Tax Research Memorandum

Date: September 8, 2014
To: John Smith
From:
Subject: Casualty Losses

Summary of Facts

John Smith and his girlfriend are at a party. John has several drinks with the understanding his girlfriend will be the designated driver. At the party, the couple has a fight and John’s girlfriend leaves with her friends. Knowing he has had too much to drink, John takes a two hour nap before he drives home. On his way home, he loses control of his vehicle and totals his brand new $50,000 BMW. When the police arrive, they administer a breathalyzer test. John’s blood alcohol level is .12, which is over the .08 limit set by the state. As a result, John receives a DUI. Due to the DUI, his insurance will not pay anything to replace his car.

Issue

Is John entitled to a casualty deduction for the cost of his car?

Law and Analysis

IRC §165(a) generally allows a deduction for “any loss sustained during the taxable year and not compensated for by insurance or otherwise.” However, under§165(c), a limitation on losses of individuals is imposed. The deduction is limited to “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 casualty, or from theft.” The key term in this deduction limitation is casualty.

In Justin M. Rohrs v. Commissioner, TC Summary Opinion 2009-190, Rohrs buys a new Ford F-350 pickup truck for $40,210.65 in August 2005. On October 28, 2005, Rohrs attends a party at a friend’s house. Knowing that he would be drinking, Rohrs arranged for transportation to and from his house. Once Rohrs arrived home, he decided to drive to his parents’ house. On the way to his parents’ house, Rohrs failed to negotiate a turn successfully and slid off an embankment. The truck was severely damaged as a result. The police performed a breathalyzer test and discovered Rohrs’ blood alcohol level was .09, which was above the legal limit in California. Rohrs was given a DUI, and his loss claim filed with the insurance company was denied due to the DUI. Rohrs filed a casualty loss deduction for his new truck.

In the above case, the facts are similar to the case of John Smith. The court in Rohrs decided that Rohrs was entitled to the claimed casualty loss deduction. The court decided this because the manner in which Rohrs drove did not suggest he was consciously indifferent to the hazards of drunk driving. Rohrs took precautions such as setting up transportation and also allowed time for his body to process the alcohol before driving to his parents’ house and was not negligent. Also, there was no evidence that excess speed or alcohol directly caused the accident.

Conclusion

Based on §165(a) of the IRC, any loss can be deducted if the loss is not compensated by the insurance company. Furthermore, the ruling in Rohrs holds that the casualty loss deduction can be claimed under the circumstances. Thus, John Smith is entitled to a casualty deduction for the cost of his car of $49,900. However, the ruling and opinion in Rohrs cannot be treated as precedent for any other case in the future. Also, it is important to note that the casualty loss deduction will be limited by a $100 threshold per loss event and an overall threshold of 10% of your adjusted gross income.