James E. Cox and Christine D. Cox v. United States

Taxpayers appeal the summary judgment which denied a tax refund. We vacate and remand.

Taxpayers claimed a casualty-loss deduction of approximately $150,000 for tax year 1967. The Commissioner disallowed the deduction. Taxpayers paid the disputed tax, and filed this action for a refund. The Commissioner moved for summary judgment. The district court held for the Commissioner and denied the deduction. See Cox v. United States, 371 F.Supp. 1257 (N.D.Cal.1973).

Most of the facts were stipulated. In 1965, taxpayers purchased for $150,000 a cotenancy in unimproved real property located in Livermore, California. They and their cotenants planned to hold the land for eventual residential development. Shortly after the purchase, oil was discovered. After a well was brought into production, the market value of the land increased to approximately $750,000. But, after a month, a sudden and unforeseen intrusion of salt water into the oil-bearing formation destroyed the well. The fair market value of the land dropped approximately $350,000, to approximately $400,000.

From the stipulated facts and the record, it appears that taxpayers’ adjusted basis in the property was $150,000 and…