Some times in life, failure to read the fine print will cost you. And other times, failure to read the not-so-fine print will cost you just the same.
Consider the case of Larry Beach. Larry — as I envision most men named Larry are — was the proud owner of a Ford Mustang. In February 2007, the Mustang was damaged in an accident caused by an uninsured motorist. Some key facts.
- Beach’s basis in the Mustang was $25,482.
- The Mustang’s fair market value (FMV) just before the accident was $28,500.
- Its FMV immediately after the accident and before any repairs was $2,250.
- The total cost to repair the Mustang was $18,772.79.
Beach filed a claim with his insurance company, which then paid $18,522.79 of the repair cost directly to an auto body shop, with Beach’s only out-of-pocket expense his deductible of $250. Soon after, Beach got his beloved ‘Stang back.
On his Form 1040, Beach claimed a casualty loss of $17,287. The IRS denied the loss, based on a rather obvious read of the statute.
Section 165(a) provides: “There shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.” Are you starting to see the problem?
Beach was compensated by his insurance company to the tune of $18,552. The only expense he incurred personally was his deductible of $250.
Section 165(h) further provides that a casualty loss is only deductible to the extent it exceeds $100 and 10% of the taxpayer’s adjusted gross income. Because Beach’s $250 loss did not exceed 10% of his adjusted gross income, no loss was deductible pursuant to I.R.C. § 165.