Date: 27 April 2001
From: Dave Anderson
Re: The (dis)allowability of a casualty
loss deduction for the loss of Jeff Andrews’ home
On
June 1, 2000, Jeff Andrews was clearing dry brush from behind his Malibu home in
California. He became frustrated with how long it was taking using his
clippers. He decided instead to light the brush on fire believing this would be
safe because it was an overcast day. Jeff brought out a fire extinguisher in
case the fire got out of control. Unfortunately, some wind kicked up and fanned
the fire out of control. The fire completely consumed both his and his
neighbor's house. The two children staying in the neighbor's house died of
smoke inhalation. The taxpayer was charged with negligent homicide.
Jeff
Andrews wishes to take a casualty loss deduction for the loss of his house
which was worth an estimated $1,000,000 at the time of the fire. He purchased
the home for $800,000 two years earlier. His insurance company has refused to
compensate for the loss under the circumstances. Jeff is currently out on bail.
The
issue is whether or not Jeff Andrews can claim a casualty loss deduction for
the loss of his home.
The activity of setting fire may be a violation of the Federal Clean Air Act, as well as the statutes set forth by the California Air Resources Board, in which case, the presiding judge may disallow a deduction claim based on these laws. Judge Simpson stated in Biltmore Blackman v. Commissioner, 88 T.C. No. 38 (1987), “Courts have traditionally disallowed business expense and casualty loss deductions under §162 or §165 where national or State public policies would be frustrated by the consequences of allowing the deduction”.
Furthermore, in Commissioner v. Heininger, 320 U.S. 467 (1943), the petitioner is not entitled to a deduction for the damage caused by his fire1.
Arguments
in favor of claiming a casualty loss deduction and an opinion regarding
Biltmore Blackman v. Commissioner, 88 T.C. No. 38
However,
in Anderson v. Commissioner, 17 AFTR 369 (81 F.(2d)
457), 01/18/1936, the taxpayer was not disallowed a casualty deduction
under §165(a) because of his "negligence".
The Biltmore Blackman case may be used against Jeff Andrews because of its similarity, but there is a distinct difference. In the case, the presiding Judge Simpson disallowed Biltmore Blackman’s petition to deduct a casualty loss under §165(a) and (c)(3) due to the fact that his actions subsequent to the fire that he started was “grossly negligent, or worse”. Judge Simpson found “no evidence to corroborate the petitioner’s claim that he attempted to dowse the flame”. He went on to say, “Once a person starts a fire, he has an obligation to make extraordinary efforts to be sure that the fire is safely extinguished, and this petitioner has failed to demonstrate that he made such extraordinary efforts. The house was a foreseeable consequence of setting the clothes [on] fire … his grossly negligent conduct bars him from deducting the loss claimed by him under §165(a) and (c)(3)”, Biltmore Blackman v. Commissioner, 88 T.C. No. 382.
The
difference with Jeff Andrews’ case is that I do not see gross negligence.
With his observation of an overcast sky, he determined that fire conditions
were not very favorable. Furthermore, he kept a fire extinguisher at his side
in the event that “the fire got out of control”.
In
my opinion, due to the lack of gross negligence, it is possible that the
courts will vote in Jeff Andrews’ favor. In returning to the case of Anderson
v. Commissioner of Internal Revenue, 17 AFTR 369 (81
F.(2d) 457), 01/18/1936, where Anderson, the petitioner, made a casualty loss
deduction from the damages not covered by insurance, which the Commissioner
denied, the U.S. Court of Appeals, 10th Circuit, held
that the petitioner was entitled to the casualty loss deduction for the
accident caused by his negligent driving. Even though the setting of brush
fires and negligent driving are not completely analogous, they are nonetheless,
similar when the element of negligence is focused upon. Also, Treasury
Regulation §1.165-7(a)(3) states regarding automobile driver negligence, “a
casualty loss occurs when an automobile owned by the taxpayer is damaged and
when: (i) the damage results from the faulty driving of the taxpayer … but is
not due to the willful act or willful negligence of the taxpayer”.
Regarding the test of “suddenness”, “unexpectedness”, and
“unusualness”, I anticipate that the Commissioner will stipulate that they are
not an issue.
Conclusion
If
Mr. Andrews claims the deduction, the IRS will not allow it, but if he
petitions the tax court, he may win. It’ll be a costly uphill battle with everything
going against him including public opinion. I recommend that Jeff Andrews seek
legal tax counsel regarding this issue before
going any further.
1 I cannot confirm the accuracy of this summary because I cannot find the case through Taxbase.
2 If you view Biltmore
Blackman v. Commissioner through the “Summary Provided by Tax Analysts, 1987
TNT 57-10”, notice that this statement is inaccurate: “SETTING FIRE TO YOUR OWN
HOME, EVEN IF YOU DID NOT MEAN TO BURN IT DOWN, IS NOT A DEDUCTIBLE CASUALTY LOSS”
(emphasis retained).
In my opinion, an intern wrote this, and his unofficial editor failed to
confirm its accuracy in summarizing the case.