From the Archives – Casualty Loss Dies in Tax Court

It’s the heat of tax season, plus Jason is working on finishing a manuscript for an upcoming continuing education seminar he is presenting at. Rather than make you wait for new posts, Jason has dug into the archives to pull out some of his personal favorites from days gone by.

This story comes from October, 14, 2011, and involves a taxpayer (an accountant!) who took a casualty loss deduction based on shaky, self-created estimates and an error-filled appraisal.

Casualty Loss Dies in Tax Court

A taxpayer’s attempt at claiming a casualty deduction of more than $40,000 based on self-created estimates and an error-filled appraisal was rejected in Tax Court yesterday.  The case shows the importance of proper documentation and valuation of the property.

The taxpayer is an accountant in Indiana.  His home and surrounding lot was damaged by a tornado, and the taxpayer took a casualty deduction on both his personal return and his business return.  The IRS rejected the business deduction and reduced the personal casualty loss portion to about $16,000.

The taxpayer had arrived at the casualty loss amount through his own calculations.  During the IRS audit, the taxpayer hired an appraiser to do an appraisal.  But the Court says the appraisal had problems:

The appraiser had not personally appraised the property before the damage occurred and relied on the statements petitioner made regarding its previous condition. The appraiser ultimately determined that the market value of the property before the tornado was $250,000 and after the tornado was $117,000. The appraisal report included numerous errors, including misstating the calculations for the pre-tornado value of the real property as totaling $220,000 and $240,000 at different points in the report.

The Court agreed with the IRS in disallowing most of the casualty deductions:

Although petitioner argues that he used a “sophisticated” appraisal method, his description of how he arrived at the values used is riddled with approximations that are not substantiated by any evidence other than petitioner’s flat assertions …. These self-serving estimates did not use any recognized method of real property valuation, are only conjecture, and do not justify petitioners’ casualty loss deduction beyond that allowed by (the IRS).

(P)etitioners offer as evidence an appraisal completed in November 2008. This appraisal, however, merely serves as a restatement of petitioners’ unsubstantiated estimates. The appraiser did not personally evaluate the property before the tornado damage and relied heavily on petitioner’s statements to justify the retrospective appraisal of the property …. The  information petitioner provided to the appraiser is extremely favorable to petitioners’ position as to the amount of the casualty loss and is not corroborated by any other evidence. We need not consider an expert’s opinion when that expert is merely an advocate for one of the parties. Furthermore, the appraisal report has numerous errors …. Such errors call into question the reliability of the appraisal, and thus the report does not provide adequate support for petitioners’ position.

Click here for the full Court ruling.

Further Dinesen Tax Times coverage of casualty and theft losses can be foundhere and here.