A loss is a gradual decline in the value of assets. This is different from an expense because expenses are typically one time costs where the value of the expense remains constant through the short use.
Business Losses
These losses are deductable in accordance with § 165(c)(1).
Casualty & Theft Losses
§ 165(c)(3).
Mazzei v. Commissioner
61 T.C. 497 (1974).
Facts
Mazzei was convinced by a few people and a co-worker that money could be reproduced. He took about 20,000 out of his business to complete the reproduction. When they were in the process, the people who claimed they could reproduce the money took the 20,000 and fled. Mazzei then filed a loss of around 20,000 on his tax return for that year.
Analysis
Although this is a loss, this is not deductable. The government has an interest in preventing counterfeit. Because the taxpayer believed he was engaging in counterfeit activities (even though there was no legitimate method of duplicating currency presented) the loss could not be deducted becuase it frustrated “clearly defined policy against counterfeiting obligations of the United States.”
Additional Notes
The takeaway from this case is that if a taxpayer is engaging in criminal activity or behavior, then you cannot take a loss if it arises based on that behavior. This is a public policy exception to § 165.
Revenue Ruling 79–174
1979–1 C.B. 99.
Facts
The taxpayer owned a lot with 40 pine trees on it. These trees were healthy until the southern pine beetle attacked the trees. Within 10 days, the trees were dead. There was no previous evidence of attacks like this in the area previously. Could the taxpayer deduct a causulty loss for the death of the trees?
Analysis
A casualty is an “identiable event of a sudden, unexpected, or unusual nature.” Although previous revenue rulings prevented a loss deduction for insect invested trees, this case is facutally distinguishable. Here, the attack was sudden, the trees were dead within 10 days. Because there was no evidence of attacks like this in the area previously, the attack was also unexpected. Thus, there was a deductable loss.
Carpenter v. Commissioner
T.C. Memo 1966–228 (1966).
Facts
While doing the dishes, the husband mistakenly poured a cleaning solution and his wife’s wedding ring from a cup that was sitting next to the sink. He then turned on the disposal. After the ring was recovered and appraised, it was a total loss amount to $980. Later the husband purchased a new ring for $170 to replace the original. Can this be seen as a casualty loss?
Analysis
The husband’s actions were accidental. Although he may be negligent, this has no bearing on whether a loss occurred. Here, the loss occurred because the ring was hidden in the solution, the action of disposing the solution and the ring down the disposal in the sink was sudden. This loss is not reduced by the value of the replacement ring because the husband was not an insurer of the ring; instead, he gave the ring as an act of repentance for his actions.
