Tuesday, February 3, 2015



This article is part of a series of articles emphasizing several ways taxpayers can be trapped by problems in dealing with the tax reporting obligations resulting from a major casualty loss event.
When analysis results in no gain or loss or even results in a loss, the taxpayer has no requirement to replace or repair the property from an income tax perspective. However, often at the time the loss is claimed or it is determined that there is no gain or loss the taxpayer does not have all the information. The return is properly prepared, but later the remote possibility that was not even thought about at the time of filing the return turns into a cash reimbursement.
In another article in this series is a discussion of FSA 200147053 (“DEEMED ELECTION” TO REPLACE PROPERTY INVOLUNTARY CONVERTED). Because of the information in that FSA (an IRS Field Service Advice memo, generally issued to IRS personnel to create examination uniformity) it is a safe defensive action to disclose the information detailed below in the event as remote as it may be, that a loss or no gain transaction may later turn into a gain.
Even if there is no gain or loss, the following information should be part of your “event disclosures” in all tax returns for each year of the recovery:
  • Type of casualty and when it occurred (including, if available, the FEMA identification number).
  • Date of the loss.
  • The loss was a direct result of the casualty.
  • Information relates to the return for the taxpayer who owns the property (or the taxpayer is leasing and is contractually liable to the owner for the damage.)
  • City, county and state in which the loss event occurred.
  • Any replacement costs incurred, appropriately detailed – both current year and cumulative since date of loss event.
  • Cost basis of property damaged.
  • Insurance proceeds received or expected to be received – both current year and cumulative since date of loss event.
Why is the above disclosure recommendation important?
What is commonly known as the “Deemed Election” (disucced in “DEEMED ELECTION” TO REPLACE PROPERTY INVOLUNTARY CONVERTED) is what we have to examine and understand.
As discussed in the prior article, the IRS position is that once a return is filed and an otherwise qualified replacement expenditure is not reported on the tax return for the year the expenditure is incurred, it can never be claimed as a qualified replacement to absorb gain that resulted from the transaction. That is a big potential problem. In most cases where there is no gain or a loss, it will never change into a gain situation. But, at the time a tax return is filed, that is not necessarily even a small possibility.
When the event does turn into an unexpected gain, as a defensive measure, this blog recommends, always include the above disclosures in any return that is filed during the recovery period. That period could be longer than two years or four years for losses related to damage to a primary personal residence in a federally declared disaster.
When a gain occurs, the replacement period starts on the date the event occurs and ends two or four years, as applicable, after the end of the first year in which a gain occurs. If the event occurred in 2014 and the insurance is settled in 2015 resulting in a gain, the replacement period starts in 2014 and extends for two or four years, as applicable, after the end of 2015, since 2015 is the first year that a gain occurs.
In one case, a fire occurred in 2007. The loss was not covered by insurance, however it turned out that a third party was responsible for the fire. A lawsuit was settled in 2007 resulting in a net gain for the family that realized the loss. The loss was to a commercial property and therefore the replacement period was two years not four years. That two year replacement period started in 2007 and ended two years after the end of the year (2010) the lawsuit was settled, 2012. If replacements had been made in 2007 to 2009 and not reported in tax returns for those years, they would not be counted toward replacements once the gain arose. On the other hand, if during the period 2007 to 2009 the actual replacements were reported, once the lawsuit was settled in 2010, those expenditures would be allowed toward absorbing the gain that arose in 2010.

JOHN TRAPANI assists both taxpayers directly and advises taxpayers’ tax professionals.
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.  

© 2015, John Trapani, CPA,
All rights to reproduce or quote any part of the chapter in any other publication are reserved by the author.


Certified Public Accountant

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(805) 497-4411       E-mail John@TrapaniCPA.com

Blog: www.AccountantForDisasteRrecovery.com

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Tax Advice Disclaimer
Any implication of accounting, business or tax advice contained in this material is not intended as a thorough, in-depth analysis related to your specific issues. It is not a substitute for a formal opinion including a discussion or your specific situation. It is not sufficient to avoid tax-related penalties. If desired, John Trapani, CPA would be pleased to perform the requisite research, specific to your facts and circumstances and provide you with a detailed written analysis. Such an engagement would be the subject of a separate engagement letter letter that would define the scope and limits of the desired consultation services.
This material was completed on the date of the posting

A 450+ page text book is available for purchase:
DISASTER RECOVERY, Tax Benefits and Reporting Responsibilities
The book covers the tax reporting process from incident to resolution in disaster situations including descriptions of  how taxpayers can run into trouble.

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