T.C. Summary Opinion 2004-80
UNITED STATES TAX COURT
MILTON CRAIG WERNER AND BARBARA K. WERNER, Petitioners v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 14689-02S. Filed June 17, 2004.
Milton Craig Werner and Barbara K. Werner, pro sese.
Huong T. Duong, for respondent.
DEAN, 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. Unless otherwise
indicated, subsequent section references are to the Internal
Revenue Code in effect for the year at issue, and all Rule
references are to the Tax Court Rules of Practice and Procedure.
The decision to be entered is not reviewable by any other court,
and this opinion should not be cited as authority.
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Respondent determined a deficiency in petitioners' 1998
Federal income tax of $17,280.84 and an addition to tax under
section 6651(a) of $4,370.11 for failure to file timely a Federal
income tax return for 1998. Petitioners concede as correct
respondent's adjustments for: (a) Taxes of $7,200 deducted on
Schedule A, Itemized Deductions; (b) charitable contributions of
$9,400 deducted on Schedule A; and (c) the addition to tax under
section 6651(a) for failure to file timely. Petitioners also
concede that they are entitled to only two dependency exemptions.
Respondent concedes that there will be no adjustment for:
(1) Capital gain income in the amount of $4,283; or (2)
miscellaneous expenses of $86 on Schedule A.
The parties agree that the only issue remaining for decision
by the Court is whether petitioners are entitled to deduct on
Schedule A casualty and theft losses totaling $37,222.
Some of the facts have been stipulated and are so found.
The stipulation of facts and exhibits received in evidence are
incorporated herein by reference. At the time the petition was
filed, petitioners resided in Berkeley, California.
Background
Petitioner Milton Werner has been a teacher most of his
career and is now a high school principal. Prior to the year at
issue, he accepted a new job "across the bay" in Palo Alto,
Callifornia. He and his family sold their home, put their
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belongings in "storage units", and rented another residence.
Abnormally wet weather during the year caused the storage units
to leak badly.
Petitioner Barbara Werner's father, Col. James Richard
Kelly, was a former dean of the New Mexico Military Academy. An
avid reader and historian, he amassed a large personal library.
The collection included books that were leather bound,
antebellum, and signed editions. The items were subjected to
water damage, most beyond repair.
On Schedule A of petitioners' Federal income tax return,
petitioners claimed a casualty loss deduction of $37,222.
Included with the return was a Form 4684, Casualties and Thefts,
reporting the loss of the books in the amount of $30,000 and the
loss of some furniture accounting for the balance of the claimed
amount.
During the examination of petitioners' return, petitioners
presented to the auditor a copy of an appraisal prepared by an
appraiser certified by the International Society of Appraisers.
According to the cover letter forwarding the appraisal to
petitioner Milton C. Werner:
The objective of the appraisal, at your request, was to
estimate the Fair Market Value of the household
furniture prior to damage, and in current damaged
condition. The books were appraised at Replacement
Value, for the purpose of settling an insurance claim.
These values are effective as of the inspection date.
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This appraisal is to be used ONLY for the function
of settling your insurance claim. Any other use of
this appraisal, such as for selling the property or for
income tax deduction purposes, renders it null and
void.
The appraisal finds that the fair market value of the household
furniture prior to damage is $4,315 and in damaged condition the
value is $1,140. The replacement value of the books available
for valuation was determined to be $2,910, and the "Books and
year books badly damaged and thrown away" were "Not valued".
Respondent determined that petitioners had failed to
substantiate the casualty loss and denied the deduction in full.
Discussion
Because petitioners failed to meet the requirements of
section 7491(a)(2), the burden of proof does not shift to
respondent in this case.1
Losses may be deductible under section 165 to the extent
"not compensated for by insurance or otherwise." In the case of
an individual, section 165(c)(3) allows a taxpayer to claim as a
deduction any loss from theft or casualty sustained during the
taxable year. The loss is allowed only to the extent that it
exceeds $100 and the net casualty loss is in excess of 10 percent
of adjusted gross income. Sec. 165(h). The amount of the loss
1
Sec. 7491 is effective with respect to court proceedings
arising in connection with examinations by the Commissioner
commencing after July 22, 1998, the date of its enactment by sec.
3001(a) of the Internal Revenue Service Restructuring and Reform
Act of 1998, Pub. L. 105-206, 112 Stat. 685, 726.
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allowed as a deduction is the lesser of: (1) The fair market
value of the property immediately before the loss, or (2) the
adjusted basis of the property. Helvering v. Owens, 305 U.S. 468
(1939); sec. 1.165-7(a)(2) and (b), Income Tax Regs.
The basis of property acquired by purchase is its cost.
Sec. 1012. The basis of inherited property ordinarily is the
fair market value of the property at the date of the decedent's
death. Sec. 1014. The basis of property acquired by gift is the
same as it would be in the hands of the donor or the last
preceding owner by whom it was not acquired by gift, except that
if such basis is greater than the fair market value of the
property at the time of the gift, the basis for determining loss
is the fair market value of the property. Sec. 1015.
In order for the Court to determine whether petitioners are
entitled to a casualty loss, petitioners' basis in the property
damaged or destroyed must be known. Where petitioners fail to
prove that basis, the Court is unable to determine the amount of
the loss that is deductible. Zmuda v. Commissioner, 79 T.C. 714,
728-729 (1982), affd. 731 F.2d 1417 (9th Cir. 1984); Millsap v.
Commissioner, 46 T.C. 751, 760 (1966), affd. 387 F.2d 420 (8th
Cir. 1968).
The Court presumes that petitioners acquired the items of
furniture by purchase, but they offered no evidence of the
acquisition cost of the items. The books that were damaged were
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acquired by either gift or inheritance, and petitioners offered
no evidence of their basis in the items. As to all of the items,
therefore, petitioners have failed to prove their tax basis in
the property.
The Court therefore sustains respondent's determination that
petitioners are not entitled to deduct on Schedule A, casualty
and theft losses totaling $37,222.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be
entered under Rule 155.