Category: Deductions & Credits; Individuals Copyright 1998, The Tax Resource Group. All rights reserved. Telephone 800-578-3498. Internet: www.taxresourcegroup.com Individual taxpayer (TP) operated a self-service car wash. In November of 1993, the car wash was seriously vandalized, and TP made the decision to abandon the business at that time. The car wash was not repaired and was never operated after the vandalism. The facility was actually torn down this month. The equipment of the business has significant remaining tax basis. Issues 2. If so, is the loss available in 1993 or 1994? Answer Discussion To be allowable as a deduction under Section 165(a), a loss must be Reg. Sec. 1.167-8(a)(4) provides that where an asset is retired by actual physical abandonment (as, for example, in the case of a building condemned as unfit for further occupancy or other use), loss will be recognized measured by the amount of the adjusted basis of the asset abandoned at the time of such abandonment. In order to qualify for the recognition of loss from physical abandonment, the intent of the taxpayer must be irrevocably to discard the asset so that it will neither be used again by him nor retrieved by him for sale, exchange, or other disposition. It seems certain that TP had the requisite intent to abandon the car wash given that it was actually torn down in April, 1994. The only serious issue is when that intent was formed. This is entirely a question of fact. Based on the facts set forth above, it appears that the intent to abandon the car wash was formed in 1993; thus, TP should be able to deduct the undepreciated cost of the equipment in 1993. Although I cannot locate any case law sufficiently close to TP's facts, it seems to me that the complete cessation of business after the event of vandalism argues strongly that TP made the decision to abandon the car wash in 1993. Tax effects which turn on questions of fact are always susceptible to scrutiny and alternative interpretations. Based on the limited facts set forth above, it appears that TP has a strong case for taking a deduction in 1993. Be cautioned, however, that if the matter were scrutinized by the IRS, their determination and the determination of a court (if any) would be made based on all the facts that could be elicited through the audit, appeals, and litigation discovery processes. It is almost a certainty that there are relevant facts incremental to those set forth above, and it is probable that there are also relevant unknown even to you, TP's tax advisor. Of course, it is impossible to judge the effect these as yet unknown facts would have (if any) on the ultimate outcome of this issue. An additional word of caution, in the event TP is examined on this issue and the statute of limitations for the 1993 tax year is extended as a result of the examination, care should be taken not to allow the statue of limitations to expire on the 1994 return without taking precautionary measures to protect 1994 as the fall-back position for this deduction. Should measures be necessary, you should consider filing a protective claim for refund for tax year 1994 in order to hold the statute open. I would be happy to discuss this matter with you further should you so desire. |
