Proper measure of casualty damages needed for federal income tax deduction.

Author:Blair, Benjamin A.
 
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The River Oaks neighborhood in Houston is often listed as one of the most exclusive and prestigious subdivisions in the United States. A famous architect designed several of the houses in the neighborhood, including the house owned by Petitioner.

The house was built in 1930 and included three-foot thick exterior walls, four bedrooms, six bathrooms, a living room with attached garden room in one of the turrets, and a library, among other features. The house also included art nouveau stained glass windows with an insured value of $1,200,000, as well as a 635-square foot basement wine cellar with nearly 6,900 bottles. The house was located on 4-89 acres that also included a reflecting pool, a heated in-ground swimming pool, and extensive gardens designed by a well-known landscape architect.

Petitioner purchased the property in 1998 for $9.25 million in as-is condition. In 2007, Petitioner listed the property for $18.5 million.

On September 13, 2008, Hurricane Ike struck Houston, and the property sustained significant damage. Over thirty trees were lost, windowpanes were broken, the roof was damaged, and the stained-glass windows were damaged. There was also water damage to the oak wood floors, and the basement wine cellar was flooded with three-foot deep water, which was not discovered until several days after the hurricane and allowed mold to form. Half the wine bottles were submerged in the fetid water, and asbestos was discovered shortly thereafter.

Four days after the storm, Petitioner filed a claim with his insurance company for hurricane damage and also filed a "Proof of Loss" with his flood insurance company, listing the actual cash value of all property of $15.46 million. Overall, the insurer paid Petitioner a total of $2.39 million. Petitioner took the property off the market to make the needed repairs, eventually selling it in 2014.

On Petitioner's 2008 individual income tax return, he claimed a casualty loss deduction of $888,345, reporting a fair market value before the casualty of $15.4 million and after the casualty of $12.25 million. After the IRS determined that Petitioner was not entitled to deduct a casualty loss for 2008, Petitioner protested. In 2016, Petitioner supplemented his petition seeking a casualty loss deduction in excess of the amount claimed on his 2008 return. Petitioner relied on a retrospective appraisal that determined a pre-casualty value of $18,468 million and post-casualty value of $11.081 million.

The...

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