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.
Here is a key item to consider when dealing with the IRS in an examination.
One of the rules affecting examiners on audit as stated in IRS Chief Counsel Advice, CCA 200750016. The IRS restricts its auditors to evaluating information that is available to the taxpayer as of the end of the tax year. The taxpayer may take into consideration and the examiner must review information that the taxpayer has determined after the end of the tax year in preparation of the return. This limits the IRS use of 20/20 hindsight three years later.
While valuing a loss is covered in a later article and has been covered in this blog as early as 2008, here is a point that you want to keep in mind when the IRS attacks your valuation. The IRS regulations provide two methods, the Appraisal Method and the Cost of Repairs Method. The taxpayer gets to determine which method will be used. The taxpayer must follow the rules meticulously or the IRS will be able to change the method to the detriment of the taxpayer. Here is what the IRS states in their own regulations:

IRS regulations provide direction on the use of the two methods. Reg. §1.165–7 (a) (2)
“(2) Method of valuation”
“(i)   In determining the amount of loss deductible under this section, the fair market value of the property immediately before and immediately after the casualty shall generally be ascertained by competent appraisal. This appraisal must recognize the effects of any general market decline affecting undamaged as well as damaged property which may occur simultaneously with the casualty, in order that any deduction under this section shall be limited to the actual loss resulting from damage to the property.”
“(ii)   The cost of repairs to the property damaged is acceptable as evidence of the loss of value if the taxpayer shows that ( a) the repairs are necessary to restore the property to its condition immediately before the casualty, ( b) the amount spent for such repairs is not excessive, ( c) the repairs do not care for more than the damage suffered, and ( d) the value of the property after the repairs does not as a result of the repairs exceed the value of the property immediately before the casualty.”
(Underlining added by John Trapani, CPA for emphasis.)
From the wording in the regulation of the IRS, The preferred method is using FAIR MARKET VALUES as described in sub-paragraph (i) … the fair market value method
The COST OF REPAIR is acceptable, but clearly is only an alternative to the Fair Market Value Method.
Do not allow the IRS the ability to change the method you have chosen in order to reduce you deduction.

I have written on the topic of CPAs not having the depth of experience to understand the intricacies of a major casualty event. But, the same thing seems to exist inside the IRS. Often the IRS examiner has not seen a casualty loss and needs to examine and close the case in a budgeted period of time that does not allow for extensive research or understanding. The examiner, sometimes incorrectly, attempts to pigeon-hole the case into a more ordinary set of circumstances. This can be dangerous and add to the possible poor outcome for the taxpayer.

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

It All Adds Up For You

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.

An APPRAISER'S GUIDE (100 pages) is also available for purchase  to assist in evaluating appraisal reports and guiding appraisers in the tax law requirements to be addressed in an appraisal.

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