Professional Tax Research Solutions from the Founder of Kleinrock. tax and accounting research
Parker Tax Pro Library
Accounting News Tax Analysts professional tax research software Like us on Facebook Follow us on Twitter View our profile on LinkedIn Find us on Pinterest
federal tax research
Professional Tax Software
tax and accounting
Tax Research Articles Tax Research Parker's Tax Research Articles Accounting Research CPA Client Letters Tax Research Software Client Testimonials Tax Research Software Federal Tax Research tax research


Accounting Software for Accountants, CPA, Bookeepers, and Enrolled Agents

CPA Tax Software

        

 

No Casualty Loss Deduction Allowed for Payments to Repair Collapsed Retaining Wall

(Parker Tax Publishing August 2016)

The Tax Court held that because the collapse of a retaining wall was due to progressive deterioration that had begun at least 20 years before the wall's collapse, the owner of a co-op was not entitled to a casualty loss deduction for amounts paid to fix the wall. The court rejected the taxpayer's argument that the collapse of the wall was due to excessive spring rain which overstressed a recently installed drainage system and caused rapidly accelerating movement in the wall in the four weeks immediately preceding the collapse. Alphonso, T.C. Memo. 2016-130.

Background

Christina Alphonso is a tenant-stockholder of Castle Village Owners Corp., a New York cooperative housing corporation (i.e., co-op). Castle Village owns a tract of land in Manhattan on which five high-rise residential buildings sit. Before May 12, 2005, the grounds near those five Castle Village apartment buildings were supported by a retaining wall of stone masonry construction that had been built between 1921 and 1925. Before May 12, 2005, the retaining wall in question ran parallel to Riverside Drive for approximately 800 feet and had an average height of 65 feet.

In 1985, Castle Village retained an engineer to perform an inspection of the retaining wall. In a letter to Castle Village, the engineer indicated that a portion of the retaining wall showed signs of movement and instability and that several cracks were observed and that relief drains appeared not to function properly. For the next 20 years, various engineering and architectural firms were hired to address issues with the retaining wall. There were two documented times when work was performed either directly on the wall or close to the wall - the installation of rock anchors/bolts in 1986 and drainage modifications beyond the top of the wall in 2004.

On May 12, 2005, a 150-foot portion of the retaining wall collapsed onto Riverside Drive. The various consultants whom Castle Village had retained over the previous 20 years had reported their findings about the retaining wall in numerous letters, reports, proposals, and/or memoranda sent to Castle Village. Most of the major problems in and around the retaining wall that those consultants had observed and described in those respective documents were observed in and around the 150-foot section of the retaining wall that collapsed.

On her 2005 Form 1040, Alphonso reported a casualty loss of $26,390 and, after making reductions required by Code Sec. 165(h)(1) and (2) (relating to the dollar limitation per casualty and the limitation on the deductible amount), she claimed a casualty loss deduction of $23,188. The IRS disallowed the deduction.

Losses Deductible as Casualty Losses

Under Code Sec. 165(a), (c) and (h), an individual can deduct 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. A loss is treated as sustained during the tax year in which the loss occurs, as evidenced by closed and completed transactions and as fixed by identifiable events occurring in such tax year. As defined in Code Sec. 165(c)(3), the term "other casualty" refers to an event that shares characteristics with a fire, storm, or shipwreck. A casualty is an event which is due to a sudden, unexpected, or unusual cause.

In Fay v. Helvering, 120 F.2d 253 (2d Cir. 1941), the Second Circuit held that the progressive deterioration of property through a steadily operating cause is not a casualty. The Tax Court, in Carlson v. Comm'r, T.C. Memo. 1981-702, held that a collapse, even one that occurs suddenly, is not a casualty when the collapse is caused by progressive deterioration. Similarly, in Hoppe v. Comm'r, 42 T.C. 820 (1964), the Tax Court held that a loss that is accelerated by a contributing factor such as rain or wind is not a casualty if the loss is caused by progressive deterioration.

However, in Helstoski v. Comm'r, T.C. Memo. 1990-382, the Tax Court held that the taxpayers sustained a casualty loss when a storm caused a dam to fail, which resulted in damage to the taxpayers' property and a decrease in the fair market value of the property. The court rejected the IRS's contention that the cause of the damage was gradual erosion of the earth that occurred over a period of years.

Alphonso I

In Alphonso v. Comm'r, 136 T.C. 247 (2011) (Alphonso I), the Tax Court initially denied Alphonso's casualty loss deduction on the grounds that Alphonso held no property interest in the cooperative's grounds sufficient to entitle her to the deduction. She appealed to the Second Circuit, arguing that her right to use the grounds and to exclude persons who are not tenants or the guests of tenants, coupled with her obligations as a tenant-stockholder under the cooperative lease, constituted a property interest in the land sufficient to entitle her to the casualty loss deduction. In Alphonso v. Comm'r, 2013 PTC 17 (2d Cir. 2013), the Second Circuit agreed with Alphonso and vacated the Tax Court's holding and remanded the case back to the Tax Court. According to the Second Circuit, under New York law, Alphonso's right to use the grounds, shared with other residents of Castle Village and their respective guests but not with anyone else, was a property interest in the grounds.

Alphonso's Arguments

Before the Tax Court, Alphonso argued that the cause of the collapse of the retaining wall was excessive rainfall during the months of January through May 2005, which overstressed the recently installed drainage system (i.e., the 2004 drainage modifications) and caused rapidly accelerating movement in the wall in the four weeks immediately preceding the collapse. Proceeding from that core contention, Alphonso argued that the Tax Court's decision in Helstoski supported her position that the collapse of the retaining wall was a casualty within the meaning of Code Sec. 165(c)(3).

Tax Court's Decision

The Tax Court disagreed with Alphonso and held that the collapse of the retaining wall was not a casualty within the meaning of Code Sec. 165(c)(3) and thus Alphonso was not entitled to a casualty loss deduction. According to the court, the cause of the collapse of the retaining wall was due to a progressive deterioration in and around that wall that had begun at least 20 years before the wall's collapse on May 12, 2005. The court found that although the spring 2005 rainfall and the 2004 drainage modifications may have been contributing factors to the particular time at which the retaining wall collapsed, they did not cause that collapse.

With respect to Alphonso's reliance on the decision in Helstoski, the court said that reliance was misplaced. The court found the facts in Helstoski with respect to the cause of the failure of the dam and the loss to the taxpayers' property to be materially distinguishable from the facts dealing with the cause of the collapse of the retaining wall and the loss to Alphonso's property value.

For a discussion of casualty losses, see Parker Tax ¶84,505.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com


Professional tax research

We hope you find our professional tax research articles comprehensive and informative. Parker Tax Pro Library gives you unlimited online access all of our past Biweekly Tax Bulletins, 22 volumes of expert analysis, 250 Client Letters, Bob Jennings Practice Aids, time saving election statements and our comprehensive, fully updated primary source library.

Parker Tax Research

Try Our Easy, Powerful Search Engine

A Professional Tax Research Solution that gives you instant access to 22 volumes of expert analysis and 185,000 authoritative source documents. But having access won’t help if you can’t quickly and easily find the materials that answer your questions. That’s where Parker’s search engine – and it’s uncanny knack for finding the right documents – comes into play

Things that take half a dozen steps in other products take two steps in ours. Search results come up instantly and browsing them is a cinch. So is linking from Parker’s analysis to practice aids and cited primary source documents. Parker’s powerful, user-friendly search engine ensures that you quickly find what you need every time you visit Our Tax Research Library.

Parker Tax Research Library

Dear Tax Professional,

My name is James Levey, and a few years back I founded a company named Kleinrock Publishing. I started Kleinrock out of frustration with the prohibitively high prices and difficult search engines of BNA, CCH, and RIA tax research products ... kind of reminiscent of the situation practitioners face today.

Now that Kleinrock has disappeared into CCH, prices are soaring again and ease-of-use has fallen by the wayside. The needs of smaller firms and sole practitioners are simply not being met.

To address the problem, I’ve partnered with a group of highly talented tax writers to create Parker Tax Publishing ... a company dedicated to the idea that comprehensive, authoritative tax information service can be both easy-to-use and highly affordable.

Our product, the Parker Tax Pro Library, is breathtaking in its scope. Check out the contents listing to the left to get a sense of all the valuable material you'll have access to when you subscribe.

Or better yet, take a minute to sign yourself up for a free trial, so you can experience first-hand just how easy it is to get results with the Pro Library!

Sincerely,

James Levey

Parker Tax Pro Library - An Affordable Professional Tax Research Solution. www.parkertaxpublishing.com

    ®2012-2017 Parker Tax Publishing. Use of content subject to Website Terms and Conditions.

IRS Codes and Regs
Tax Court Cases IRS guidance