The Misconstruction of the Deductions for Business and Personal Casualty Losses

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Jeffrey H. Kahn


Losses suffered on an individual’s personally used property generally are not deductible. Even after the changes made by the 2017 Tax Cuts and Jobs Act, in two circumstances an exception to this rule applies when “such losses arise from fire, storm, shipwreck, or other casualty, or from theft.” The principal issue that arises is determining the meaning of the term “other casualty.” Taking what they deemed to be the common elements in the three explicitly identified casualties, the courts and the Internal Revenue Service determined that an event will qualify as an “other casualty” only if it is “sudden,” “unusual,” and “unexpected.”

This current definition of “other casualty” does not support the appropriate purpose of that provision. Applying this incorrect standard leads to unfair results in that the courts and the Service disallow deductions for some losses that should be deductible. Instead, courts and the
Service should look to the purpose of allowing a casualty and theft loss deduction. The key issues are whether a loss of property as a result of an outside force constitutes a personal consumption and whether the event causing the loss is one that is part of the ordinary vicissitudes of life. If not, allowing a deduction complies with the congressional purposes for allowing one in the two circumstances in which the deduction is currently allowed.

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