Income Tax Memo

September 28, 2010

TAX FILE MEMORANDUM

FROM: Me

SUBJECT: Taxpayer

Engagement: Conclusions

Section 165(a) provides that there shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise. Beatrice, having stated that the hose connecting the washing machine and sink had burst and caused flooding, cannot take a casualty loss for Federal Income Tax purposes on the washing machine or sink. As the noted in Revenue Ruling 70-91, 1970-1 CB 37, "since the rust and corrosion of the water heater itself was gradual and progressive, its loss is not a casualty within the meaning of section 165(c)(3) of the Internal Revenue Code of 1954.

Furthermore, section 165(c)(3) provides in the case of an individual, the deduction under subsection (a) shall be limited to 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, or from theft. Therefore, damage to the carpets and furniture resulting from the flooding event, because of the suddenness in nature, fixing a point at which the loss to the damaged property can be measured, and was also unexpected or unusual in nature, can be claimed as a casualty loss.

The amount of the damage can be claimed as the lesser of either (1) the difference between the fair market value of the property immediately before and immediately after the casualty, or (2) the adjusted basis of the property. Further limitations on the casualty claim are provided in section 165(h). Section 165(h)(1) provides that the casualty can only be claimed is the amount is greater than $100 for the taxable years beginning after December 31, 2009. Sections 165(h)(2) provides that (A) In