When The Wall Comes Tumbling Down

Christina A. Alphonso v. Commissioner, 136 T.C. No. 11

It's interesting that someone who struck a pedestrian with his car and someone who is assessed to repair a crumbling retaining wall end up with the same tax question - Am I entitled to a casualty loss?.  As it turns out they both got the same answer.  No.  I wrote about the car accident last week . Besides the synchronicity with the car accident case I was also drawn to this case by the location of the property.  Castle Village is just north of the New York side of the George Washington bridge.  I grew up just a couple of miles to the south on the other side of the river in Fairview NJ.  I love the views around there.

Ms. Alphonso was a tenant-stockholder in Castle Village, a housing cooperative, a form of ownership apparently more common in New York than in most places.  Although in practice, it is a lot like owning a condominium, it is not exactly the same legally.  You own stock in a corporation which owns the real estate and as a stockholder you are entitled to occupy one of the apartments.  You really don't own the apartment though, in the same sense as your would if it were a condominium.  Among other things it can make it easier for the cooperative to obtain financing for renovations and to have some control over who becomes a owner - subject to anti-discrimination laws.

Along with other residents she had the right to use common areas such as a garden and a playground.  Security guards would ask non-residents who were not in the company of residents to leave such areas.  As any homeowner knows, stuff happens when you own a home:

On May 12, 2005, the Castle Village retaining wall collapsed, causing rocks and soil to fall onto the public roads below the Castle Village complex. The collapse of that retaining wall caused significant damage.

Fixing the retaining wall must have been quite a project.  Ms. Alphonso's assessment was over $26,000 and there are over 500 housing units that are part of the complex.  Her logic in taking a casualty loss deduction seems pretty sound.  If she owned a house and there was a retaining wall on the property that collapsed and she had to spend $26,000 to repair it, that seems to qualify as a casualty loss.

Initially the IRS denied the loss on the theory that the collapse was the result of gradual deterioration of the wall.  Under that theory a homeowner would not be entitled to the loss.  They amended their theory, though, and indicated that any casualty loss would only be allowed to the housing cooperative corporation not its owners.  The Tax Court agreed with the IRS:

With respect to petitioner's assertions regarding her alleged property interest in the Castle Village grounds, petitioner is wrong in asserting that she possesses a property interest in those grounds that entitles her to a casualty loss deduction for damage to those grounds. We have carefully considered the model proprietary lease, the Castle Village board house rules, the corporate charter of Castle Village, and the bylaws of Castle Village on which petitioner relies in support of her assertion that she has such a property interest in the Castle Village grounds.  We find nothing in those documents that allows us to conclude that petitioner possessed a leasehold interest, an easement, or any other property interest in the Castle Village grounds that entitles her to a deduction under section 165(a) and (c)(3) for damage to those grounds.

Ms. Alphonso's team had another argument.  Code Section 216 allows the tenant-stockholders of a cooperative housing corporation to deduct a proportionate share of the cooperative's mortgage interest and real estate taxes.  The argument is that this proves Congress wanted the tenant-stockholders to be treated like homeowners and the principle should be extended to casualty losses.  The Tax Court didn't buy that argument either :

As the Supreme Court of the United States has held, “Where Congress explicitly enumerates certain exceptions to a general prohibition, additional exceptions are not to be implied, in the absence of evidence of a contrary legislative intent.” Andrus v. Glover Constr. Co., 446 U.S. 608, 616-617 (1980). Petitioner does not cite any legislative history establishing that Congress intended section 216(a) to permit the stockholders of a cooperative housing corporation to deduct any of such corporation's expenses that it paid or incurred except for the two deductions that Congress expressly allowed in that section.

An interesting question is how this same set of facts would play out in the context of a condominium.  I'm not a lawyer and I won't try to start playing one on this blog, but I suspect the answer might turn on subtle issues about the exact nature of a condo owners interest in the common areas.

Who's the Casualty Here ?

Robert K.K. Pang, et ux. v. Commissioner, TC Memo 2011-55

Not everything that happens happens to you.

We recently lost someone to an auto accident, so I'm not inclined to take my usual irreverent approach to this case.  It was an interesting one, though, so I didn't want to let it go by.

Here is the story:

On December 5, 2002, Mr. Pang was involved in an automobile accident in which he hit a pedestrian with his vehicle. The pedestrian later died as a result of this accident. The pedestrian's estate filed a claim against Mr. Pang for wrongful death.


Mr. Pang had a personal automobile insurance policy with Tradewind Insurance Co., Ltd. The policy had a liability limit of $100,000 per person for bodily injury, death benefit endorsements of $50,000, and personal injury protection (PIP) of $10,000. 2 Mr. Pang's insurance company concluded that the proximate cause of the accident rested with Mr. Pang, and they tendered to the estate payments that exhausted the policy's limits—i.e., $100,000 for bodily injury, plus a death benefit of $50,000, plus a PIP payment of $10,000.


In order to fully settle its claim against Mr. Pang, the estate insisted on a large contribution of funds from Mr. Pang in addition to the insurance funds it had already received. Following arbitration, Mr. Pang agreed to pay $250,000 to the estate.

I'm feeling particularly unkindly toward motorists who hit pedestrians this month, but if you think about it, all it takes is a bit of inattention.  I've had some close calls myself both as a pedestrian and a driver.  So if I was Mr. Pang's tax advisor, I'd be thinking the same thing  his advisor or he himself must have been thinking.  Is there anyway that the $250,000 might be deductible ?  They came up with a theory:

The Pangs maintain, however, that their $250,000 settlement payment is deductible under section 165(c)(3) as a casualty loss because Webster's Dictionary defines “casualty” as "[l]osses caused by death, wounds” and the accident victim's death in December 2002 was certainly a casualty.

The Tax Court wasn't buying it.


This issue is resolved not by Webster's definition of “casualty” but by the Code's provisions for “casualty loss”............... Moreover, the Pangs' position conflates two distinct things—the victim's casualty (which occurred when he died in 2002) and the Pangs' financial loss (which occurred when they made their payment in 2004)  —and does not explain how the “casualty” of the victim results in a deductible “casualty loss” for the Pangs under section 165.

The Pangs' claimed loss is attributable not to property damage but to the monetary settlement of a wrongful death claim. To the extent the Pangs are arguing that the payment constitutes a loss of their property, we find that to be beyond the scope of section 165(c)(3). The term “losses of property” in section 165(c)(3) does not include a taxpayer's monetary payment to a third party or a decrease in the taxpayer's net worth.

I generally root for the taxpayer, when their arguments aren't totally lame.  I don't think Mr. Pang's argument was all that lame, but I'm still glad that he lost.  Think about driving a little slower and pay attention to your driving and don't be such a cheapskate on your liability limits in case, God forbid, something happens anyway.

And Another Purge

I was starting to worry about running out of material, but my last ramble through the hottest stuff on RIA indicated that I am well supplied for a while, so I will continue purging those items that I just couldn't seem to turn into a full length post.  I thought they were worth sharing when I first saw them though and have looked at them each a dozen or so times since then, so I hate to let them go without a little salute.



Henry A. Williams v. Commissioner, TC Summary Opinion 2010-125

had a fairly messy set of facts.  The bottom line is that when it comes to deducting alimony, oral agreements are not worth the paper they are printed on.

Anthony Cicciarella, et ux. v. Commissioner, TC Memo 2010-195 was about medical expenses, but the issue was really just substantiation.  The taxpayers had a not unusual amount of lameness, telling the court that they had "researched" the wrong year, but best of all that some of their records were destroyed in a flood.  Unfortunately the flood occurred before the records would have been produced.  I was going to title the post "Antediluvian".

THE HENRY E. & NANCY HORTON BARTELS TRUST v. U.S., Cite as 106 AFTR 2d 2010-6004

was a good example of an "is what it is" decision.  The exempt trust was taxable on UBIT from securities transactions that it had entered into on margin. Trust's attempt to sidestep statute's clear language with claim that UBIT was really meant only to apply in case of unfair competition was off base since statute was clear and didn't limit UBIT in manner suggested.


More Fun For Landlords

was a title of a post I was working on about the extension of 1099 requirements to landlords.  The cautionary note that I wanted to make is the language in several IRS audit manuals :

The examiner must be aware of the potential of the information return test work because it can often lead to significant tax dollars which the primary return (corporate, partnership, or individual) may not produce. Large adjustments can be produced through back-up withholding, return penalties, and even on the returns of the payees who were required to report the compensation but did not receive information returns.


If you were supposed to send somebody a 1099, you were supposed to ask them for their social security number of EIN.  Since you didn't ask they didn't give it to you.  Therefore you should have subjected their payments to back up withholding.  It's a nightmare.  You can get out of the back-up withholding by getting them to sign a form swearing they reported the income.  Good luck.
Rev. Proc. 2010-36, 2010-42 IRB, 09/30/2010

gives taxpayers a special procedure for claiming a casualty loss from corrosive drywall :

An individual who pays to repair damage to that individual's personal residence or household appliances that results from corrosive drywall may treat the amount paid as a casualty loss in the year of payment.

Taxpayers who have a pending claim for reimbursement may deduct 75% of the amount they spend for repairs in the year they spend it.  The loss is claimed on Form 4864 and taxpayers should mark "Revenue Procedure 2010-36" on the top of the form.

Joel P. Arnold v. Commissioner, TC Memo 2010-223

I found the IRS and the Tax Court a little mean spirited in this one.  The taxpayer worked as a field auditor for the State of Georgia.  He was allowed to check out a state vehicle for his work, but if he travelled more than a certain distance he was required to stay over.  This would prevent him from going home to his chronically ill son.  So he used his own car and claimed mileage which was disallowed.  On the other hand they did allow his job hunting expenses, which were based on the same motivation.


ARGYLE v. COMM., Cite as 106 AFTR 2d 2010-6759 10/14/2010



  The taxpayer is a CPA, appealing a Tax Court decision, pro se (That means fool for a client).  He tried to file as single even though his divorce had not gone through.  He was also trying to deduct legal expenses for criminal proceedings for simple assault, the assault being a kiss.  Seemed like an interesting story, but ultimately I couldn't make anything much out of it.

Willard R. Randall v. Commissioner, TC Summary Opinion 2010-163

Mr. Randall was entitled to $69,000 in property equalization from his ex-spouse.  He offset the amount against alimony that he was required to pay.  The IRS wanted to deny the deduction, but the taxpayer won.  I was going to title the post "Still Better to Swap Checks", but as I read it more closely I saw that it was possible that check swapping might not have been a viable alternative (e,g, if the property being equalized was illiquid).  It does illustrate the principle that your life will be simpler in the long run if you don't skip transaction steps.