I have stayed away from
talking about casualty losses.
To be fair, one needs to distinguish
business casualty losses from personal casualty losses. Business casualties are
still deductible under the Code. Personal casualties are not. This change occurred
with the Tax Cut and Jobs Act of 2017 and is tax law until 2025, when much of
it expires.
This is the tax law that
did away with office-in-home deductions, for example. Great timing given that
COVID would soon have multitudes working from home.
It also did away with
personal casualty losses, with an exception for presidentially - declared
disaster areas.
Have someone steal your personal
laptop. No casualty loss. Accident with your personal car? No casualty loss. Lost
your house during the storms and tornados in western Tennessee at the end of
March 2023? That would be a casualty loss because there was a presidential
declaration.
I consider it terrible tax
law, but Congress was primarily concerned about finding money.
I am reading a case that involves
casualty losses. Two, in fact. The Court included several humorous flourishes
in its decision.
Let’s go over it.
Thomas Richey and his
wife Maureen Cleary bought a second home in Stone Harbor on Cape May in the
south of New Jersey. The house was on the waterfront with access to the open
ocean. They also bought a 40-foot boat.
Sounds nice.
In 2017 storm Stella hit.
Richey and Cleary claimed
casualty losses totaling over $820,000 on their 2017 tax return.
That will catch
attention.
Here is the Court:
Such a large loss - one that caused them to reduce their adjusted gross income of more than $850,000 to a taxable income of zero – bobbed into the Commissioner’s view, and he selected their return for audit.”The Commissioner did more than select the return; he denied the casualty loss deduction altogether.
Richey and Cleary
petitioned the Tax Court.
Yep. Had to.
Whereas they lived in
Maryland (remember: New Jersey was their second home), they petitioned the
Court for trial in Los Angeles.
I do not get the why. Very little upside. Possible massive downside.
We added the case to one of our trial calendars for Los Angeles, but on the first day of that session neither petitioner showed up.”
Uh, Richey …?!
We postponed trial for a day to enable Richey to testify via Zoom.”
Richey explained that he
learned about the trial only a week before, and even then, no one gave him
specific details.
We do not find this credible ….”
This could have started better.
The couple’s case began taking on water right at the start…”
The Court seemed amused.
Back to business, Richey. Let’s first establish that a casualty occurred.
He testified that he had taken pictures of the damage to both boat and home on his phone shortly after the storm.”
Good.
He explained, however, that a later software update to his phone deleted them.”
Seriously?
That left him to introduce only photographs of the house taken … nearly a year after the storm hit and after reconstruction had already begun.”
A year? Were you that busy?
These photographs depict no visible damage other than that which one might see at any construction site, and we could see nothing that showed damage that we could specifically attribute to the storm. “
Richey, I have a question for you.
… we did not find Richey’s testimony, standing alone, credible on this point.”
Have you seen John Wick?
As for the boat, the couple introduces a photograph of what the boat looked like before the storm, but nothing to show what it looked like afterwards. The couple also gave us no receipts for any boat repairs.”
Tell me the truth: did
you do something to this judge’s dog?
Whom are we to believe?”
Richey, this is legal-speak
for “we do not believe you.”
OK, we are going to have to lean double hard on the appraisals. Those involve third parties, so maybe we can get the Court to back off a bit.
Richey and Cleary did not get an appraisal of their own home valuing it before and after the storm.”
And may I ask why, Richey?
Richey instead consulted a real-estate agent who provided them with Multiple Listing Service (MLS) printouts of other people’s homes. This is a problem for many different reasons.”
You think?
The first … is that he didn’t talk to this agent until after the audit had begun.”
I have an idea, Richey,
but it’s a long shot.
It is not impossible for a homeowner to conduct an appraisal himself …”
Richey, go improv. You live in Cape May. You know the prices. You know the damage the storm wrought. Make the Court believe you. Sell it.
They also produced no evidence of their awareness of market conditions in Stone Harbor. What we got were photographs of MLS printouts.”
You are a man of commitment and sheer will, Richey.
We infer from Richey’s having to reach out to an agent to give him such comparables an unspoken admission that he is not qualified to conduct an adequate appraisal on his own.”
I am familiar with the parlance, Richey.
If the absence of proof of damage causes the couple’s case to founder, the absence of proof on valuing that damage causes it to sink altogether.”
Well, that’s that. Maybe
we can get something on the boat.
Richey and Cleary fare no better on the loss they claim for their boat.”
Richey, walk out of here with your pride intact.
All these attacks by the Commissioner have picked completely clean the flesh of their claimed deduction.”
Richey, just walk out of
here.
Richey’s first mistake
was scheduling a Tax Court hearing in Los Angeles. That led to the disastrous
failure-to-show, which clearly angered the Court. The Court felt they were
being lied to, and they never relented. The lack of an appraisal – while not
necessarily having to be fatal – was fatal in this case. Richey was unable to
persuade the Court that he had the experience or expertise to substitute for an
appraisal.
Sometimes the Court will
carry water for a petitioner who is underprepared. We have reviewed a couple of
these cases before, but that beneficent result presupposes the Court likes the
person. That was not a factor here.
Our case this time was Richey
and Cleary v Commissioner, T.C. Memo 2023-43.
