Home Owners Beware of Casualty Losses
In a recent tax court memo TC 2016-130 “Alphonso” held that a stockholder in a residential cooperative housing corporation failed to show that the damage from a collapsed retaining wall on the co-op’s premises was a deductible casualty loss and not a nondeductible loss caused by gradual deterioration.
Alphonso, TC Memo 2016-130
An individual taxpayer may deduct losses of property not connected with a trade or business or a transaction entered into for profit, if such losses arise from fire, storm, shipwreck, or other casualties. Generally, only the owner of the property damaged by a casualty is entitled to a deduction for a casualty loss sustained to that property. Where a taxpayer has a leasehold interest in property that is damaged by a casualty, the taxpayer is entitled to deduct a casualty loss sustained to that leasehold interest.
Court decisions and revenue rulings have developed the overall concept that the term “casualty” refers to an identifiable event of a sudden, unexpected, or unusual nature. Suddenness is an essential element of a casualty. To be sudden, the event must be one that is swift and precipitous and not gradual or progressive. Progressive deterioration of property through a steadily operating cause isn’t a casualty loss.
In Helstoski, TC Memo 1990-382 , the Tax Court held that a taxpayer could claim a casualty loss where rain damage caused a dam on the taxpayer’s pond to collapse, draining the pond and washing away the access road.
Christina Alphonso owned stock in Castle Village (CV), a cooperative housing corporation that owned land and buildings located in upper Manhattan. In 2005, a retaining wall that CV owned collapsed, causing substantial damage. CV levied an assessment against each of its stockholder-tenants to repair the damage, and Alphonso’s portion of the assessment came to $26,390, which she paid. On her 2005 income tax return, Alphonso claimed the $26,390 assessment as a casualty loss.
IRS disallowed the claimed 2005 casualty loss deduction on the ground that the collapse of the retaining wall was a result of gradual weakening, and therefore didn’t constitute a casualty. Based upon the record, the Court found that the taxpayer failed to carry her burden of showing that the cause of the collapse of the retaining wall was the excessive rainfall. The Court further found that although the spring 2005 rainfall and the 2004 drainage modifications may have been contributing factors to the particular time at which the retaining wall collapsed, they did not cause that collapse. The cause of the collapse was progressive deterioration in and around that wall that had begun at least 20 years before that collapse occurred on May 12, 2005.
The information contained herein is not necessarily all inclusive, does not constitute legal or any other advice, and should not be relied upon without first consulting with appropriate qualified professionals.
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