In Chief Counsel Advice 201529008 the IRS noted that while a loss sustained in an automobile accident might normally appear to meet the definition of a casualty loss, that won’t be true if your business is a car rental operation.
In the matter discussed in this advice a car rental company had been claiming as a casualty loss the amount of loss incurred when a customer had bought the company’s damage waiver, become involved in accident and the rental car company determined that they were not going to repair the vehicle and return it to their fleet. So the question became whether the company was properly classifying the loss they incurred in this case.
Generally for a loss to qualify as a casualty loss under IRC §165, it must result from an event that is:
- Results in damage to the property and
- Is sudden, unexpected and unusual in nature
There was little question the auto accidents met the first two tests, being identifiable and resulting in damage to the vehicles.
But the last test is where the CCA determined the rental car company failed to meet the test. While for the average car owner a car accident would be a sudden, unexpected and unusual event, a car rental operation is simply going to see such damage occur on a regular basis simply because of the large number of vehicles they have out on rental contracts.
As the memo notes:
...the Taxpayer operates a business in which it rents a large number of vehicles. The number of vehicles damaged, just in the subset at issue, remained relatively consistent. When considered in the context of the overall approximate annual cost to repair damage to the Taxpayer's vehicles, it is clear that accidents are not unusual and nonrecurring items and that they are an ordinary and necessary expense of engaging in the Taxpayer's line of business.