Tax Research Exercise

In: Business and Management

Submitted By rytite
Words 585
Pages 3
Tax Research Memorandum

Date: September 8, 2014
To: John Smith
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.


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…...

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