52 T.C. 41">*41 Respondent determined a deficiency in petitioners' income tax for 1963 in the amount of $ 1,212.22. The issues presented for decision are:

(1) Whether petitioners are entitled to a deduction under section 165(a)¹ for the loss resulting from a flash flood which caused the destruction of a dam and the drainage of a lake on which their summer home was located, or whether such loss was that of a corporation (of which petitioner, S. P. Keith, Jr., was a shareholder) which had retained certain rights in the lake under a restrictive covenant.

1969 U.S. Tax Ct. LEXIS 157">*159 (2) The amount, if any, petitioners are entitled to deduct under section 165(a) for the damage caused by the flood to their equipment.

FINDINGS OF FACT

S. P. Keith, Jr. (hereinafter referred to as petitioner), and his wife, Marguerite C. Keith, were legal residents of Birmingham, Ala., at the time their petition was filed. They filed their joint income tax return for 1963 with the district director of internal revenue, Birmingham, Ala.

On April 1, 1959, a group of individuals, not including petitioner, formed a corporation named Green Valley, Inc. (hereinafter GVI), which purchased a 400-acre tract of land in Shelby County, Ala. GVI's certificate of incorporation and bylaws are in the form customarily used by business corporations and confer no rights on its shareholders as to the use of any corporate property. GVI thereafter constructed a large earthen dam to enlarge a lake on the tract, Green 52 T.C. 41">*42 Valley Lake, to approximately 1 1/4 miles long and one-fourth of a mile wide.

On September 15, 1959, GVI recorded a restrictive covenant pertaining to the acquired realty, providing, in pertinent part, as follows:

Now, Therefore, the undersigned, GREEN VALLEY, INC., a corporation1969 U.S. Tax Ct. LEXIS 157">*160 organized and existing under the laws of the State of Alabama, being the owner of said real estate, does by these presents file the following protective covenants and restrictions which are to run with the land identified above [the 400-acre tract] and shall be binding on all parties and persons claiming under it until the 1st day of January, 1978, at which time the covenants shall be automatically renewed for successive five-year periods, unless a vote of nineteen (19) out of twenty-four (24) of the owners of the stock of Green Valley, Inc. (or the same or a higher percentage of the total outstanding stock of Green Valley, Inc. in the event there is more or less than twenty-four (24) outstanding shares) agree affirmatively in writing to change said covenants in whole or in part.

1. Green Valley, Inc. is a corporation that has issued and outstanding twenty-four (24) shares of common stock. * * * Said corporation owns the real estate described above. It is agreed by this convenant to restrict said real estate so that the same can only be sold to, owned, or used by an individual who is also a shareholder of said corporation. Each shareholder must own a lot that is part of said realty. 1969 U.S. Tax Ct. LEXIS 157">*161 * * *

2. All lots shall be known and described as recreational lots. No structure shall be erected, altered, placed, or permitted to remain on any lot other than one detached single family dwelling and other outbuildings, garages, stables, barns, boat houses, incidental to recreational use attached thereto.

* * * *

5. Green Valley, Inc. shall retain title to all dams, dam sites, spill ways, lakes, and shall retain a permanent easement running with the land for all roads, easements for public utilities, and the exclusive control and regulation of hunting, fishing, swimming, water-skiing, and all recreational facilities, so that all shareholders shall at all times be subject to such rules and regulations as may be adopted by Green Valley, Inc. to promote the health, wellbeing, safety, and well-regulated recreational activities of the users of said realty and facilities. In the event that the lake or lakes cease to exist, the land, dam, dam sites, spillways, shall revert to the owner of the forty-acre tract.

6. No residential building, barn, boat house, or other structure shall be constructed on any lot until the building plans, specifications and plot plan showing the location of1969 U.S. Tax Ct. LEXIS 157">*162 such structure shall have been submitted in writing to the Board of Directors of Green Valley, Inc. and approved in writing by said Board of Directors, as to location of septic tanks, study of pollution of springs and lakes, location of said structure with respect to topography, and general appearance of said structure as to its harmony with other developments of said realty.

* * * *

8. Each lot shall have an easement running with the land, in addition to other easements herein contained, to go across the land contained in each other lot at reasonable times and places and in a reasonable manner solely for the recreational purposes mentioned in paragraph 5 above, and the owner of each lot is forbidden to construct anything upon his lot that will not leave to each other lot such reasonable access for such recreational purposes. The corporation shall have the authority to specify rules relating to such easements, and to determine 52 T.C. 41">*43 what are reasonable times, places, and manner of access, and what construction may or may not be permitted, and shall decide any disputes relating to the provisions of this paragraph.

After this restrictive covenant was recorded, GVI subdivided the1969 U.S. Tax Ct. LEXIS 157">*163 400-acre tract into lots of 20 or 40 acres each, and deeded these lots to its shareholders. The deeds covered the entire lakebed as well as the adjoining land. None of these deeds, or any other deeds involved in this case, indicate the portion, if any, of the property described therein that was covered by Green Valley Lake, beyond referring to the restrictive covenant. As a result of the subdivision and conveyances, each shareholder of GVI owned a lakefront tract of land. In March 1963 the shareholders amended the restrictive covenant of September 15, 1959, to permit landowner-shareholders to mortgage their lots and to permit sale of any foreclosed property free of the restrictive covenant.

On or about May 31, 1963, petitioner became a shareholder in GVI, and acquired two adjoining lots of land -- one from William K. Murray, the president of GVI, and his wife, and one from GVI -- for a total cost of $ 17,500. The deed from Murray to petitioner, dated May 31, 1963, and bearing documentary stamps in the amount of $ 13.75, described the property conveyed thereby as consisting of a rectangular tract, 600 feet by 320 feet, and a half of a quarter-quarter section (from which a rectangular1969 U.S. Tax Ct. LEXIS 157">*164 tract 744.46 feet by 350 feet was excepted), or a total of approximately 18.5 acres. ² The deed from GVI to petitioner, also dated May 31, 1963, and bearing documentary stamps in the amount of $ 5.50, described a half of a quarter-quarter section, or 20 acres. Part of the property described by these deeds was under the waters of the lake. Petitioner's lot fronted on the lake for approximtaely 1,600 feet.

On June 23, 1963, a flash flood caused the large earthen dam holding the lake to break and wash away, leaving the lake completely drained. The flood also destroyed a 75-foot long, 5-foot wide, T-shaped wooden pier, which had previously extended1969 U.S. Tax Ct. LEXIS 157">*165 from petitioner's land into the lake. The part of the pier forming the top of the T was 25 to 30 feet long. The pier was supported by steel beams and concrete posts alternating on each side at distances of from 12 to 15 feet. Petitioner later replaced the pier at a cost of $ 431.39.

In 1964 the landowner-shareholders decided to rebuild the dam that had been washed away on June 23, 1963. A group of the landowner-shareholders 52 T.C. 41">*44 was appointed to confer with the Alabama State Conservation Department, and bids for constructing the dam were submitted by local contractors. At a special meeting of the shareholders and directors of GVI on March 5, 1964, a bid in the amount of $ 23,358.10 was accepted. Because of certain unforeseen circumstances, an additional $ 1,500 had to be expended on restoring the dam. The cost of rebuilding the dam was assessed upon each landowner-shareholder according to the size of his lot and the concomitant number of shares he owned in GVI; i.e., a person owning a 40-acre lot was required to bear twice as much of the cost as a person who owned only a 20-acre lot. The dam was not rebuilt until the fall of 1964, with the result that petitioner was unable1969 U.S. Tax Ct. LEXIS 157">*166 for two summers to enjoy the recreational activities -- fishing, swimming, boating, and water-skiing -- that normally would have accompanied ownership of his lakefront property.

Aside from purchasing the 400-acre tract and subdividing it, recording the restrictive covenant, and functioning as the vehicle through which the landowners restored the lake and dam, GVI performed no active duties other than maintaining the lake and regulating its use for the benefit of the landowners. GVI's authorized capital was $ 2,200 of which $ 1,100 was paid in at the time of its organization; the funds with which it operated were obtained by periodic assessments upon the individual landowner-shareholders. Each shareholder of GVI was a director, and the corporate officers served without pay. The meetings of GVI's members served as a forum in which they could discuss rules for the use of the lake.

In addition to destroying the dam and petitioner's pier, the flood also damaged a secondhand, 7 1/2-horsepower outboard motor owned by petitioner; and it caused him to lose paddles, water-skiing belts, life preservers, seat cushions, a gasoline can, and light poles and wiring. Petitioner received no compensation, 1969 U.S. Tax Ct. LEXIS 157">*167 from insurance or otherwise, for the loss of any of these items or for the damage to his property.

On their income tax return for 1963 petitioners deducted $ 5,800 as "Loss of dam at lake cottage" and $ 55.25 as "Loss of equipment," both losses shown as having been "caused by rainstorm." In his notice of deficiency, respondent disallowed the entire amount of the deductions.

ULTIMATE FINDINGS OF FACT

Petitioner sustained a casualty loss in 1963 to his lakefront property in the amount of $ 2,917.20, and to his equipment in the amount of $ 55.25.

52 T.C. 41">*45 OPINION

The question is whether petitioner is entitled to a deduction for a casualty loss, under subsections (a) and (c)(3) of section 165, ³ as a result of the destruction of the lake and his recreation equipment in the flash flood. Petitioner contends that he is entitled to a deduction measured by the decrease in the fair market value of his real property, plus the fair market value of the destroyed equipment. Respondent does not deny that the damage caused by the flood arose from a "casualty"; but he urgently insists that the words of the restrictive covenant, "Green Valley, Inc. shall retain title to all dams, dam sites, spill1969 U.S. Tax Ct. LEXIS 157">*168 ways, lakes," establish the boundary of petitioner's property at the water's edge; that the lake was not, therefore, the "property" of petitioner within the meaning of section 165(c)(3); and that, consequently, the loss with respect to the real estate was not petitioner's loss but that of GVI. As to the recreation equipment, respondent argues that petitioner failed to establish the value of the lost or destroyed property. ⁴

1969 U.S. Tax Ct. LEXIS 157">*169 To support his position that petitioner suffered no loss with respect to his real property, respondent relies primarily upon West v. United States, 163 F. Supp. 739">163 F. Supp. 739 (E.D. Pa. 1958), affirmed per curiam 259 F.2d 704 (C.A. 3, 1958), in which a casualty loss was claimed by an individual taxpayer for the diminution in value of her property fronting on a lake which had been destroyed by a flood. ⁵ The lake, the dam, and the lots surrounding the lake were owned by an incorporated social club of which the taxpayer was a member. The taxpayer's lot was held under a 99-year lease, and none of the property owned by her was damaged. The District Court concluded that the taxpayer, as a member of the club, was not entitled to a deduction for 52 T.C. 41">*46 a casualty loss, basing its decision on precise, narrow grounds as follows (163 F. Supp. 739">163 F. Supp. at 741):

Plaintiff clearly has a property interest in her leasehold and in the cottage built on it. She has no property interest, however, in the dam or lake. Her right to use corporate property comes solely and entirely from her membership. This right is conferred 1969 U.S. Tax Ct. LEXIS 157">*170 by the corporate charter and by-laws. Her claim to a casualty loss deduction would have more force if her rights in the lake were granted by the lease. In that case her property interest in the leasehold might well be considered to extend to an easement in the lake.

The factual differences between the present case and West are apparent and we think they require an opposite result. Here petitioner's rights in the lake did not stem from his ownership of stock in GVI; indeed, neither the certificate of incorporation nor the bylaws of GVI even purport to confer any such rights. These instruments are cast in the form ordinarily used by business corporations1969 U.S. Tax Ct. LEXIS 157">*171 and do not refer in any way whatever to the use by the shareholders of the lake or any other corporate property. Petitioner's rights in the lake stemmed primarily from his ownership in fee (not merely a lease), subject to the restrictive covenant, of a portion of the lakebed ⁶ and the land adjoining the lake. While the restrictive covenant limited his rights in the lake in certain respects, it also conferred certain rights on him with respect to the use of the lake as well as the adjoining property, e.g., the right to go across the property of the other lot owners for recreational purposes.

Disregarding for the moment the restrictive covenant, we think it apparent that petitioner, by virtue of his warranty deeds to a part of the lakebed and to the adjoining land, possessed valuable property rights in the lake which were destroyed by the flood. The owners of the land underlying an artificial1969 U.S. Tax Ct. LEXIS 157">*172 lake and the land bordering upon such a lake have property rights in the water by virtue of their ownership of the land. These rights include the right to make reasonable use of the lake. Southern Ry. Co. v. Lewis, 165 Ala. 555">165 Ala. 555, 51 So. 746">51 So. 746, 51 So. 746">749 (1910); see Hood v. Murphy, 231 Ala. 408">231 Ala. 408, 165 So. 219">165 So. 219, 165 So. 219">220 (1936) (fishing rights). Also see Akron Canal & Hydraulic Co. v. Fontaine, 72 Ohio App. 93">72 Ohio App. 93, 50 N.E.2d 897, 902 (1943) (fishing and boating rights); Burt v. Munger, 314 Mich. 659">314 Mich. 659, 23 N.W.2d 117">23 N.W.2d 117, 23 N.W.2d 117">120 (1946) (right to construct a wharf or pier).

In the present case, these littoral rights added substantially to the value of petitioner's property. His property was located in a remote farming area but consisted of acreage too small for economic use as a farm; its value lay mainly in its recreational use. Destruction of the littoral rights through the drainage of the lake obviously caused an 52 T.C. 41">*47 economic loss to petitioner, and absent the restrictive covenant he manifestly would be 1969 U.S. Tax Ct. LEXIS 157">*173 entitled to a casualty loss deduction therefor.

The question thus becomes whether the restrictive covenant, to which petitioner's deeds were subject, deprived him of any "property" interest in the lake within the meaning of section 165(c)(3). We do not think it did.

While the restrictive covenant spoke of GVI's rights to the lake and dam in terms of the retention of "title," those retained rights were only temporary ones. The restrictive covenant, by its terms, was effective until January 1, 1978, at which time it was to be automatically renewed for successive 5-year periods unless a specified percentage of the shareholders agreed in writing to change the covenants in whole or in part. In addition, it provided that "In the event that the lake or lakes cease to exist, the land, dam, dam sites, spillways, shall revert to the owner of the forty-acre tract."

Furthermore, the rights were retained for only a limited, specific purpose: "so that all shareholders shall at all times be subject to such rules and regulations as may be adopted by Green Valley, Inc. to promote the health, wellbeing, safety, and well-regulated recreational activities of the users of said realty and facilities." 1969 U.S. Tax Ct. LEXIS 157">*174 The lots could be sold, owned, or used only by an individual who was also a shareholder, and each shareholder was required to own a lot in the tract. No structure could be built on any lot unless the building plans, specifications, and plot plan had been approved in writing by the board of directors of GVI "as to its harmony with other developments of said realty." The owner of each lot was given an easement to go across the land contained in each other lot at reasonable times "solely for * * * recreational purposes," and GVI was given authority to specify rules relating to the use of such easements.

When viewed in this context, it seems clear that GVI's rights were in the nature of an equitable easement, covering only the dam and the surface of the lake, with ownership of both the lakebed and the adjacent land being vested in the lot owners, including petitioner. ⁷The rights retained and the restrictions imposed were not for the benefit of the corporation, but were for the benefit of the lot owners. Not infrequently provisions, analogous to those included in the restrictive 52 T.C. 41">*48 covenant, are inserted in deeds granted by developers of real estate subdivisions to regulate1969 U.S. Tax Ct. LEXIS 157">*175 the kind of dwellings that may be constructed, their location, and the manner in which individual properties are to be used. See, e.g., Vaughan v. Fuller, 278 Ala. 25">278 Ala. 25, 175 So. 2d 103 (1965); Scheuer v. Britt, 218 Ala. 270">218 Ala. 270, 118 So. 658">118 So. 658 (1928). Where the subdivided tract also contains an area, such as a park or lake, set off for the common use of the lot owners in the subdivision, and authority to maintain this common area and to regulate its use is vested in a separate entity, the entity is held to have no more than "an easement * * * with specific restrictions and conditions as to the use and management of the easement," the individual lot owners taking fee title to a proportionate share of the common area adjoining their lot. United Statesv. 11.06 Acres of Land, Etc., 89 F. Supp. 852">89 F. Supp. 852, 89 F. Supp. 852">858 (E.D. Mo. 1950); see generally Johnston v. Harsh, 207 Ala. 524">207 Ala. 524, 93 So. 451">93 So. 451 (1922).

1969 U.S. Tax Ct. LEXIS 157">*176 We are confirmed in our view of the meaning of the deeds and covenant by the fact that GVI existed merely to oversee the proper recreational use of the lake and related shore properties by the lot owners who were its only shareholders. GVI had no other active function. It had no source of income and its nominal capital was insufficient to maintain the recreational facilities. Assessments were levied by the landowner-shareholders on themselves to cover expenses as they arose, including the cost of rebuilding the dam. GVI served as a forum for the discussion of recreation rules on such matters as fishing, hunting, water skiing, and other matters of common interest. For all practical purposes, the situation was the same as if the lot owners had hired GVI to manage the lake, giving it the necessary rights and powers to execute its duties.

We think it clear that in every practical sense, legal as well as economic, the loss resulting from the destruction of the dam and lake was that of petitioner and the other lot owners, not that of the corporation. The entire burden of the loss fell on them. Petitioner's loss was not a temporary one due to buyer resistance, see Harvey Pulvers, 48 T.C. 245">48 T.C. 245 (1967),1969 U.S. Tax Ct. LEXIS 157">*177 affirmed per curiam 407 F.2d 838 (C.A. 9, 1969), or to a voluntary decision that could be reversed at any time in the future, see Citizens Bank of Weston, 28 T.C. 717">28 T.C. 717 (1957), affd. 252 F.2d 425 (C.A. 4, 1958), but was the result of actual, physical damage to his property interest in the lake. We hold that petitioner qualifies for a deduction under section 165(a) and (c)(3).

Having concluded that petitioner is entitled to a deduction for 1963 for the casualty loss sustained to his property, we must now determine the amount of that deduction. Petitioner contends that the measure of the deduction is, according to section 1.165-7(b)(1), Income Tax 52 T.C. 41">*49 Regs., ⁸ the difference between the fair market value of his property immediately before and immediately after the flood.

1969 U.S. Tax Ct. LEXIS 157">*178 Petitioner provided us with expert testimony of a competent appraisal showing the difference in value between his precasualty property and postcasualty property, thus complying with the general rule set forth in section 1.165-7(a)(2)(i), Income Tax Regs.⁹ However, we are not convinced that the appraisal is the most reliable yardstick to use in determining petitioner's loss, for the last clause in that regulation points out that the deduction for a casualty loss "shall be limited to the actual loss resulting from damage to the property." (Emphasis added.) In cases such as this, a more realistic measure of the deduction is the cost of restoration. Clapp v. Commissioner, 321 F.2d 12 (C.A. 9, 1963), affirming 36 T.C. 905">36 T.C. 905 (1961); Squirt Co., 51 T.C. 543">51 T.C. 543, 51 T.C. 543">547 (1969); Clarence A. Peterson, 30 T.C. 660">30 T.C. 660 (1958); see sec. 1.165-7(a)(2)(ii), Income Tax Regs. This is the only loss that petitioner has sustained in the economic sense. It is also the only loss he sustained in the tax sense.

1969 U.S. Tax Ct. LEXIS 157">*179 The total cost of rebuilding the dam and restoring the lake was $ 24,858.10. Petitioner's share of such cost was $ 2,485.81. Hence the amount he may deduct for 1963 as a casualty loss to his land is this sum plus the amount he expended to replace the pier, $ 431.39, or $ 2,917.20. ¹⁰

1969 U.S. Tax Ct. LEXIS 157">*180 Petitioner also claimed a deduction in the amount of $ 55.25 for the destruction by the flood of certain equipment described in our findings. Respondent contends that petitioner failed to substantiate 52 T.C. 41">*50 the amount of this loss. Although we do not have the benefit of any documentary evidence as to the exact amount of these losses, we accept petitioner's testimony that he did sustain them and we believe his estimate of the amount is reasonable. It is our conclusion that petitioner is entitled to a casualty loss deduction for the destroyed equipment in the amount claimed.

Decision will be entered under Rule 50.