On May 12, 2005, a 150-foot long section of a stone retaining wall came crashing down alongside Manhattan’s West Side Highway, causing a closure of the highway and nightmarish traffic jams. Countless New Yorkers sitting in stalled traffic were no doubt wondering (i) whose retaining wall had caused the havoc and (ii) whether this was preventable or caused by a freak accident. In an amusing twist to a very non-amusing incident, a recent tax case in connection with the collapse of this wall hinged on these same questions.
Background
Internal Revenue Code Section 165(a) provides a general rule that “[t]here shall be allowed as a deduction any loss sustained during the taxable year and not compensated for by insurance or otherwise.” For an individual, however, Section 165(c) limits the amount that can be deducted under this provision to (1) losses incurred in a trade or business, (2) losses incurred in any transaction entered into for profit, though not connected with a trade or business, and (3) “losses of property” that don’t fit in either of the previous two categories, if “such losses arise from fire, storm, shipwreck, or other casualty, or from theft” (a “casualty loss”).
