Memorandum-to-the-File
Date: April 26, 2000
From: Marc J. LeClere
Re: Jeff Andrews’ Casualty Loss
In the
process of clearing dry brush around his home, Jeff Andrews set fire to the
brush in order to speed up the task. He
had a fire extinguisher on hand. The
fire got out of control and burned down his house and his neighbor’s
house. Two children in the neighbor’s
house died of smoke inhalation. He was
charged with negligent homicide and the trial is pending. The fair market value of the house was
$1,000,000, his basis is $800,000, and the insurance company has refused to
compensate for the loss.
The issue is whether the casualty loss is deductible
or non-deductible.
Treas. Reg.
Sec 1.165-7(a)(3)(i) states that damage to automobiles is deductible provided
that the damage is not due to the ‘willful act’ or ‘willful
negligence‘ of the taxpayer. In Blackman
v. Commissioner of Internal Revenue, 88 T.C. No. 38, a taxpayer, who burned
down his house in the process of setting fire to his wife’s clothes, was denied
a casualty loss deduction because he was ‘grossly negligent’ in his
efforts to douse the fire. Heyn v.
Commissioner of Internal Revenue, 46 T.C. 302, 308 (1966), states that ‘foreseeability’
and ‘negligence’ are not grounds for the denial of a casualty loss
deduction and that in the absence of ‘gross negligence’ casualty losses
are deductible.
Analysis
The
Heyn case provides support that the loss is a deductible casualty loss
even if it was caused by the taxpayer’s negligence. But the case and Treas. Reg. Sec 1.165-7(a)(3)(i) appear to
provide authority that if the loss is caused by gross negligence or by a
willful act or willful negligence of the taxpayer, the loss is not deductible.
Until
the court issues a decision with respect to the taxpayer’s responsibility and
level of negligence, a resolution of the issue is unclear. The taxpayer can either claim the loss in
the current year and amend the return if he is deemed to be ‘grossly negligent’
or he could not claim the loss in the current year and file an amended return
if the court holds that he is not ‘grossly negligent’.