the effect that the killing of trees by drought might require a recurrence of drought over a number of years, which would be a gradual and not a sudden occurrence, there was other evidence tending to show that the death of the trees could have been from forces other than the drought. Such being the state of the proof, it was concluded and held that the taxpayer had not shown that the loss of the trees resulted from the drought, and it was accordingly unnecessary to determine that the drought was or was not a casualty within the meaning of the statute.
*793 Similarly, in this case, even if it be held that the drought experienced was a casualty within the meaning of section 23(e)(3), the loss for which deduction is claimed must, if it is to be allowed, have been a loss "of property" actually sustained during the taxable year and a loss occasioned by the casualty to which it is attributed. There is no allowance for deductions on account of fluctuations in value. And since the natural impact of fires, storms, or shipwreck on property is physical damage or destruction, it is equally obvious, we *118 think, that Congress was thinking in terms of such damage or destruction in listing as deductible, losses "of property" from "fires, storms, or shipwreck." The words "or other casualty" first appeared in the Revenue Act of 1916, when they were inserted to follow the words "fires, storms, shipwreck." Since that time, much has been written in the decided cases as to their meaning and scope, and from the beginning, they have consistently been interpreted as meaning an event or happening which was destructive of the property in question and was sudden in its occurrence. And while there have been differences of opinion as to what should be regarded as a sudden occurrence, we have found no departure from the concept that the loss covered was that represented by physical damage of property, whether the result was partial or complete destruction. See Shearer v. Anderson, 16 F. 2d 995; Daniel T. Ebbert, 9 B.T.A. 1402">9 B.T.A. 1402; William J. Matheson, 18 B.T.A. 674">18 B.T.A. 674, affd. 54 F.2d 537">54 F. 2d 537; Harry Johnson Grant, 30 B.T.A. 1028">30 B.T.A. 1028; United States v. Rogers, 120 F. 2d 244;*119 Charles J. Fay, 42 B.T.A. 206">42 B.T.A. 206, affd. 120 F.2d 253">120 F. 2d 253; Rosenberg v. Commissioner, 198 F.2d 46">198 F. 2d 46, reversing 16 T.C. 1360">16 T.C. 1360 as to the suddenness factor; Buist v. United States, 164 F. Supp. 218">164 F. Supp. 218; E. G. Kilroe, 32 T.C. 1304">32 T.C. 1304; Buttram v. Jones, supra; and Maurer v. United States, supra.
The claim here is for the deduction of $ 7,371.56, which is the amount expended for the new deep-drilled well, pump, pumphouse, water storage tank, and purifying system. The facts show that in the winter of 1949-1950, following the drought of 1949, petitioner drilled the well and installed the mentioned appurtenances, destroying one of the dug wells in the process and abandoning the other two. The contention is that the fair market value of the property overall immediately following the drought was less by $ 7,371.56, the amount of the cost of the new well, than it was immediately before the drought.
In making this claim, petitioner, on brief, has disavowed*120 any contention that the dug wells were destroyed by the drought. And if he did so contend, he would be faced with an absence of proof to sustain such a contention. According to petitioner's own experience, the three wells had been fully effective from 1941, when he purchased the property, and, on brief, he suggests that this could have been true *794 as far back as 1827, "when the house was built." At the best, the proof is that there was a water shortage from the three wells during the period of the drought. There is no proof of expectancy that the water levels would continue to be such that the three wells would not thereafter supply adequate water for petitioner's needs, as they had in all prior years. Furthermore, the proof does show that water levels in Connecticut did rise and that at the end of 1949 the water table in most sections of the State was only slightly below normal.
As for the three wells, the proof only shows that they were abandoned by petitioner as sources of water for his property, in favor of a deep-drilled well, the well at the corner of the house being destroyed in the drilling of the new well. At one point, petitioner did testify that the well which*121 served the barn "went bad," but did not explain what he meant by that, and there is no evidence that its going "bad" was in any way attributable to the drought. Petitioner later testified that the two wells remaining after the new well was drilled were covered over, that he had lifted the lids to check for rodents, but did not know how the water levels compared with what they had been prior to the 1949 drought.
Actually, petitioner's contention, as set forth in his reply brief, appears to be that the 1949 drought, which was unprecedented for the area, "revealed that his wells were inadequate to supply the property with water during such drought." This would appear to be no more than to say that the situation was in fact the same both before and after the drought, namely, that a new and further source of water was necessary to provide adequate water in the event of a drought of equal intensity to the 1949 drought, and that a deep-drilled well would not only be new but something the property never had had before. In no true sense of the words may it properly be said that the new well was in the nature of repair or restoration of property damaged or destroyed by the drought, or that*122 its cost was a measure of loss, if any, sustained therefrom, rather than an improvement or betterment to his residential property.
The record does show that there was some damage to petitioner's plantings and grounds from the 1949 drought, in that, due to lack of water brought on by the drought, the flowers, plants, shrubs, and lawns "were all dried out and ceased growing," and required "expensive" treatment in the spring of 1950 "to bring them back," including reseeding and resodding of the lawns.
Where property is damaged or destroyed by fire, storm, shipwreck, or other casualty, it appears settled law that a proper measure of the loss sustained, and thus the amount of the allowable deduction, is the difference between the fair market value of the property immediately before the damage occurred and its fair market value immediately *795 after, not to exceed basis and to the extent not compensated for by insurance or otherwise. Helvering v. Owen, 305 U.S. 468">305 U.S. 468.
In the instant case, petitioner has shown neither the fair market value of his property as it was when the drought started nor as it was when the damage had been done. Furthermore, *123 there is no way of knowing whether the damage which was incurred was such or of sufficient magnitude to affect the fair market value of the property overall. It would be extremely doubtful, we think, that even if the vegetables in the gardens and the flowers which were annuals were killed by the drought, such loss for the 1949 season, or such part of the year as they were killed, would seriously affect the fair market value of the property overall. As for the perennials, shrubs, and lawns, the testimony is that they "were all dried out and ceased growing," and required "expensive" treatment in the spring of 1950 "to bring them back." It would thus appear that except possibly for the lawns, which were described at one point as burned out, the plants and shrubs survived, even though they did cease to grow in 1949. And when related to the value of the total property, the amount of expense required to bring them back in the spring of 1950 may or may not have been of significance, for the purposes here. Furthermore, it is not unusual, even in the normal course, for lawns to require reseeding and resodding from time to time in whole or in part, and again, there is no way of telling the*124 extent, if any, by which the fair market value of the property immediately before and immediately after the drought was affected. Possibly the reason for such state of the record is that petitioner has not based his claim of loss under section 23(e)(3) on the damage done to the flowers, plants, shrubs, and lawns on his property.
We are accordingly unable to say that petitioner has shown, under the rule in Helvering v. Owen, supra, even by taking into account some amount representing the so-called expensive treatment to the plantings on his property, that he in fact sustained a loss which would be deductible on a holding that an unprecedented drought such as was experienced in 1949 in the area in which his property was located, was a casualty within the meaning of the statute.
As for the nonbusiness bad debt issue, it is our conclusion that it must be resolved against petitioners. The note involved had been received in 1929 by petitioner from Henry, his younger brother, as part payment for a portion of petitioner's interest in the family business. In 1930, petitioner sold the note, at face, to Bella Broido, the widow of his elder brother. The *125 family business had been a profitable business, and there is no indication of record that either petitioner or Bella had any thought that the note was not worth the amount she had *796 paid petitioner therefor. By 1932, however, the country was in the throes of the big depression and the family investment in the mortgage and lumber businesses was lost. Henry had never theretofore made any payments on the note, either principal or interest, and he never made any payments thereafter. The note was a demand note, but petitioner makes no claim that ever at any time did he ask or demand payment. Apparently the same was true of Bella, even though she owned the note, it being petitioner's testimony that she looked to him, not Henry, for payment. Furthermore, the record suggests, if it does not fully show, that over a substantial part if not most or all of the period after the note was made, Henry could have made payment of the note, if he so desired. And certain it is that there is no proof that he would not have paid the note if petitioner had requested payment of him. It could, of course, be that since Henry was petitioner's brother, petitioner had no inclination to require further*126 payment for the interest in the family businesses for which the note had been received, which businesses, within some 3 years thereafter, had been a total loss.
As for Bella, petitioner had actually received in cash and for his own purposes and uses, the amount of money represented by the note. Further, in view of the family relationship, it is understandable that petitioner would, if he was able, desire to repay to Bella the money he had received from her, even though, considering all of the facts and circumstances, he would not, and did not, press Henry for payment.
We are not convinced or persuaded by the evidence of record that from and after the failure of the family businesses, petitioner regarded the note which had theretofore been received in the sale of a portion of his interest in the businesses as a continuing obligation on the part of Henry. On the other hand, taking into account the facts which are shown, including the family relationship between Bella and petitioner, it is, in our opinion, reasonable to conclude that the controlling consideration for the payments to Bella was a desire on the part of petitioner to repay the money he had received from her and used for*127 his benefit, without regard to the fact that the money had originally been received from her as payment for Henry's note.
Such being the state of the record, we conclude and hold that petitioner has failed to prove the existence of a valid and subsisting debt which became worthless in 1949.
Decision will be entered under Rule 50.
Footnotes
1. Both the 1949 rainfall at Hemlocks Reservoir and the average rainfall for the four reservoirs for the years 1894 to 1956, inclusive, were taken from the supplemental stipulation of facts of the parties. Also included in the stipulation was a paragraph purporting to reflect the 1949 rainfall at the four reservoirs of the company. That paragraph of the stipulation is as follows:
"The records of the company reflect the precipitation for the year 1949 at the four reservoirs above mentioned by months, as follows:
1949 Normal May-December (Inclusive) 31.71" June-December (Inclusive) 27.81" Year of 1949 47.57" June, 1949 through May, 1950 47.57"" Taking into account the fact that this stipulation indicates that the 1949 rainfall at the four reservoirs was 47.57 inches and that the rainfall for the 12 months ending with May 1950 was likewise 47.57 inches, which is exactly the same as the average rainfall at the four reservoirs for the years 1894 to 1956, inclusive, there is, in reason, some basis for doubting that the wording of the quoted stipulation is as the parties intended.↩
2. It was petitioner's testimony that the cost would have been about $ 5 per "running foot," and that the annual charge for the water would be some $ 2,000 or $ 3,000 a year. Whether or not the waterline so testified to would be merely a line serving petitioner's property, or a line serving other properties in the area, one of which was across the road from petitioner's place and which, as in petitioner's case, likewise suffered a water shortage, does not appear.↩
3. SEC. 23. DEDUCTIONS FROM GROSS INCOME.
In computing net income there shall be allowed as deductions:
* * * *
(e) Losses by Individuals. -- In the case of an individual, losses sustained during the taxable year and not compensated for by insurance or otherwise --
* * * *
(3) of property not connected with the trade or business, if the loss arises from fires, storms, shipwreck, or other casualty, or from theft. * * *↩