Friday, March 11, 2011
In Whitney v. Commissioner, 13 T.C. 897, 899 (1949), this Court observed that "the losses allowable under § 23(e)(3) [a predecessor to § 165] are specifically limited to losses of property arising from casualty, and damages paid for injuries and wrongful death are plainly without the provisions of the statute." (Emphasis added.) This Court has consistently held that settlement payments which result from automobile accidents do not constitute deductible casualty losses. Tarsey v. Commissioner, 56 T.C. 553 (1971); Dickason v. Commissioner, 20 B.T.A. 496 (1930); Mulholland v. Commissioner, 16 B.T.A. 1331 (1929); Peyton v. Commissioner, 10 B.T.A. 1129 (1928); Hall v. Commissioner, T.C. Memo. 1980-485.
The Pangs maintain, however, that their $250,000 settlement payment is deductible under § 165(c)(3) as a casualty loss because Webster's Dictionary defines "casualty" as "[l]osses caused by death, wounds" and the accident victim's death in December 2002 was certainly a casualty.
This issue is resolved not by Webster's definition of "casualty" but by the Code's provisions for "casualty loss" quoted above. Moreover, the Pangs' position conflates two distinct things -- the victim's casualty (which occurred when he died in 2002) and the Pangs' financial loss (which occurred when they made their payment in 2004) -- and does not explain how the "casualty" of the victim results in a deductible "casualty loss" for the Pangs under § 165.
This Court has held that "physical damage or destruction of property is an inherent prerequisite in showing a casualty loss." Citizens Bank of Weston v. Commissioner, 28 T.C. 717, 720 (1957), affd. 252 F.2d 425 (4th Cir. 1958). ... As a result, to obtain the deduction the Pangs must demonstrate that the claimed casualty loss is attributable to physical damage to their property (e.g., damage caused to their vehicle during the accident). They have not done so -- and any damage to their property occurred in 2002, not 2004.
The Pangs' claimed loss is attributable not to property damage but to the monetary settlement of a wrongful death claim. To the extent the Pangs are arguing that the payment constitutes a loss of their property, we find that to be beyond the scope of § 165(c)(3). The term "losses of property" in § 165(c)(3) does not include a taxpayer's monetary payment to a third party or a decrease in the taxpayer's net worth
Update: Tax Update Blog, Tax Court: No Casualty Loss Deduction for Casualties You Inflict.