Lessons on Casualty Losses From the O.J. Case and Others

Most of you probably don't think tax law qualifies as a good read.

And the Tax Court does indeed rule on some mind-numbing minutiae. But it also serves as a highly entertaining record of what taxpayers try to get away with -- and often do get away with.

The tax code allows you to claim casualty and theft losses that are not covered by insurance as an itemized deduction. And it's in the gray area of what constitutes a casualty loss that makes for some good Tax Court reading. The Internal Revenue Service has disallowed many a casualty loss under its strict definition, while the Tax Court has often proved more generous. (These cases come courtesy of the ubiquitous J.K. Lasser's Your Income Tax 2003.)

To be deductible as a casualty loss, property must be damaged or destroyed as the result of a sudden, unexpected or unusual event. That may sound obvious, but the IRS takes those terms quite literally. To be "sudden," the event must be swift, not gradual or progressive. A swarm of southern pine beetles that destroys your trees in five to 10 days counts as sudden, the court says. But a swarm of termites that eats a hole in your garage door is not, because termite damage requires years of infestation.

Ring Rules

Unexpected or unusual events must truly be unforeseen -- a result of pure chance or natural disaster that can't be anticipated under ordinary circumstances. While tornadoes, earthquakes and even vandalism from riots or other civil disorders clearly meet these criteria, it's the more mundane losses of everyday life that cause some dispute.

Mr. White accidentally slammed the car door on his wife's hand. In pain, she shook her hand vigorously. A diamond flew out of her ring's setting, which was loosened by the impact. The diamond was never found. The IRS disallowed the deduction, contending that a casualty loss requires a cataclysmic event. The Tax Court disagreed. A deductible casualty loss occurs whenever an accidental force is exerted against property, and its owner is powerless to prevent the damage because of the suddenness. The IRS has accepted the decision. -- J.K. Lasser's Your Income Tax

Apparently the Tax Court has seen its fair share of taxpayers destroying wedding rings. Mrs. Kane dropped her ring in a glass of ammonia in order to clean it. Alas, it wasn't long before Mr. Kane emptied the glass into the sink and started the automatic garbage disposal. The ring was crushed. According to J.K. Lasser's, the court allowed a full deduction for the loss, saying it didn't matter if Mr. Kane was negligent; the loss of the ring resulted from a destructive force.