Taxing Definitions

Definitions — Written in stone

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If nothing is written in stone, then something must be written in stone, and that something is nothing.

The stone referenced in a recent revenue procedure (revenue procedure 2017-60) was the aggregate used in residential foundations of certain homes built in Connecticut.

Aggregate is one of four main elements in concrete that is used in the construction of home foundations (the other three are cement, chemical admixtures, and water). The aggregate that is the subject of the revenue procedure contained a naturally existing mineral called pyrrhotite. When pyrrhotite comes in contact with water and oxygen, the resulting minerals cause concrete to deteriorate prematurely.

In the Connecticut homes, which were built in the 1980s, 1990s, and early 2000s, the repairs can cost from $100,000 per home and up, and typically are not covered by insurance.

The question before the IRS: Can the loss resulting from the deteriorating concrete be claimed as a casualty loss? (Editorial note: The answer affects taxpayers throughout the country, not only those in Connecticut.)

Here are the tax rules for casualty losses, which may or may not be written in stone.

From internal revenue code section 165(a): Generally allows taxpayers to deduct losses sustained during the taxable year that are not compensated for by insurance or otherwise.

From internal revenue code section 165(c )(3): Limits an individual’s casualty loss deduction to losses arising from fire, storm, shipwreck, or other casualty, or from theft.

From revenue ruling 72-592: A “casualty” is the complete or partial destruction or loss of property resulting from an identifiable event of a sudden, unusual, and unexpected nature. To be “sudden” the event must be one that is swift and precipitous and not gradual or progressive. To be “unexpected” the event must be one that is ordinarily unanticipated that occurs without the intent of the one who suffers the loss. To be “unusual” the event must be one that is extraordinary and nonrecurring, one that does not commonly occur during the activity in which the taxpayer was engaged when the destruction or damage occurred, and one that does not commonly occur in the ordinary course of day-to-day living of the taxpayer.

 

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Pyrohite casualty loss rp-17-60

 

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Right answer!
Sorry, wrong answer :(

Yes, the deterioration can qualify for casualty loss treatment.

In view of the unique circumstances surrounding the damage caused by deteriorating concrete foundations containing the mineral pyrrhotite, the Treasury Department and the IRS conclude that it is appropriate to provide a safe harbor method that treats certain damage resulting from deteriorating concrete foundations as a casualty loss and provides a formula for determining the amount of the loss.

Accordingly, for an individual taxpayer within the scope of this revenue procedure, the IRS will not challenge the taxpayer’s treatment of damage resulting from a deteriorating concrete foundation as a casualty loss if the loss is determined and reported as provided in this revenue procedure.

This revenue procedure applies to any individual taxpayer who pays to repair damage to that taxpayer’s personal residence caused by a deteriorating concrete foundation that contains the mineral pyrrhotite.

This revenue procedure is effective for federal income tax returns (including amended federal income tax returns) filed after November 21, 2017.

Editorial note: The IRS issued a similar revenue procedure in 2010 (revenue procedure 2010-36) regarding the federal income tax treatment of amounts paid to repair damage to personal residences resulting from corrosive drywall building materials.

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