T.C. Summary Opinion 2002-23
UNITED STATES TAX COURT
ROBIN E. SCHMIDT, a.k.a. ROBIN E. TRIPALDI, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 7994-00S. Filed March 26, 2002.
Robin E. Schmidt, pro se.
Gary M. Slavett, for respondent.
GOLDBERG, Special Trial Judge: This case was heard pursuant
to the provisions of section 7463 of the Internal Revenue Code in
effect at the time the petition was filed. The decision to be
entered is not reviewable by any other court, and this opinion
should not be cited as authority. Unless otherwise indicated,
subsequent section references are to the Internal Revenue Code in
effect for the year in issue.
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In a notice of deficiency, respondent determined that
petitioner is liable for a deficiency in Federal income tax for
1995 of $2,953.
After concessions made by petitioner,1 the sole issue for
decision is whether petitioner is entitled to a casualty loss for
earthquake damage to her residence.
Some of the facts have been stipulated and are so found.
The stipulation of facts and the attached exhibits are
incorporated herein by this reference. At the time the petition
was filed, petitioner resided in Encino, California.
Background
In 1994, petitioner owned and resided in a condominium
located at 21901 Burbank Boulevard, #161, Woodland Hills,
California (the condominium), with her two minor children and her
companion, Richard Tripaldi (Mr. Tripaldi). Petitioner and Mr.
Tripaldi were married in 1996. The condominium was a trilevel
unit with three bedrooms, three bathrooms, and an attached
garage. On January 17, 1994, an earthquake occurred in
Northridge, California (Northridge earthquake). Immediately
after the Northridge earthquake petitioner, her children, and Mr.
Tripaldi moved out of the condominium and stayed at a hotel in
1
Petitioner concedes respondent’s disallowance of a
charitable contribution deduction of $187 and miscellaneous
itemized deductions of $1,195 claimed on her Schedule A, Itemized
Deductions, for 1995.
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Ventura County. After a few days at the hotel, they moved back
to the condominium. When petitioner returned to the condominium,
she found the place in disarray. Visible cracks in the walls
allowed sunlight to shine into the interior of the condominium
and the front door could not be closed. In May 1994, petitioner,
her children, and Mr. Tripaldi moved into a single-family home in
Woodland Hills (the home) about 1 mile away. After May 1994,
petitioner did not make any payments on the mortgage obligation
underlying the condominium. Petitioner received a letter from
CenFen Bank (CenFen), dated August 18, 1995, informing her that
her account “is seriously delinquent, and subject to immediate
foreclosure.” In a letter dated October 2, 1995, petitioner
filed a “hardship request” to postpone the foreclosure proceeding
on her condominium. On March 26, 1996, a Notice of Default and
Election to Sell Under Deed of Trust was filed against the
condominium, and foreclosure was completed on December 6, 1996.
After petitioner, her children, and Mr. Tripaldi moved to
their new home, petitioner attempted to rent the condominium but
was not able to find a tenant until November of 1994.
Before the Northridge earthquake, on June 30, 1993,
petitioner quitclaimed 50-percent ownership of the condominium to
Mr. Tripaldi. On August 29, 1994, Mr. Tripaldi quitclaimed his
ownership interest in the condominium back to petitioner.
According to testimony at trial, petitioner and Mr. Tripaldi
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entered into an arrangement where Mr. Tripaldi lent approximately
$30,000 to petitioner for the purchase of the home. The loan
obligation was to be secured by petitioner’s condominium. No
loan documents were created to memorialize the loan. In other
words, the parties’ intent was to enter into a secured loan
transaction by use of the 50-percent interest quitclaimed to Mr.
Tripaldi. As exhibited by the quitclaim deed, dated August 29,
1994, Mr. Tripaldi testified that he relinquished his “security
interest” in the condominium when petitioner purportedly
satisfied her loan obligation.
Petitioner filed and was granted an automatic extension of
time to file her 1995 Federal income tax return. Petitioner
timely filed her 1995 Federal income tax return, in which she
reported a casualty loss of $21,935.49 attributable to damage to
the condominium from the 1994 Northridge earthquake. Petitioner
attached to her 1995 return a four-page, single-spaced, itemized
list of necessary repairs to the condominium (repair list).
Petitioner based the repair list, categorized by the estimated
cost for damage which occurred in each room, from an itemized
list of repairs prepared by State Farm Insurance Co. (State
Farm), dated June 20, 1996. Petitioner did not make the repairs
or incur any repair expenses for items listed on the repair list
during 1995 or any other year.
On her 1994 Federal income tax return, petitioner claimed a
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casualty loss deduction of $51,029 for damage to her personal
property and fixtures to the condominium. Included in the
claimed casualty loss were the following homeowners association
fees:
Homeowners Association Emergency Assessment
(A Fund) Warner Village III $8,600
Homeowners Association Insurance Deductible
(B Fund) Warner Village III $4,000
Homeowners Association Insurance 10% Exclusion
(C Fund) Warner Village III $2,179
Respondent allowed petitioner’s casualty loss deduction for 1994,
and the above casualty loss is not in dispute in this case.
In the notice of deficiency, respondent disallowed
petitioner’s casualty loss deduction for 1995 because petitioner
failed to substantiate the amount of the purported casualty loss.
In the alternative, respondent contends that if the Court were to
decide that petitioner’s loss was substantiated, then the loss
was claimed in the incorrect year, and also that petitioner owned
50 percent of the Woodland Hills condominium, entitling her to
only 50 percent of the claimed loss.
Discussion
Section 165(a) generally allows a deduction for “any loss
sustained during the taxable year and not compensated for by
insurance or otherwise.” Individuals may deduct losses to
property caused by casualties such as earthquakes. Sec.
165(c)(3). The loss must exceed $100 and 10 percent of the
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individual’s adjusted gross income. Sec. 165(h)(1) and
(2)(A)(ii).
The regulations provide two methods of valuing a casualty
loss; namely, the decrease in fair market value or the cost of
repairs. Sec. 1.165-7(a)(2), Income Tax Regs. To be eligible
for a casualty loss deduction based on the decrease in the fair
market value, a taxpayer must prove (a) the fair market value of
the property immediately before and immediately after the
casualty, (b) the amount of insurance reimbursement, and (c) the
adjusted basis in the property. Helvering v. Owens, 305 U.S. 468
(1939); Lamphere v. Commissioner, 70 T.C. 391, 395-396 (1978);
Cornelius v. Commissioner, 56 T.C. 976, 979 (1971); sec. 1.165-
7(a)(2), Income Tax Regs.2
2
Sec. 1.165-7(a)(2), Income Tax Regs., provides:
(2) Method of valuation. (i) In determining the amount
of loss deductible under this section, the fair market
value of the property immediately before and
immediately after the casualty shall generally be
ascertained by competent appraisal. This appraisal
must recognize the effects of any general market
decline affecting undamaged as well as damaged property
which may occur simultaneously with the casualty, in
order that any deduction under this section shall be
limited to the actual loss resulting from damage to the
property.
(ii) The cost of repairs to the property damaged
is acceptable as evidence of the loss of value if the
taxpayer shows that (a) the repairs are necessary to
restore the property to its condition immediately
before the casualty, (b) the amount spent for such
repairs is not excessive, (c) the repairs do not care
(continued...)
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The cost of repairs may be considered if the taxpayer shows
that (a) the repairs are necessary to restore the property to its
condition immediately before the casualty, (b) the amount spent
for the repairs is not excessive, (c) the repairs are made only
to the damaged portion of the property, and (d) the repairs do
not cause the value of the property to exceed the value of the
property immediately before the casualty. Lamphere v.
Commissioner, supra at 395-396; Farber v. Commissioner, 57 T.C.
714, 719 (1972); sec. 1.165-7(a)(2)(ii), Income Tax Regs.
We note that in the instant case the claimed casualty loss
is based upon the itemized repair list attached to petitioner’s
1995 return. The parties stipulated that this repair list is
identical to the State Farm estimated repair list, dated June 20,
1996. The parties further stipulated that none of the repairs
were actually made, nor did petitioner expend any money for the
repairs. Simply put, petitioner made no repairs to her
condominium unit. According to Farber v. Commissioner, supra at
719, in order for a taxpayer to use the “cost of repair” method
of valuation, the taxpayer must first show that “actual repairs
and expenditures, not just estimates” were made. We stated in
Farber that “in cases where this Court has permitted the ‘cost of
2
(...continued)
for more than the damage suffered, and (d) the value of
the property after the repairs does not as a result of
the repairs exceed the value of the property
immediately before the casualty.
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repairs’ method to be used to ascertain the amount of the loss,
the repairs and expenditures were actually made * * * The use of
estimates has not been regarded as persuasive.” Id. at 719; cf.
Clapp v. Commissioner, 36 T.C. 905, 908 (1961), affd. 321 F.2d 12
(9th Cir. 1963); Harmon v. Commissioner, 13 T.C. 373, 382-383
(1949). Like the taxpayer in Farber, petitioner did not provide
the actual costs she incurred in repairing the condominium during
1995 because no repairs were made. Rather, the only evidence
submitted is the estimated cost of repair list compiled by State
Farm. Accordingly, we find that petitioner failed to
substantiate the claimed casualty loss deduction by the cost of
repair method of valuation.
Petitioner may use the decrease in fair market valuation
method to calculate the casualty loss; however, we have only
sparse testimony from petitioner and Mr. Tripaldi as to the value
of the condominium before or immediately after the Northridge
earthquake. Petitioner did not provide expert testimony,
appraisal reports, or other documents to corroborate her basis
for the fair market value. See sec. 1.165-7(a)(2), Income Tax
Regs. It is well settled that we are not required to accept a
taxpayer’s self-serving testimony in the absence of corroborating
evidence. Niedringhaus v. Commissioner, 99 T.C. 202, 212 (1992).
Finally, we note that petitioner does not argue that her
out-of-pocket costs for actual repairs due to damage from the
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Northridge earthquake were deducted as a casualty loss on her
1994 return, which respondent does not dispute. At the core of
petitioner’s case is her desire to recover some of the lost
insurance reward which she was denied because the condominium was
foreclosed.
On the basis of the above, we find that petitioner failed to
substantiate the amount of the casualty loss, and, therefore, it
is unnecessary for us to address respondent’s alternative
arguments. Accordingly, petitioner is not entitled to the
casualty loss deduction during the year in issue. Respondent is
sustained on this issue.
We have considered all arguments by the parties, and, to the
extent not discussed above, conclude that they are irrelevant or
without merit.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.