Casualty loss allowed for water damage from washing machine.

• Author: Cooper, Pamela S.

P purchased her home in 1985, where she continued to reside until sometime in 1995. The existing washing machine in the house was conveyed to P at the time of purchase.

When P arrived home on Aug. 26, 1994, she discovered that her home was flooded; the cause was identified as a split in the hose from the sink to the washing machine. As a result, the house (which is on a concrete slab) became water soaked; carpets and furniture were destroyed. Mold and mildew began to appear throughout the house within a few days. P and her daughter had to move temporarily. P, a collector, had many boxes and other items stored in her home; she incurred expenses to remove water-soaked items and for general cleanup and repair. The cleanup and repair process took many months and was delayed, at least in part, because of disputes between P and her insurance company.

In December 1994, P filed a claim for insurance loss; the cause and origin was described as "washing machine hose had a small split." On July 31, 1998, P received a payment of $12,500 in settlement of her lawsuit and claim.

On Form 4684, Casualties and Thefts, P reported a total casualty and theft loss of $138,479 and claimed a loss deduction of $130,851, as shown in Exhibit 1 on p. 118.

The IRS contends that (1) P has not established that the failure of the washing machine hose, and subsequent damage, constitute a casualty within the meaning of Sec. 165 and (2) even if a casualty occurred, P has not presented sufficient evidence to prove its amount.

What is a Casualty?

Sec. 165(a) and (c)(3) allow an individual a deduction for loss of property not connected with a trade or business or a transaction entered into for profit, if the loss arises from fire, storm, shipwreck or other casualty and is not compensated for by insurance or otherwise. "Other casualty" is defined as a loss proximately caused by a sudden, unexpected or unusual event, excluding the progressive deterioration of property through a steadily operating cause or by normal depreciation.

Whether damage qualifies as a casualty typically turns on whether the damage satisfies the suddenness requirement, which denotes an accident, a mishap or some sudden invasion by hostile agency, rather than progressive deterioration of property through steadily operating cause; Fay, 120 F2d 253 (2d Cir. 1941), aff'g 42 BTA 206 (1940). The "suddenness" of the loss itself (i.e., the lapse of time between the precipitating event and the loss proximately...