Posted by: captainfalcon | November 9, 2011

Amusing Tax Case

§ 165(a) of the IRC allows deductions for “any loss sustained during the taxable year and not compensated for insurance or otherwise.” § 165(c) limits such deductions to (inter alia) “lossess of property . . . if such losses arise from fire, storm, shipwreck, or other casualty, or from theft.”

The material facts in Blackman v. Commissioner: “[O]n September 2, 1980, the petition . . . went to his former home [which petitioner still owned]. He wanted to ask his wife whether she wanted a divorce. They quarreled, and Mrs. Blackman left the house. After she left, the petitioner gathered some of Mrs. Blackman’s clothes, put  them on the stove, and set them on fire. The petitioner claims that he then “took pots of water to dowse the fire, put the fire totally out” and left the house. The fire spread . . . When the firefighters arrived, they found some of the clothing still on the stove. The house and its contents were destroyed.” After his insurance declined to honor his claim, “On his 1980 Federal income tax return, the petitioner deducted as a casualty loss $97,853 attributable to the destruction of his residence and its contents.”

The language of § 165, which does not limit deductions to casualty losses arising from certain kinds of conduct, seems to allow the deduction. Following various earlier decisions, the court carved a public policy exception to it. Their holding: “We refuse to encourage couples to settle their disputes with fire.”


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