Rev. Rul. 59-360

Advice has been requested concerning the tax treatment of the proceeds of a fire insurance contract which compensated the taxpayer partially for property losses sustained on the destruction of his residence and partially for increases in his family's living expenses resulting from loss of use and occupancy of the residence.

The taxpayer carried fire insurance on his residence. The contract provided that in the event of damage to the residence through fire, the insurance company would reimburse the taxpayer for the property loss sustained and would reimburse him for any increase in his family's living expenses resulting from loss of use and occupancy of the residence. In 1955, the taxpayer's residence was severely damaged by fire, rendering it uninhabitable. The company paid the taxpayer a sum to compensate him for his property loss and a sum to compensate him for the increase in living expenses.

Section 165 of the Internal Revenue Code of 1954 provides, in part, as follows:

(a) * * * There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.

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(c) * * * In the case of an individual, the deduction under subsection (a) shall be limited to-

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(3) losses of property not connected with a trade or business, if such losses arise from fire * * *.

Section 61 of the Code defines gross income as all income from whatever source derived.

The deduction allowable under section 165 of the Code is to be reduced only by that portion of the insurance proceeds which compensates the taxpayer for the property losses incurred as a result of the casualty. Section 165 permits a taxpayer a deduction only for losses in property values. See Samuel E. Mulholland v. Commissioner , 16 B.T.A. 1331. Where a loss in property values is partially compensated by insurance proceeds, the actual loss incurred is to that extent reduced. However, where a property insurance contract also compensates a taxpayer for added living expenses incurred as a direct result of the casualty, these amounts do not reduce the actual loss in property values sustained and, therefore, do not reduce the amount of the deduction allowable. See Richard R. Hollington et ux. v. Commissioner , T.C. Mcmo. 1956-132.

The insurance proceeds which compensated the taxpayer for added living expenses constitute gross income to the taxpayer within the meaning of section 61 of the Code. These latter amounts were received to compensate the taxpayer for the loss of use and occupancy of his home. The value of the use and occupancy of a dwelling by the owner thereof does not constitute gross income to him. Homer P. Morris v. Commissioner , 9 B.T.A. 1273, acquiescence C.B. VII-2, 28 (1928). However, when transformed into cash, as where an owner rents his property to another, the amounts received constitute gross income. See Commissioner v. Glenshaw Glass Co. et al. , 348 U.S. 426, Ct. D. 1783, C.B. 1955-1, 207; and General American Investors Co., Inc. v. Commissioner , 348 U.S. 434, Ct. D. 1784, C.B. 1955-1, 210. This is true even though the cash receipt is in the form of insurance proceeds. See Miller v. Hocking Glass Co. , 80 Fed.(2d) 436.

Accordingly, it is held that, in these circumstances, only that portion of the insurance proceeds which compensates the taxpayer for loss in the value of his residence through damage by fire reduces the loss deduction allowable under section 165 of the Code. The remaining proceeds constitute gross income to the taxpayer within the meaning of section 61 of the Code.