*152 Decision will be entered under Rule 155.
Petitioners' house was burglarized in 1976 for the fourth time in an 8-year period, and various items of personal property were stolen. Petitioners did not file what would have been their fourth claim under their existing policy since they feared that the policy would not be renewed. A theft loss was claimed by petitioners on their 1976 return. Held, petitioners' loss was not "compensated for by insurance," and they are accordingly entitled to a theft loss deduction under
*485 OPINION
Respondent determined a deficiency of $ 190 in petitioners' income tax for the taxable year 1976. Concessions having been made, the issue for decision is whether petitioners are entitled to a deduction for a theft loss under
All of the facts have been stipulated. The stipulation and attached exhibits are incorporated herein by reference.
At the*154 time the petition in this case was filed, petitioners resided in Atlanta, Ga.
On November 19, 1960, petitioners purchased a parcel of property in Lumpkin County, Ga. This property fronts on a lake in a rural wooded area and is approximately 10 miles from Dahlonega, Ga. Subsequent to their purchase, petitioners built a house on the property.
On Thursday, April 1, 1976, petitioner Henry L. Hills (petitioner) visited the property and found the inside of the house in disarray; drawers were open with their contents spilled onto the floor. Petitioner drove to his nearest neighbor and called the sheriff to report a burglary. Petitioner compiled a list of the missing items and turned it over to the sheriff's office. The aggregate estimated value given for listed items was $ 446.
During 1976, petitioners' property was covered under an Aetna Homeowners Insurance Policy. This policy covered losses from vandalism, malicious mischief, and theft. Petitioners had had their homeowners insurance with Aetna for many years.
As of April 1, 1976, petitioners had filed three previous claims with Aetna relating to burglaries at the lake property. These burglaries occurred on March 13, 1968, October*155 26, 1972, and July 16, 1974, and occasioned respective losses of $ 750, $ 840, and $ 911 in personal property. Petitioners never filed a claim with Aetna for the 1976 burglary as they feared their policy would not be renewed.
On their 1976 joint Federal income tax return, petitioners claimed a theft loss in the amount of $ 660 ($ 760 less the $ 100 "floor" required by
The issue herein involves whether the loss which resulted from the burglary of petitioners' house in 1976 was "not compensated for by insurance or otherwise" within the meaning of
Respondent does not contest the amount of the claimed loss. He argues that, since the loss would have been covered had an insurance claim been filed, the loss was "compensated for by insurance" and thus not deductible under
As a matter of statutory construction, the normal, everyday meaning of the word "compensated" does not comport with *487 respondent's interpretation. To compensate denotes "to pay" or "to make up for." 3 The reason for denying a loss deduction when a taxpayer's loss has been compensated (made up for or paid) is relatively easy *158 to comprehend. The taxpayer has not sustained a true economic loss when the detrimental effects of the loss (visa-vis the taxpayer's net worth) are counterbalanced by the receipt of money or replacement property. However, to expand the meaning of compensated from actual to potential recoupment defies the word's acceptation.
The legislative etymology of "not compensated for by insurance" is also illustrative of the incongruous meanings of "compensated" and "covered." This portion of
Further, respondent's own regulations do not bear out the expanded construction of "compensated for" offered by *160 respondent.
We are not persuaded by the argument that the petitioners' voluntary failure to file for an insurance claim signifies that the loss results from that election and not the loss event or transaction. By the same token, any theft or casualty loss suffered by an individual taxpayer who voluntarily chooses not to maintain insurance coverage can likewise be said to result from the choice to forego insurance coverage. When a taxpayer fails to pursue a right of insurance recovery, his economic loss is nonetheless sustained and a deduction should be allowed. To hold otherwise would unjustifiably*161 advantage taxpayers who voluntarily decline insurance coverage. 6
It is enlightening that
(2)(i) If a casualty or other event occurs which may result in a loss and, in the year of such casualty or event, there exists a claim for reimbursement with respect to which there is a reasonable prospect of recovery, no portion of the loss with respect to which reimbursement may be received is sustained, for purposes of
The abandonment of a claim will result in the taxpayer's failure to receive any reimbursement for his loss. Where, for *489 example, a taxpayer has commenced a civil suit in conversion against the thief/tort-feasor, there may be a host of practical reasons for abandoning his cause of action. Among other things, these could include the cost of the litigation vis-a-vis the eventual recovery, hardship, or the involvement of a substantial amount *163 of time and expense. Although the above regulation appears to be directed more toward a litigation context (because of the employment of words such as "settlement," "adjudication," and "abandonment"), the regulation would seem to be equally apropos to situations where reimbursement would be in the form of an insurance recovery. Since the regulations expressly contemplate abandonment of a claim for reimbursement (one already initiated), we can discern no reason why, in an insurance context, analogous pragmatic considerations should not be relevant when the taxpayer must determine at the outset whether his interests would be better served by never asserting his recovery rights.
The various authorities which respondent has cited (
*490 K-U did not sustain any loss during 1951 which was not compensated for by insurance or otherwise, *165 within the meaning of
The settlement agreement provided that K-U assume $ 44,486.67 of the cost of repairs to the generator. Even though the settlement resulted in an amount unrecovered by K-U, any amount in excess of the $ 10,000.00 deductible under the policy cannot be considered as a loss because K-U's claim against Lloyds was not in dispute. K-U is not entitled to a deduction of $ 34,486.67 as a loss not compensated for by insurance or otherwise under
The Sixth Circuit, on appeal, accepted the District Court's findings of fact as to K-U's business reasons for making the settlement and stated:
This record convinces us that the District Judge's quoted findings of fact are not clearly erroneous. KU's loss over and above the $ 10,000 allowed by the District Judge was not an "uninsured loss."
We view Kentucky Utilities as distinguishable from the instant case and, in any event, in light of the brief treatment of the issue, therein, that case should not preclude a fresh consideration of this issue. See concurring opinion of Judge Fay in
*167 In
In a concurring opinion in Axelrod, Judge Quealy stated that, aside from any failure of proof, the legal*168 issue should have been addressed since even if the facts were as alleged (i.e., a specified loss resulting from a casualty), the taxpayer, as a matter of law, could not have prevailed because the loss was not one "not compensated for by insurance." The central rationale was essentially the same as respondent's argument here: that the loss did not result from a casualty but rather from the taxpayer's choice in not pursuing his right of insurance recovery.
Judge Fay's concurring opinion in Axelrod expressed the concern that there is no statutory authority for an expanded interpretation of "compensated for." He also indicated his view that individuals who are forced to assume a loss out of fear of policy cancellation are, in effect, without insurance and thus are unduly disadvantaged vis-a-vis those taxpayers who choose to self-insure. Similarly, petitioners here, as a result of the fourth theft in an 8-year period, were forced to assume a loss out of fear that their policy would not be renewed. As a matter of fact, petitioners might also have feared that any renewal cost would have been exorbitant as a result of any such claim. They were faced with the no-win situation of either*169 risking nonrenewal of their policy or being unable to claim a loss deduction for a sustained casualty.
We note, however, that in
We accordingly hold that since petitioners sustained a loss *492 during the taxable year which was not compensated for by insurance or otherwise, a deduction for such loss is allowed.
Decision will be entered under Rule 155.
Sterrett, J., dissenting: I respectfully dissent.
Subsection (c)(3) further limits losses incurred by individuals with respect to nonbusiness property to specific circumstances, i.e., "losses * * * from fire, storm, shipwreck, or other casualty, or from*170 theft." The foregoing circumstances have a common denominator: they are caused by forces external to the taxpayer and they are beyond the victim's volition. The courts have frequently emphasized the unexpected nature of the loss when defining "casualty"; equally unexpected is a theft. The latter term is defined in
The petitioners premise their claimed loss on the admitted fact that a theft did occur, resulting in an obvious economic loss to them. However, equally conceded is the fact that the petitioners' stolen property was covered by insurance. There is no allegation that the insurance company questioned its liability or even the amount. Nonetheless, the petitioners chose not to file a claim and accept their contractual right to be made whole through reimbursement. Thus, it seems beyond peradventure that the operative fact resulting in the loss was not a theft (or any other unexpected event beyond their volition), but the petitioners' voluntary act in refusing to accept their entitlement. Just as a taxpayer cannot avoid taxation by turning his back on income, a taxpayer should not be *171 allowed a deduction because he has refused to accept reimbursement. See generally
On page 487, the majority herein says:
all losses compensated by insurance are also, as a necessary concomitant, covered by insurance. Nonetheless, it should be equally obvious that the *493 converse, i.e., that all losses covered by insurance are also compensated for, is not necessarily true.
From one perspective, the above language begs the question because if one is covered by insurance, he will be compensated unless he voluntarily chooses not to file a claim. In the latter event the loss is due, not to one of the circumstances listed in
We were told in
Footnotes
1. All section references are to the Internal Revenue Code of 1954, as amended and in effect during the year in issue, unless otherwise specifically indicated herein.↩
2. On brief, petitioners assert (although there is no testimony to support the assertion) that their reluctance to file a claim stemmed primarily from a fear of jeopardizing the fire insurance coverage which was also included in their policy. Petitioners state that since their house is in a rural mountain area which lacks nearby firefighting facilities, any cancellation would only exacerbate the disinclination of insurance companies to provide fire coverge for their home.↩
3. Webster's Third New International Dictionary (1971).↩
4. This income tax act was held unconstitutional in
Pollock v. Farmers' Loan & Trust Co., 157 U.S. 429">157 U.S. 429 (1895), rehearing158 U.S. 601">158 U.S. 601↩ (1895). However, the Pub. L. 227 language was reenacted by the Revenue Act of 1913, Pub. L. 16, ch. 16, 38 Stat. 114, 167, 172, and has remained in the relevant statutes to the present time.5. There were no reports published by the Finance Committee for this bill.↩
6. There is a substantial incentive for taxpayers in the higher brackets to self-insure or substantially underinsure since the rate of reimbursement (from the Government via a loss deduction) can approach or equal 70 percent. See U.S. General Accounting Office, The Personal Casualty and Theft Loss Tax Deduction: Analysis and Proposals for Change (GGD-80-10, 1979).↩
7. The Circuit Court's opinion states that "K-U's loss over and above the $ 10,000 allowed by the District Judge was not an 'uninsured loss.'" The term "uninsured loss" is not contained in
sec. 165(a) or in the cited case,Sam P. Wallingford Grain Corp. v. Commissioner, 74 F.2d 453">74 F.2d 453 (10th Cir. 1934). In that case a corporate taxpayer, in order to protect its credit and business standing, paid various debts of its president and a predecessor partnership and corporation; it was under no legal obligation to do so. The Court held that such payments were not deductible either as business expenses or losses. An uninsured loss would clearly be commensurate with a loss that was not "covered by insurance," but that is not the statutory language before us.In the recent case of
Miller v. Commissioner, T.C. Memo 1980-550">T.C. Memo. 1980-550 , this Court, pursuant toGolsen v. Commissioner, 54 T.C. 742">54 T.C. 742 , 757 (1970), affd.445 F.2d 985">445 F.2d 985 (10th Cir. 1971), cert. denied404 U.S. 940">404 U.S. 940 (1971), abided by the rule announced inKentucky Utilities Co. v. Glenn, 394 F.2d 631">394 F.2d 631 (6th Cir. 1968), affg.250 F. Supp. 265">250 F. Supp. 265↩ (W.D. Ky. 1965), in holding that the taxpayer therein was not entitled to deduct a portion of a casualty loss his boat sustained.8. Respondent has directed our attention to
Morgan v. Commissioner, T.C. Memo 1978-116">T.C. Memo. 1978-116 . However, since we readAxelrod v. Commissioner, 56 T.C. 248">56 T.C. 248 (1971), as not having reached the issue before us, we consider the statements in Morgan↩ relied upon by respondent as offering limited guidance toward the resolution of the instant dispute.