Casualty Loss

[Harvey Lucas]

My client was in a car accident.

The other driver died.

The family of the other driver sued my client and won a $600,000 award.

My client was determined liable, but he was not willfull or negligent.

My clients insurance company paid $500,000 of the award.

My client paid the other $100,000 out of his own pocket in 2007.

Is this a deductible Casualty Loss?

Thank You,

Harvey Lucas

[Bees Knees]

TTB, page 4-21:

How to Calculate a Casualty or Theft Loss
A casualty or theft loss is the lesser of the basis in the property
damaged or destroyed, or the reduction in FMV of the property
due to the casualty or theft...

Since your client has zero basis in the other driver's property that was destroyed, your client does not have a casualty loss. In other words, you have to own and have basis in the property damaged in order for it to be a casualty loss.

[Harvey Lucas]

His payment doesn't create basis?

He paid $100,000 out of his own pocket in 2007, doesn't that payment create basis?

If I were housesitting for a friend, and while I was sleeping, a burglar broke in and stole my friends uninsured valuable art collection, and my friend sued me for the loss, and I had to pay him $100,000, it seems to me I would have suffered a casualty/theft loss even though I had no original basis in the artwork.

My payment to him creates basis?

Could be that I am just battle weary from a long tax season and my thinking is off, but it seems like a logical assumption at the moment.

Harvey Lucas

[jimmcg]

This is an interesting observation that Harvey makes. I agree that a payment would create basis however that basis would not have existed at the time of the casualty event. Without furthur researching this I do not know how prior case law has addressed this issue of basis created after the casualty event but I think a very good argument could be made for either side of the issue,

[Bees Knees]

His payment does not create basis. An interesting related concept is mentioned in TTB, page 4-21:

Business casualty loss—double deduction. The cost of repairs
may indicate the reduction in FMV for purposes of deducting a
business casualty loss if the repairs only restore the property to
its condition prior to the casualty. The same cost of repairs is also
deductible as repairs. (TAM 199903030)
Example: Barry owns rental property damaged in a flood. His insurance
does not cover flood damage. Barry spends $10,000 restoring
the property to its pre-flood condition without materially improving the
value of the property. Barry takes a $10,000 casualty loss deduction
plus a $10,000 repair deduction on his Schedule E. The $20,000 in total
deductions are allowed even though his out of pocket expenses are
only $10,000. Barry must reduce the basis in his rental property by the
$10,000 casualty loss deduction.

Note that this IRS letter ruling is allowing for a double deduction. Why? If the cost of repairs created basis, there would be no double deduction.

The point is, the cost of repairs or replacing the item is not the casualty. The cost of repairs or replacement property might be an indication of the loss of FMV on the property that was damaged or destroyed. But it itself is NOT the casualty.

To prove my point, lets change the example above. What would have happened if Barry started with zero basis in his rental property? The IRS letter ruling would have still allowed the deduction for the cost of repairs, but not a deduction for a casualty loss because you can’t claim a casualty loss on something with zero basis. The cost of repairs would not have increased basis in his rental property. The fact that he gets to deduct the cost of repairs because it is a business expense is irrelevant. Had it been his personal house with zero basis and $10,000 for the cost of repairs, it still would not have been a deductible casualty loss.

[Harvey Lucas]

Thanks Bees

Thank you for your well thought out reply, you are right of course, no basis for a casualty loss.

I guess the bottom line is, generally speaking, if you cause personal injury to someone, and have to pay money because of it, it is generally not deductible in any way.

Possibly there should/could be a blurb in TTB under personal injury that says..."your payments for personal injuries that you cause to another person are never deductible, unless those injuries were caused by you in the course of your business or your job, then they may under certain circumstances be deductible"

Harvey Lucas

[AZ-Tax]

Adequate insurance coverage..

I PDF this message thread since I market Auto & Homeowners insurance. If the client would have had a $1mil umbrella policy, no out of pocket on his end. I saw an article the other day where a golfer with his cart ran into a walking golfer on the course. Golfer sued got $820,000 and I assume there is no basis to that $820,000.