Bad things can happen to good people. And when they happen, you can generally catch something of a break in the way of a casualty loss filed with the IRS. The casualty loss deduction allows you to write off damage, destruction or loss of your property from any sudden, unexpected, and unusual event such - usually a flood, hurricane, tornado, fire, earthquake or even the massive snowstorm we just encountered on the east coast this weekend.
Oh - and driving drunk.
Yes, in a decision that astounded tax professionals everywhere, the U.S. Tax Court allowed the owner of a car to write off thousands of dollars after he totaled it while driving under the influence.
The taxpayer, Justin M. Rohrs, bought a 2006 Ford F-350 pickup truck for $40,210 in 2005. Just over two months after he purchased the truck, he went to a party at a friend's house. He drank at the party but had a driver take him back to his house. He then decided to drive his own vehicle, the Ford truck, to his parents' house. During the ride to his parents' house, he rolled the truck over, totaling the truck and landing him in the hospital.
Rohrs' blood alcohol limit following the crash was .09, just over the legal limit in California. As a result, Rohrs was cited for the crash.
Rohrs filed a loss with his insurance carrier. The carrier, not surprisingly, turned him down because of the citation.
So Rohrs decided to collect another way: he filed for a casualty loss deduction on his tax return. Assuming that the truck was personal-use property, the amount of the casualty loss would have been the lesser of the adjusted basis of the property (the cost of the truck), or the decrease in fair market value of the property as a result of the casualty (generally, the value of the truck at the time of the accident, taking into account any improvements or depreciation), less $100. Rohrs figured this amount to be $33,629 and reported it on a federal form 4864, Casualties and Thefts.
The IRS issued a notice of deficiency to Rohrs, disallowing the casualty loss deduction, and assessing a $6,230 income tax deficiency in addition to a $1,246 section 6662(a) accuracy-related penalty for the 2005 tax year. As a result, Rohrs decided to take the matter to court and he did it on his own: Rohrs represented himself in court against the IRS.
The case turned on whether Rohrs' drunk driving was willful. The IRS relied on section 1.165-7(a)(3), Income Tax Regs., which you can claim a casualty loss for damage to a vehicle if the damage is not due to the willful act or willful negligence of a taxpayer. So case closed, right? After all, Rohrs was admittedly drinking and he was cited.
Not so fast. The judge, remarkably, found that "[w]hile petitioner’s decision to drive after drinking was negligent, that alone does not automatically rise to the level of gross negligence." The judge found that "the level of intoxication and the quality of the driving has to be taken into consideration." The judge believed Rohrs when he argued that he didn't know he was drunk when he got into his truck, and that his drinking may not have been the cause of the accident. After all, the judge wrote, Rohrs was just "slightly over California’s legal limit of 0.08 percent."
In other words, being just a little drunk is apparently enough for the IRS, the police and the insurance company but not for Tax Court.
As a result of his actions, which the judge found to be negligent but not willful, the deduction was allowed and the penalty was reversed.
So, good news, right? For Rohrs, sure, but not necessarily for other taxpayers. The Tax Court opinion, while certainly interesting reading, cannot be treated as precedent for other cases (IRC section 7463(b)). In other words, don't rely on the same thing happening twice: your judge may not be as sympathetic.
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Kelly Phillips Erb is a founding shareholder of The Erb Law Firm, PC, in Philadelphia, PA, where she focuses on tax law for businesses and families. Kelly authors the popular tax blog,
taxgirl, cited in
2008 and
2009 as one of the top 100 legal blogs by the ABA Journal.
