Case — Effect of Negligence on Casualty Loss

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TL Case Summ

THE QUESTION

Does driving while intoxicated rise to the level of willful negligence necessary to deny a casualty loss deduction?

THE DISPUTE

Taxpayer Says: His actions did not rise to the level of willful negligence and the casualty loss deduction should be allowed.

Internal Revenue Service Says: The casualty was caused by the taxpayer’s willful negligence. The loss should be denied.

THE LAW

From Internal Revenue Code Section 165(a): Allows a deduction for losses not compensated for by insurance or otherwise.

From Internal Revenue Code Section 165(c)(3): If a loss is not incurred in connection with a trade or business or in a transaction entered into for profit, it may be deducted by an individual if it arises from a fire, storm, shipwreck, or other casualty, or from theft, except as provided in section 165(h).

From Federal Tax Regulation 1.165-7(a)(3): Provides that an automobile may be the subject of a casualty loss when the damage is not due to the willful act or willful negligence of a taxpayer.

From People v. Bennett, 819 P.2d 849 (Cal. 1991): The California Supreme Court defined gross negligence as “the exercise of so slight a degree of care as to raise a presumption of conscious indifference to the consequences.” Gross negligence cannot be shown by the mere fact of driving under the influence and violating the traffic laws. The overall circumstances of the defendant’s actions, including the level of intoxication and/or the manner in which he drove must be considered.

From Commissioner v. Heininger, 320 U.S. 467, 473 (1943): Courts have disallowed deductions where national or State public policy would be frustrated by the allowance of a deduction.

THE CAUSE OF THE DISPUTE

You can take a casualty loss deduction for damage to your car due to an accident if the damage results from faulty driving (yours or the other driver’s), as long as the accident is not caused by willful negligence. The tax code and regulations do not define “willful negligence.”

In this case, the taxpayer, who lived in California, arranged for a ride home after drinking alcohol at a party. Then, believing he was no longer intoxicated, he decided to drive to another location. He went off an embankment, damaging his vehicle, and was cited and arrested for driving under the influence of alcohol (.01 percent over the legal threshold). His insurance company refused to pay his claim due to the citation and arrest, and he deducted a casualty loss on his income tax return. He contends that though he was negligent for driving while intoxicated, the fact that he arranged a ride and chose not to drive immediately after drinking shows his negligence was not willful, and the casualty loss should be allowed.

The IRS disagrees. Alternatively, the IRS argues that allowing a deduction for a loss caused by drunk driving frustrates public policy (by encouraging unlawful behavior).

WHAT WOULD YOU DECIDE?

Make your selection, then see “The Court’s Decision” below for a full explanation

For the or for the

THE COURT’S DECISION

For the Taxpayer. Taxpayer’s actions did not amount to willful or gross negligence. While the decision to drive after drinking was negligent, that alone does not automatically rise to the level of gross negligence. The circumstances do not support a holding that taxpayer was willfully or grossly negligent. In addition, the casualty loss deduction would have no impact on either the DUI sentence or fine. Taxpayer is entitled to the claimed casualty loss deduction.

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HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit TaxingLessons.com and HLCarpenter.com.

This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.

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For the Taxpayer. Taxpayer’s actions did not amount to willful or gross negligence. While the decision to drive after drinking was negligent, that alone does not automatically rise to the level of gross negligence. The circumstances do not support a holding that taxpayer was willfully or grossly negligent. In addition, the casualty loss deduction would have no impact on either the DUI sentence or fine. Taxpayer is entitled to the claimed casualty loss deduction.