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Archive for March 10th, 2011

In 2002, Robert Pang hit and killed a pedestrian with his car. Pang was sued for wrongful death, and agreed to pay the estate of the deceased $250,000. He was not compensated or reimbursed by insurance for the payment.

On his 2004 tax return, Pang deducted the $250,000 payment as a casualty loss under Section 165(c)(3).

Relevant Law: Section 165 allows a deduction for any loss sustained during the year not compensated for by insurance or otherwise. Under subparagraph (c)(3), in the case of an individual, the deduction is limited to losses of property not connected with a trade or business or a transaction entered into for profit, if such losses arise from fire, storm, shipwreck, or other casualty, or from theft. (emphasis added)

Taxpayer’s Argument: Pang looked to Websters for the following partial definition of a casualty: “losses caused by death…” Reasoning that the victim’s death certainly qualified as a casualty under this definition, Pang believed he was entitled to a deduction.

Court’s Decision: The Tax Court took issue with Pang’s logic; noting that while the victim’s death was certainly a casualty to the victim, it was not a casualty to Pang. Further, Pang did not suffer the physical damage or destruction of property that has become the inherent prerequisite to a casualty loss deduction after decades of case law.

In holding against the taxpayer, the court concluded that the $250,000 payment was not attributable to property damage, but rather the monetary settlement of a wrongful death claim, which is not covered by the definition of a casualty loss.

Pang v. Commissioner, T.C. Memo 2011-55

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