Monday, June 14, 2004

For those of us living in cicada country (DC, Indiana, Georgia, Kentucky, Maryland, New Jersey, North Carolina, Ohio, Pennsylvania, Virginia & West Virginia), the past several weeks have been disgusting as billions of the “Brood X” insects have tunneled to the surface after lying dormant underground for the past 17 years. Although the cicadas are not harmful to humans, they can damage young trees on which they climb to mate and then lay eggs on the branches. Which naturally got me to thinking: what are the tax consequences of these little buggers?

It turns out that there is a neat tax issue concerning the deductibility of losses caused by the cicadas. Although the tax code generally disallows the deduction of personal losses, § 165(c)(3) allows taxpayers to deduct losses from “fire, storm, shipwreck, or other casualty, or from theft.” So does tree damage from cicadas constitute a “casualty” loss?

To be treated as a casualty, a loss must be “sudden,” “unexpected,” and “unusual.” There is quite a bit of law on the application of these terms to maladies suffered by homeowners: tree damage caused by diseases like dutch elm, oak wilt, and lethal yellowing does not qualify as a casualty loss because it is not suffiiciently “sudden” but rather manifests itself over a period of months or years. Termite damage also does not qualify as a casualty loss for this reason.

Yet tree damage caused by pine beetles and draught can qualify as a casualty loss if it is sufficiently “sudden.” Can damages from a cicada attack fit within this line of cases? There is no law directly on point, and the leading tax treatise by Boris Bittker and Larry Lokken (who, it should be noted, live in cicada-free states) raises in jest the casualty loss treatment of the plague of locusts in Exodus 10:13. Although cicadas are not locusts, their reappearance on schedule after 17 years would appear to make them not “unexpected” in casualty loss parlance and thus any losses nondeductible. (Of course, since casualty losses in any event are not deductible unless thay exceed 10% of the taxpayer’s income per § 165(h)(2), as a practical matter this section screens out most, if not all, of the potential cicada damage cases.)