Saturday, June 9, 2012

What is a casualty?

What is a casualty?

Something happened! Is it a casualty?

“Personal losses” generally are not deductible except when they qualify as a casualty, the Courts and IRS are leery of personal assets that appear to be the subject of a casualty by some contrivance. 
A loss upon condemnation of a personal residence was not a casualty because there was no proximate relationship between a casualty event and the loss even though the property was taken for a flood control project.

The law establishes three bases for losses allowed as deductible by individuals in:
1  losses incurred in a trade or business;
2  losses incurred in any transaction entered into for profit, though not connected with a trade or business; and;
3  losses of property not connected with a trade or business or a transaction entered into for profit, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft. (Emphasis added.)

IRS Publication 547, Non-Business Disaster, Casualties and Thefts, defines a “casualty” as the complete or partial destruction or loss of property resulting from an identifiable event that is “...sudden, unexpected or unusual in nature.”

In 1959 the IRS ruled:
The term “casualty” denotes an accident, a mishap, some sudden invasion by a hostile agency; it excludes the progressive deterioration of property through a steadily operating cause. Also, an accident or casualty proceeds from an unknown cause, or is an unusual effect of a known cause. Either may be said to occur by chance and unexpectedly. To be of the same nature or kind as fires, storms and shipwreck for purposes of section 165(c)(3) of the code, an event must first be unexpected and, second, be identifiable as the cause of a provable loss. There must be a provable event which not only has a casual relation to the diminution in value of the damaged property but can be isolated from other events or sequences leading to changes in value in the damaged property. The primary significance of the latter requirement is that generally the amount of a casualty loss deduction is in part determined with reference to the value of the property before the casualty and its value immediately after the casualty so that it is necessary to fix a time at which the casualty took place. (Emphasis added, internal references omitted)

A 1967 Tax Court case states:
unexpected, accidental force exerted on property and the taxpayer is powerless to prevent … [it, the] direct and proximate damage causes a loss … similar to losses arising from the causes specifically enumerated in section 165(c)(3).  “[M]ere negligence on the part of the owner-taxpayer has long been held not to necessitate the holding that an occurrence falls outside the ambit of ‘other casualty.’” The Court limits the IRS stating: “To hold that a loss must be cataclysmic in order to qualify as some ‘other casualty’ under section 165(c)(3) would be to limit the availability of the casualty loss deduction to circumstances which are virtually catastrophic in character.

While the taxpayer may be powerless, has the taxpayer taken all reasonable steps to limit the loss as it occurs where possible. Additionally, has the taxpayer processed all appropriate insurance claims? The tax law is not an alternative to appropriate care and mitigation, nor is the tax law an alternative to filing an insurance claim. However, taxpayers, generally, are not required to purchase insurance simply because it is available.

In the case of the Fifth Circuit Court of Appeal ruled that gradual deterioration of property caused either by the action of the elements or other factors does not constitute a casualty loss.

Generally, six characteristics must be present for the loss to have any possibility of being classified as a casualty: Physical damage; Identifiable event; Sudden; and Unexpected and Unusual. An accidental loss may qualify as a casualty loss if it exhibits those qualities. Inherent in these qualities, the taxpayer, generally, must show the sixth element, he is powerless to prevent the damage from occurring.

All rights to reproduce or quote any part of the chapter in any other publication are reserved by the author. Republication rights limited by the publisher of the book in which this chapter appears also apply.


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This material was contributed by John Trapani. A Certified Public Accountant who has assisted taxpayers since 1976, in analyzing and reporting transactions of the type covered in this material.  
Internal Revenue Service Circular 230 Disclosure
This is a general discussion of tax law. The application of the law to specific facts may involve aspects that are not identical to the situations presented in this material. Relying on this material does not qualify as tax advice for purpose of mounting a defense of a tax position with the taxing authorities
The analysis of the tax consequences of any event is based on tax laws in effect at the time of the event.
This material was completed on the date of the posting
© 2012, John Trapani, CPA,

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