Cross References
• Ambrose, U.S. Court of Federal Claims, August 3, 2012

In November 2002, the taxpayer’s home was damaged by a dryer fire. The insurance company contracted with a company to repair the fire, smoke, and water damage in the home. On December 25, 2002, a second fire occurred which totally destroyed the home. On December 26, 2002, the taxpayer reported the loss to his insurance company. On December 27, 2002, an insurance adjuster met with the taxpayer and conducted an inspection of the property, as well as an interview.

On January 29, 2003, the insurance company sent a letter to the taxpayer asking that within 60 days the taxpayer submit to the insurance company a signed, sworn proof of loss. On June 12, 2003, the insurance company denied the insurance claim asserting that the taxpayer failed to return the signed, sworn proof of loss statement to the insurance company. The taxpayer filed suit against the insurance company, and a court later ruled in favor of the insurance company. The taxpayer then filed an amended federal tax return claiming a casualty loss deduction for the loss. The IRS denied the loss, claiming the taxpayer failed to timely file an insurance claim, as required by IRC section 165(h)(5)(E).

Section 165(h)(5)(E) says “any loss of an individual described in subsection (c)(3) to the extent covered by insurance shall be taken into account under this section only if the individual files a timely insurance claim with respect to such loss.” Despite the evidence that the taxpayer did contact the insurance company concerning the fire four hours after the event, the IRS claimed the taxpayer was not entitled to deduct a casualty loss for the fire that destroyed their home because they failed to file a timely insurance claim with respect to this loss. The IRS said this failure to provide proof within the time specified in their policy is the reason why a court later decided in favor of the insurance company.

The Court looked to congressional intent to determine what is meant by filing a timely insurance claim. The House Committee report said: “The deduction for personal casualty losses should be allowed only when a loss is attributable to damages to property that is caused by one of the specified types of casualties. Where the taxpayer has the right to receive insurance proceeds that would compensate for the loss, the loss suffered by the taxpayer is not damage to property caused by the casualty. Rather, the loss results from the taxpayer’s personal decision to forego making a claim against the insurance company. The committee believes that losses resulting from a personal decision of the taxpayer should not be deductible as a casualty loss.”

The IRS argued the taxpayer failed to file a timely insurance claim because they made a personal decision not to file the proof of loss on a timely basis. The Court said the statute does not use that phrase, nor does it define what is meant by the phrase it actually employs, “files a timely insurance claim.”

The Court looked to a number of cases which all show that requiring an insured taxpayer to file a timely claim does not mean that he must file with his insurer anything more than what qualifies, under his policy, as a basic demand for compensation.

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