T.C. Summary Opinion 2004-80

UNITED STATES TAX COURT

MILTON CRAIG WERNER AND BARBARA K. WERNER, Petitioners v.

COMMISSIONER OF INTERNAL REVENUE, Respondent

Docket No. 14689-02S. Filed June 17, 2004.

Milton Craig Werner and Barbara K. Werner, pro sese.

Huong T. Duong, for respondent.

DEAN, Special Trial Judge: This case was heard pursuant to 

the provisions of section 7463 of the Internal Revenue Code in 

effect at the time the petition was filed. Unless otherwise 

indicated, subsequent section references are to the Internal 

Revenue Code in effect for the year at issue, and all Rule 

references are to the Tax Court Rules of Practice and Procedure. 

The decision to be entered is not reviewable by any other court, 

and this opinion should not be cited as authority.
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Respondent determined a deficiency in petitioners' 1998

Federal income tax of $17,280.84 and an addition to tax under 

section 6651(a) of $4,370.11 for failure to file timely a Federal

income tax return for 1998. Petitioners concede as correct

respondent's adjustments for: (a) Taxes of $7,200 deducted on

Schedule A, Itemized Deductions; (b) charitable contributions of

$9,400 deducted on Schedule A; and (c) the addition to tax under

section 6651(a) for failure to file timely. Petitioners also

concede that they are entitled to only two dependency exemptions.

Respondent concedes that there will be no adjustment for: 

(1) Capital gain income in the amount of $4,283; or (2) 

miscellaneous expenses of $86 on Schedule A. 

The parties agree that the only issue remaining for decision

by the Court is whether petitioners are entitled to deduct on

Schedule A casualty and theft losses totaling $37,222.

Some of the facts have been stipulated and are so found. 

The stipulation of facts and exhibits received in evidence are 

incorporated herein by reference. At the time the petition was 

filed, petitioners resided in Berkeley, California.

Background

Petitioner Milton Werner has been a teacher most of his

career and is now a high school principal. Prior to the year at

issue, he accepted a new job "across the bay" in Palo Alto,

Callifornia. He and his family sold their home, put their
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belongings in "storage units", and rented another residence. 

Abnormally wet weather during the year caused the storage units

to leak badly. 

Petitioner Barbara Werner's father, Col. James Richard

Kelly, was a former dean of the New Mexico Military Academy. An

avid reader and historian, he amassed a large personal library. 

The collection included books that were leather bound,

antebellum, and signed editions. The items were subjected to

water damage, most beyond repair.

On Schedule A of petitioners' Federal income tax return,

petitioners claimed a casualty loss deduction of $37,222. 

Included with the return was a Form 4684, Casualties and Thefts,

reporting the loss of the books in the amount of $30,000 and the

loss of some furniture accounting for the balance of the claimed

amount. 

During the examination of petitioners' return, petitioners

presented to the auditor a copy of an appraisal prepared by an

appraiser certified by the International Society of Appraisers. 

According to the cover letter forwarding the appraisal to

petitioner Milton C. Werner:

The objective of the appraisal, at your request, was to

estimate the Fair Market Value of the household

furniture prior to damage, and in current damaged

condition. The books were appraised at Replacement

Value, for the purpose of settling an insurance claim. 

These values are effective as of the inspection date.
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1Sec. 7491 is effective with respect to court proceedings

arising in connection with examinations by the Commissioner

commencing after July 22, 1998, the date of its enactment by sec.

3001(a) of the Internal Revenue Service Restructuring and Reform

Act of 1998, Pub. L. 105-206, 112 Stat. 685, 726.

This appraisal is to be used ONLY for the function

of settling your insurance claim. Any other use of

this appraisal, such as for selling the property or for

income tax deduction purposes, renders it null and

void.

The appraisal finds that the fair market value of the household

furniture prior to damage is $4,315 and in damaged condition the

value is $1,140. The replacement value of the books available

for valuation was determined to be $2,910, and the "Books and

year books badly damaged and thrown away" were "Not valued".

Respondent determined that petitioners had failed to

substantiate the casualty loss and denied the deduction in full.

Discussion

Because petitioners failed to meet the requirements of

section 7491(a)(2), the burden of proof does not shift to

respondent in this case.1

Losses may be deductible under section 165 to the extent

"not compensated for by insurance or otherwise." In the case of

an individual, section 165(c)(3) allows a taxpayer to claim as a

deduction any loss from theft or casualty sustained during the

taxable year. The loss is allowed only to the extent that it

exceeds $100 and the net casualty loss is in excess of 10 percent

of adjusted gross income. Sec. 165(h). The amount of the loss
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allowed as a deduction is the lesser of: (1) The fair market

value of the property immediately before the loss, or (2) the

adjusted basis of the property. Helvering v. Owens, 305 U.S. 468

(1939); sec. 1.165-7(a)(2) and (b), Income Tax Regs. 

The basis of property acquired by purchase is its cost. 

Sec. 1012. The basis of inherited property ordinarily is the

fair market value of the property at the date of the decedent's

death. Sec. 1014. The basis of property acquired by gift is the

same as it would be in the hands of the donor or the last

preceding owner by whom it was not acquired by gift, except that

if such basis is greater than the fair market value of the

property at the time of the gift, the basis for determining loss

is the fair market value of the property. Sec. 1015.

In order for the Court to determine whether petitioners are

entitled to a casualty loss, petitioners' basis in the property

damaged or destroyed must be known. Where petitioners fail to

prove that basis, the Court is unable to determine the amount of

the loss that is deductible. Zmuda v. Commissioner, 79 T.C. 714,

728-729 (1982), affd. 731 F.2d 1417 (9th Cir. 1984); Millsap v.

Commissioner, 46 T.C. 751, 760 (1966), affd. 387 F.2d 420 (8th

Cir. 1968).

The Court presumes that petitioners acquired the items of

furniture by purchase, but they offered no evidence of the

acquisition cost of the items. The books that were damaged were
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acquired by either gift or inheritance, and petitioners offered

no evidence of their basis in the items. As to all of the items,

therefore, petitioners have failed to prove their tax basis in

the property.

The Court therefore sustains respondent's determination that

petitioners are not entitled to deduct on Schedule A, casualty

and theft losses totaling $37,222.

Reviewed and adopted as the report of the Small Tax Case

Division.

Decision will be

entered under Rule 155.