T.C. Summary Opinion 2005-83
UNITED STATES TAX COURT
VERTA HILL, Petitioner v.
COMMISSIONER OF INTERNAL REVENUE, Respondent
Docket No. 5946-04S. Filed June 16, 2005.
Verta Hill, pro se.
Kathleen C. Schlenzig, 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, and all Rule references are to the
Tax Court Rules of Practice and Procedure.
- 2 -
Respondent determined a deficiency in petitioner’s Federal
income tax of $2,745 for the taxable year 2001.
The issue for decision is whether petitioner is entitled to
a casualty loss deduction of $19,068 for damage to her personal
property and residence due to a flood.
Background
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. Petitioner resided in
Chicago, Illinois, on the date the petition was filed in this
case.
During 2001, petitioner resided in a single-family home,
consisting of a first floor and a full basement, in Chicago,
Illinois. On or about August 2, 2001, a severe 3-hour
thunderstorm dumped up to 4 inches of rain on a 30-mile corridor
from Lake County, south through Cook County, and on to Kankakee.
The flash flooding caused by the thunderstorm damaged thousands
of homes. Governor George Ryan declared the area a State
disaster area. Damage from the torrential rain shut down
expressways and Chicago Transit Authority trains. The resulting
runoff overwhelmed the city’s combined storm and sewer systems,
causing sewer backup flooding.
Petitioner returned home on August 2, 2001, to discover that
her basement had flooded. Petitioner had insurance which,
- 3 -
unfortunately, did not cover flooding. Petitioner did not
attempt to file any claim with her insurance carrier.
Petitioner timely filed a Federal income tax return for the
2001 taxable year. On her Form 1040, U.S. Individual Income Tax
Return, petitioner claimed a casualty loss deduction of $19,068,
after application of the $100 limitation, pursuant to section
165(h)(1), and the 10 percent of adjusted gross income
limitation, pursuant to section 165(h)(2). Petitioner attached
to the Form 1040 a Schedule A, Itemized Deductions, and a Form
4684, Casualties and Thefts, along with schedules that were meant
to verify such casualty calculations.
On Form 4684, petitioner described the property for which
she claimed a casualty loss as: “Clothing acquired 01-01-01,
appliances, tools, and electronics”. The Form 4684 reflected in
pertinent part as follows:
Section A--Personal Use Property
Property Description Clothing acquired 01-01-01
Line A2. Cost or other basis of each property $9,200
Line A3. Insurance or other reimbursement 0
Line A5. Fair market value before casualty or theft 8,900
Line A6. Fair market value after casualty or theft 0
Line A7. Subtract line 6 from line 5 8,900
Line A8. Enter the smaller of line 2 or line 7 8,900
Line A9. Subtract line 3 from line 8 8,900
Property Description Appliances
Line A2. Cost or other basis of each property $5,850
Line A3. Insurance or other reimbursement 0
Line A5. Fair market value before casualty or theft 4,950
Line A6. Fair market value after casualty or theft 0
Line A7. Subtract line 6 from line 5 4,950
Line A8. Enter the smaller of line 2 or line 7 4,950
Line A9. Subtract line 3 from line 8 4,950
Property Description Tools
Line A2. Cost or other basis of each property $1,500
- 4 -
Line A3. Insurance or other reimbursement 0
Line A5. Fair market value before casualty or theft 1,500
Line A6. Fair market value after casualty or theft 0
Line A7. Subtract line 6 from line 5 1,500
Line A8. Enter the smaller of line 2 or line 7 1,500
Line A9. Subtract line 3 from line 8 1,500
Property Description Electronics
Line A2. Cost or other basis of each property $9,200
Line A3. Insurance or other reimbursement 0
Line A5. Fair market value before casualty or theft 7,500
Line A6. Fair market value after casualty or theft 0
Line A7. Subtract line 6 from line 5 7,500
Line A8. Enter the smaller of line 2 or line 7 7,500
Line A9. Subtract line 3 from line 8 7,500
Line A10D. Casualty or theft loss 22,850
Line A11D. The smaller of line 10 or $100 100
Line A12D. Subtract line 11 from line 10 22,750
Line A13D. Add the amounts on line 12 of all
Forms 4684 22,750
Line A14D. Add the amounts on line 4 of all
Forms 4684 0
Line A16D. If line 14 is less than line 13, enter
the difference 22,750
Line A17D. Enter 10% of your adjusted gross income
from Form 1040, line 37 3,682
Line A18D. Total personal property loss amount $19,068
Petitioner attached to her return a schedule for each
category. Each schedule contained the following information:
(1) A description of each item purportedly lost; (2) the quantity
of each item purportedly lost; (3) the number of years prior to
the loss that petitioner purportedly acquired each item of
property; (4) the cost or other basis of each item of property;
(5) the fair market value of each item of property before the
casualty; and (6) the fair market value of the property following
the casualty.
The schedules reflected in pertinent part as follows:
Schedule - Clothing 01-01-01 (Women’s clothing)
Item No. of Date Cost or FMV before FMV after
items acquired1 other basis2 casualty casualty
Blouses 13 $30.00 $390.00 $0
- 5 -
Work shoes 3 130.00 390.00 0
Coats 4 140.00 560.00 0
Dresses 11 75.00 825.00 0
3
Hats 4 13.00 60.00 0
Jackets 3 75.00 225.00 0
Scarves 9 15.00 135.00 0
Shirts 12 30.00 360.00 0
Shoes 7 70.00 490.00 0
4
Pants 13 75.00 1,125.00 0
Wind breaker 2 75.00 150.00 0
Suits 9 129.00 1,161.00 0
Sweaters 7 25.00 175.00 0
Sweatsuit 11 12.00 132.00 0
Nightgown 10 20.00 200.00 0
Leather coat 2 175.00 350.00 0
Softcover book 25 8.50 212.50 0
Hardcover book 2 25.00 50.00 0
Artwork 1 75.00 75.00 0
Total $7,065.50 0
1
Date item was acquired prior to the year of the casualty.
2
Amount of individual item.
3
Petitioner did not explain how she calculated this amount. The
appropriate calculation appears to be $52.
4
Petitioner did not explain how she calculated this amount. The
appropriate calculation appears to be $975.
Schedule - Clothing 01-01-01 (Children’s clothing)
Item No. of Date Cost or FMV before FMV after
items acquired1 other basis2 casualty casualty
Blouses 9 $30 $135 $0
Boots 2 75 150 0
Coats 4 60 240 0
Dresses 10 35 350 0
Gloves 5 2 10 0
Hats 3 10 30 0
Shirts 13 15 195 0
Shoes 4 17 68 0
Slacks 10 25 250 0
Socks 15 3 45 0
Sport jackets 2 20 40 0
Sweaters 6 12 72 0
Underwear 20 6 120 0
Bras 15 10 150 0
Undershirt 25 5 125 0
Slips 10 5 50 0
Long johns 12 6 72 0
Tights 5 10 50 0
Total 3$2,152 0
1
Date item was acquired prior to the year of the casualty.
2
Amount of individual item.
3
Petitioner added the total amounts for the women’s clothing and
children’s clothing and then subtracted $317.50 for “depreciation”
to calculate the amount of $8,900, used on the Form 4684 for
clothing. ($7,065.50 + $2,152 - $317.50 = $8,900)
- 6 -
Schedule - Appliances
Item No. of Date Cost or FMV before FMV after
items acquired1 other basis2 casualty casualty
Carpet 1 $2,500 $2,500 $0
Sofa 1 1,250 1,250 0
Television 1 575 575 0
Deep freezer 1 475 475 0
Refrigerator 1 550 550 0
Desk 2 253 506 0
3
Total $5,856 0
1
Date item was acquired prior to the year of the casualty.
2
Amount of individual item.
3
Petitioner decreased this amount by $900 for “depreciation” which
resulted in a final claimed casualty loss for electronics of
$4,956. However, petitioner only claimed a casualty loss of
$4,950 for appliances.
Schedule - Tools
Item No. of Date Cost or FMV before FMV after
items acquired1 other basis2 casualty casualty
Dryer3 1 $460 $460 $0
Washing mach. 1 400 400 0
Snow blower 1 500 500 0
Lawn mower 1 189 189 0
4
Total $1,549 0
1
Date item was acquired prior to the year of the casualty.
2
Amount of individual item.
3
In the above schedule and on Form 4684 petitioner claims the
dryer was a total loss. However, at trial, petitioner admitted
that she repaired the dryer and did not throw it away.
4
Petitioner did not decrease this amount for “depreciation”.
Schedule - Electronics
Item No. of Date Cost or FMV before FMV after
items acquired1 other basis2 casualty casualty
Computer 1 2 years $2,785 $2,785 $0
Printer 1 1 year 1,400 1,400 0
Games boys 3 0 years 35 105 0
Sega Genesis 1 0 years 150 150 0
Playstation 2 1 0 years 230 230 0
Games 20 0 years 50 1,000 0
Supplies3 2 years 3,400 3,400 0
Computer 5 0 years 35 175 0
books
4
Total $9,245 0
1
Date item was acquired prior to the year of the casualty.
2
Amount of individual item.
3
Supplies include: software, files, disks, copier paper, etc.
4
Petitioner decreased this amount by $1,700 for “depreciation”
which resulted in a final claimed casualty loss for electronics of
$7,500.
- 7 -
With respect to each item identified on each schedule,
petitioner reported that the cost or other basis of the property
was the same as the fair market value of the property before the
casualty. Petitioner also reported that each item had a fair
market value of zero after the casualty. However, once
petitioner calculated the total purported loss for each category
of property, petitioner reduced the loss for what she described
as “depreciation” as follows:
Category FMV before Reduction for Reported Percentage
casualty depreciation loss reduction
Clothing $9,217.50 $317.50 $8,900.00 3.3%
Appliances 5,850.00 900.00 4,950.00 15.4
Tools 1,500.00 0.00 1,500.00 0.0
Electronics 9,200.00 1,700.00 7,500.00 18.5
On January 7, 2004, respondent issued petitioner a notice of
deficiency for taxable year 2001. In the notice of deficiency,
respondent disallowed petitioner’s claimed casualty loss
deduction and determined petitioner is liable for a deficiency in
the amount of $2,745.
Discussion
As a general rule, the determinations of the Commissioner in
a notice of deficiency are presumed correct, and the taxpayer
bears the burden of proving the Commissioner’s determinations in
the notice of deficiency to be in error. Rule 142(a); Welch v.
Helvering, 290 U.S. 111, 115 (1933). As one exception to this
rule, section 7491(a) places upon the Commissioner the burden of
proof with respect to any factual issue relating to liability for
- 8 -
tax if the examination of the taxpayer’s records for the subject
year began after July 22, 1998, and the taxpayer maintained
adequate records, satisfied the substantiation requirements,
cooperated with the Commissioner, and introduced during the Court
proceeding credible evidence with respect to the factual issue.
In the present case, the burden does not shift with respect to
any factual issue relating to petitioner’s liability for the
income tax deficiency because petitioner neither alleged that
section 7491 was applicable nor established that she complied
with the substantiation requirements of section 7491(a), as shown
below. Sec. 7491(a)(2)(A) and (B).
Deductions are a matter of legislative grace and are allowed
only as specifically provided by statute, and petitioner bears
the burden of proving that she is entitled to the claimed
deduction. INDOPCO, Inc. v. Commissioner, 503 U.S. 79, 84
(1992); New Colonial Ice Co. v. Helvering, 292 U.S. 435, 440
(1934). With these well-established propositions in mind, we
must determine whether petitioner has satisfied her burden of
proving that she is entitled to a casualty loss deduction
allegedly incurred during taxable year 2001. Respondent argues
that petitioner has failed to produce any credible evidence to
substantiate her claimed loss, including the occurrence of any
casualty, or, if a casualty occurred, the amount deductible.
- 9 -
Section 165(a)1 allows as a deduction any loss sustained
during the taxable year and not compensated for by insurance or
otherwise. Section 165(c) limits the allowance of losses in the
cases of individuals. Section 165(c)(3) allows as a deduction to
an individual certain losses commonly referred to as casualty
losses. A casualty loss is allowable to an individual for a loss
of property not connected with a trade or business or with a
transaction entered into for profit if the loss results from
“fire, storm, shipwreck, or other casualty”, subject to
limitations set forth in section 165(h).
Section 165(h)(1) provides that any loss of an individual
described in section 165(c)(3) is allowed only to the extent that
1
SEC. 165. LOSSES.
(a) General Rule.--There shall be allowed as a
deduction any loss sustained during the taxable year and not
compensated for by insurance or otherwise.
* * * * * * *
(c) Limitation on losses of individuals.--In the case
of an individual, the deduction under subsection (a) shall
be limited to–-
(1) losses incurred in a trade or business;
(2) losses incurred in any transaction entered
into for profit, though not connected with a trade or
business; and
(3) except as provided in subsection (h), 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.
- 10 -
the amount of the loss arising from each casualty exceeds $100.
Section 165(h)(2) provides that if the personal casualty losses
for a taxable year exceed the personal casualty gains for the
year, the losses are allowable only to the extent of the sum of
the personal casualty gains for that taxable year, plus so much
of the excess as exceeds 10 percent of adjusted gross income for
that taxable year. Thus, where there are no personal casualty
gains for a taxable year, personal casualty losses (in excess of
$100 per casualty) are allowable to the extent that they exceed
10 percent of adjusted gross income for that taxable year.
The method of valuation to be used in determining a casualty
loss is prescribed in section 1.165-7(a)(2), Income Tax Regs.,
which provides as follows:
(i) In determining the amount of loss deductible under * *
* [section 165], 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 * * * [section 165] 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 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.
- 11 -
In the case of an item held for personal use, the amount
deductible is governed by section 1.165-7(b)(1), Income Tax
Regs., which provides that the amount of the loss to be taken
into account for purposes of section 165(a) shall be the lesser
of: (1) The amount which is equal to the fair market value of
the property immediately before the casualty reduced by the fair
market value of the property immediately after the casualty, or
(2) the amount of the adjusted basis for determining the loss
from the sale or other disposition of the property involved.
Section 6001 and the regulations promulgated thereunder
require taxpayers to maintain records sufficient to permit
verification of income and expenses. As a general rule, if the
trial record provides sufficient evidence that the taxpayer has
incurred a deductible expense, but the taxpayer is unable to
adequately substantiate the precise amount of the deduction to
which she is otherwise entitled, the Court may estimate the
amount of the deductible expense and allow the deduction to that
extent, bearing heavily against the taxpayer whose inexactitude
in substantiating the amount of the expense is of her own making.
Cohan v. Commissioner, 39 F.2d 540 (2d Cir. 1930). However, in
order for the Court to estimate the amount of an expense, the
Court must have some basis upon which an estimate may be made.
Vanicek v. Commissioner, 85 T.C. 731, 742-743 (1985). Without
- 12 -
such basis, any allowance would amount to unguided largesse.
Williams v. United States, 245 F.2d 559, 560-561 (5th Cir. 1957).
Although we believe that petitioner sustained a casualty
loss from flooding, she still has to substantiate the amount of
the losses due to the casualty.
Petitioner testified that the flood which occurred in the
Chicago area in August of 2001 resulted in her basement’s taking
on water, with the depth of this water being approximately 3 feet
in one area of the basement and approximately 13 inches in
another area of the basement. However, respondent claims that
Joseph Ferrick, respondent’s counsel, visited petitioner’s home
on the morning of November 27, 2004, and noted water damage no
higher than 4 inches above the floor.
At trial, petitioner also testified: (1) She had the water
pumped out of her basement by Mr. Davis; (2) that the walls,
carpeting, and several personal property items which were kept in
the basement were damaged or destroyed; (3) she and Mr. Davis
made a list of the damaged property as the items were removed
from the basement; and (4) that the amount of clothing damaged
was excessive because she was “decorating” the first floor of the
house and had moved most of her and her grandchild’s clothing
into the basement.
Petitioner introduced into evidence an alleged receipt from
Mr. Davis, indicating a payment of $275 for his services in
- 13 -
removing water from petitioner’s basement. Attached to the
receipt is a list of items allegedly removed from petitioner’s
basement and hauled away. We do not find this receipt to be
credible evidence. The receipt does not contain Mr. Davis’s
address, business, or phone number. The receipt does not state
the date on which Mr. Davis provided his services. In fact, the
receipt is dated August 11, 2001, even though petitioner claims
that Mr. Davis provided his services on August 2, 2001. The
inventory list attached to the receipt is also dated August 11,
2001, even though petitioner claims Mr. Davis made the inventory
list on August 2, 2001. The receipt and inventory list appear to
have been created for the sole purpose of substantiating
petitioner’s claimed losses in anticipation of litigation and
neither document has been authenticated by Mr. Davis.
Petitioner had insurance at the time of the casualty.
However, petitioner testified that she did not file a claim with
her insurance company because her policy did not cover flood
damage.
Petitioner also testified as to her calculation of her
claimed casualty loss deduction. Petitioner calculated such
casualty loss deduction by inventorying the damaged and destroyed
carpeting and personal property items as they were “hauled away”.
She then found similar items over the Internet and used the
similar items’ purchase prices as the amount of her “cost or
- 14 -
other basis” in the damaged property items. Petitioner then
totaled the fair market values of the damaged property items by
categories: clothing, tools, electronics and appliances (as shown
above). Petitioner then “depreciated” the total amount of the
category by a percentage she felt was fair. It appears that
petitioner had no reasoning for the amount chosen to “depreciate”
each category. Petitioner then calculated her casualty loss by
using the sum of all the depreciated values and applying the
limitations of section 165(h).
Petitioner did not attempt to obtain actual receipts for any
of the damaged items. Petitioner did not call as witnesses to
substantiate the casualty loss, Mr. Davis, who allegedly helped
her pump the water out of her basement and helped her dispose of
the damaged or destroyed items of personal property, or any other
individual.
Petitioner has presented no reliable evidence of any repairs
made to her single-family home or to the personal property items
that were damaged or destroyed as a result of the flood.
Petitioner has offered as evidence to support that she actually
sustained a casualty loss: (1) A receipt issued by Mr. Davis
that purports to identify the items lost in the purported flood
of her basement; and (2) petitioner’s own testimony. Petitioner
has provided as evidence to support the amount of the actual
casualty loss: (1) Petitioner’s estimate of the cost of each
- 15 -
item; (2) petitioner’s estimate of the fair market value of each
item immediately prior to the purported casualty; (3) copies of
Internet catalog and web pages reflecting items petitioner claims
to have lost in the purported casualty that were collected by
petitioner in anticipation of litigation; and (4) petitioner’s
self-serving testimony. This Court is not bound to accept a
taxpayer’s unverified and self-serving testimony. Blodgett v.
Commissioner, 394 F.3d 1030, 1036 (8th Cir. 2005), affg. T.C.
Memo. 2003-212; Shea v. Commissioner, 112 T.C. 183, 189 (1999).
Because petitioner has failed to corroborate her testimony or
provide any substantiation to support her claimed amount of
casualty loss, we find that we cannot estimate any amounts of
petitioner’s deductions under the Cohan rule, and we sustain
respondent’s disallowance of petitioner’s claimed casualty loss
deduction in the amount of $19,068.
We have considered all of the other arguments made by the
parties, and, to the extent that we have not specifically
addressed them, we conclude they are without merit.
Reviewed and adopted as the report of the Small Tax Case
Division.
Decision will be entered
for respondent.