Friday, July 22, 2016
No loss deduction available for retaining wall collapse
No loss deduction available for retaining wall collapse Few laws make as little sense as tax law. In another example of a quirky tax law, the case of Alphonso v. Comm., T.C. Memo 2016-130 (TC Memo 2016) exposes a most peculiar tax law. This quirk in the law says that a sudden collapse of a building or in this case a retaining wall is deductible but an undetected deterioration followed by a collapse is not deductible. The Tax Court in Alphonso found that the taxpayer failed to show that the damage from a collapsed retaining wall was a deductible casualty loss and not a nondeductible loss caused by gradual deterioration. The IRS disallowed the casualty loss deduction stating that the collapse of the retaining wall was a result of gradual weakening, and therefore didn't constitute a casualty loss under Code Sec. 165(c)(3). The Tax court concluded that the collapse of the retaining wall in question wasn't a casualty within the meaning of Code Sec. 165(c)(3). The taxpayer wasn't entitled to claim any loss with respect to that collapse. Under Code Secs. 165(a) and (c)(3), a taxpayer may deduct losses if such losses arise from fire, storm, shipwreck, or other casualty. Prior rulings have stated that the term "casualty" refers to an identifiable event of a sudden, unexpected, or unusual nature. See Rev. Rul. 76-134 and suddenness is an essential element of a casualty. See Rev. Rul. 61-216,and Rev. Rul. 72-592. The rulings further describe that to be considered as sudden, the event must be one that is swift and precipitous and not gradual or progressive. Rev. Rul. 72-592. And on point is I.R.S. Pub. 17 which states that progressive deterioration of property through a steadily operating cause is not a casualty loss. In this case, Christina Alphonso owned stock in Castle Village a cooperative housing corporation that owned land and buildings located in upper Manhattan. The retaining wall suddenly collapsed causing substantial damage. The taxpayer then claimed a casualty loss. The U.S. Tax Court found that the taxpayer failed to carry her burden of proof of showing that the cause of the collapse of the retaining wall was excessive rainfall. The Court further found that although the rainfall may have been a contributing factor to the particular time at which the retaining wall collapsed, they did not cause that collapse. The cause of the collapse was progressive deterioration in and around that wall that had begun at least 20 years before that collapse occurred. The case boiled down to a battle of the expert witnesses over the cause and the court found the Government’s witness more compelling.