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OPINION
Section 165(a)1 allows a deduction for “any loss sustained
during the taxable year and not compensated for by insurance or
otherwise.” Although an individual taxpayer’s business and
personal casualty losses are deductible under section 165(c),
there is a distinction between them. Casualty losses incurred in
a business or other profit-seeking activity can be fully
deductible, whereas personal casualty losses are subjected to a
$100 exclusion and must exceed 10 percent of a taxpayer’s
adjusted gross income. See sec. 165(h)(1) and (2). That
distinction is critical to petitioners because the limitations on
personal losses may reduce or eliminate petitioners’ ability to
deduct a casualty loss deduction. There is no dispute about the
occurrence of the earthquake, and respondent seems to agree that
petitioners had some loss; however, respondent contends that the
loss was personal and was of an amount that would not have
exceeded the threshold limitations.
First, we consider the amount of petitioners’ loss. A
casualty loss is the difference between the fair market value of
the property immediately before and immediately after the
casualty. See sec. 1.165-7(a)(2)(i), Income Tax Regs.
1 Unless otherwise indicated, section references are to the
Internal Revenue Code in effect for the tax year under
consideration, and Rule references are to this Court’s Rules of
Practice and Procedure.
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Last modified: May 25, 2011