TaxProf Blog

Editor: Paul L. Caron, Dean
Pepperdine University School of Law

Tuesday, September 26, 2017

Kahn: The Business And Personal Casualty Loss Deductions

Florida Tax Review  (2015)Jeffrey H. Kahn (Florida State), The Misfortune of the Deductions for Business and Personal Casualty Losses, 21 Fla. Tax Rev. ___ (2017):

Losses suffered on an individual’s personal property generally are not deductible. One exception to this rule applies when “such losses arise from fire, storm, shipwreck, or other casualty, or from theft.” The principal issue that arises is determining the meaning of the term “other casualty.” Taking what they deemed to be the common elements in the three explicitly identified casualties, the courts and the Internal Revenue Service determined that an event will qualify as an “other casualty” only if it is “sudden, unusual and unexpected.”

This current definition of “other casualty” does not support the appropriate purpose of that provision. Applying this incorrect standard leads to unfair results in that the courts and Service disallow deductions for some losses that should be deductible. Instead, courts and the Service should look to the purpose of allowing a casualty and theft loss deduction. The key issues are whether a loss of property as a result of an outside force constitutes a personal consumption and whether the event causing the loss is one that is part of the ordinary vicissitudes of life. If not, allowing a deduction complies with the congressional purposes for allowing one.

While most scholarship concerning the casualty and theft loss deduction is on personal losses, the definition of “other casualty” can be important to business and investment losses as well. The determination that a business or investment loss did or did not occur as a result of a casualty can affect the timing and characterization of the deduction of that loss. Whatever definition is adopted for personal losses purpose should not be used to determine the timing and realization of a business or investment loss because the role of the casualty characterization in applying the realization requirement is very different. There has been little, if any, commentary on those issues and a major contribution of this piece is to shed light on them.

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