Category: Deductions & Credits; Estate & Gift
Subject: Losses
Title: Casualty Loss: Payment of Tort Judgment
IRC Sections: 165(c)(3)
Filename: 1282.html
Date Produced: 10/95

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Background
Taxpayer (TP) died in an automobile accident. As a result of the accident, TP's estate was sued. Ultimately, the case was settled through an agreement by which the estate sold a certain property and relinquished 50% of the proceeds to the plaintiff.

Issue
Does the portion of the sales proceeds relinquished in settlement of the lawsuit constitute a casualty loss to TP's estate?

Answer
There is no casualty loss in this case.

Discussion
It is well settled that payment of money damages in settlement or as a judgment in connection with a tort claim does not constitute a casualty. There are numerous cases on the books dealing with automobile accidents. These cases hold that Section 165(c)(3) requires damage to the taxpayer's own physical property. Money is treated as property for this purpose only if currency or coinage is damaged. Thus payment of money is not damage to the taxpayer's own physical property. See, for example, Dosher v. U.S., 730 F2d 375, 84-1 USTC ¶9420, (CA-5, 1984); Tarsey v. Commissioner, [Dec. 30,840], 56 T. C. 553 (1971); and Stern v. Carey, [54-1 USTC ¶9190], 119 F. Supp. 488 (N. D. Ohio 1953).

The facts of this case are very slightly different from those of the reported cases I was able to locate: the reported cases deal with payments of money whereas the facts of this case include liquidation of a discrete property to produce the money for settlement. Existing cases establish A) that a casualty loss requires damage to the taxpayer's own physical property; and B) payment of money to settle a claim arising from damage to another's property does not create a deductible casualty loss. I see no reason why liquidation of the taxpayer's own property to produce the money to settle a lawsuit resulting from damage to another's property (or person in this case) should change the characterization of the settlement from a nondeductible personal item into a casualty under IRC Section 165(c)(3). The liquidation is simply a means of producing money the payment of which does not produce a casualty loss.