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Tax Court Denies Taxpayer’s Casualty Loss Claim


9/24/15

Synopsis
In Fletcher v. Commissioner , T.C. Summ. Op. 2015-34; No. 11078-135, the Tax Court ruled that a taxpayer was not entitled to a casualty loss deduction for personal property destroyed in a fire because the taxpayer had a pending claim against his landlord.
 
Background
Prior to 2012, the taxpayer rented a home in California with his wife. On June 2, 2012, the taxpayer and his wife went on vacation and, while away, a fire destroyed their home and all of its contents. The taxpayer’s personal property was insured.  A few weeks after the fire, the taxpayer received a $60,000 settlement from his insurance company.  Soon after the fire, the taxpayer made a claim against the landlord and the landlord’s insurance company.  
 
In February 2015, mediation had been scheduled to address the claims against the taxpayer’s landlord and the landlord’s insurer.  The taxpayer had filed an amended 2012 return claiming a casualty loss of $1,164,547 and seeking to carry back some portion of the loss to 2010, the tax year at issue in the case. The IRS determined a deficiency of $18,160 in the taxpayer’s 2010 Federal income tax return and also assessed an accuracy-related penalty under §6662(a) of $3,632.  
 
Tax Court Analysis
The Tax Court concluded that the taxpayer did not “sustain” a loss in 2012. Therefore, the Tax Court denied the taxpayer’s claim for a carryback loss deduction, reasoning that there was no evidence of a closed and completed transaction during that year. Generally, §165(a) allows a deduction for any loss “sustained” during the year and not compensated for by insurance or other means.  The deduction is limited, in relevant part, to losses of property not connected with a trade or business or with a transaction entered into for profit if the losses arise from fire, storm, shipwreck, other casualty, or from theft. A loss is “sustained” in the year in which the loss occurs, evidenced by closed and completed transactions and as fixed by identifiable events occurring in that taxable year. See Treas. Regs. §§1.165-1(d)(1) and 1.165-1(b). If there is a reasonable possibility that a claim for reimbursement may be obtained, no portion of a loss with respect to that reimbursement claim is “sustained” until it can be established with a reasonable certainty that the reimbursement will be received. See Treas. Reg. §1.165-1(d)(2)(i).
 
The Tax Court determined that, at the time of the trial, the taxpayer was actively pursuing a claim for reimbursement from the 2012 fire. Therefore the taxpayer did not “sustain” a loss in 2012 evidenced by a closed and completed transaction. 
 
What Does CohnReznick Think?
Whether a taxpayer is “actively” pursuing a claim is a factual issue that needs to be considered. Some taxpayers might pursue claims that have only a remote chance of being successful. Unfortunately, pursuing such a claim may prevent a taxpayer from being able to take a current loss under section 165.  
 
Contact
For more information about this potential opportunity, please contact Richard Shevak, Director, at richard.shevak@cohnreznick.com or at 862-245-5029.
 

Any advice contained in this communication, including attachments and enclosures, is not intended as a thorough, in-depth analysis of specific issues. Nor is it sufficient to avoid tax-related penalties. This has been prepared for information purposes and general guidance only and does not constitute professional advice. You should not act upon the information contained in this publication without obtaining specific professional advice. No representation or warranty (express or implied) is made as to the accuracy or completeness of the information contained in this publication, and CohnReznick LLP, its members, employees and agents accept no liability, and disclaim all responsibility, for the consequences of you or anyone else acting, or refraining to act, in reliance on the information contained in this publication or for any decision based on it.

 
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