The Tax Court found that, in the case of Partyka v. Commissioner, TC Summ. Op. 2017-79, that while the taxpayer had sustained a theft loss that was properly deductible in 2012, the taxpayer had not taken sufficient care to obtain proper values for the property stolen, assessing the accuracy related penalty of 20% under IRC §6662 in addition to the tax due.
This case involves a combination of the sale of household furnishing and the rental of a residence to a tenant who ended up giving the taxpayer a check that bounced to pay for the furnishings and initial rent. The tenant did not make good on the amount due, so the taxpayers undertook proceedings to evict the tenant.
When the taxpayers finally took back possession of the house as part of the eviction proceedings, they found that the tenants had left not only with the furniture they had attempted to buy, but also virtually everything else in the home.
As the Court described it:
When petitioners gained access to the rental home, they discovered that all of the furnishings had been removed by the tenant and her husband, including furniture, window coverings, draperies, and accoutrements. In addition, petitioners discovered some damage to the home, including chipped grout and broken doors, and the house interior needed to be repainted. Petitioners took photographs of the interior and exterior of the home on the day (November 15) they gained entry. Those photographs show the rooms photographed earlier but without the furniture and accoutrements. They also show damage or abuse to the interior and exterior of the home.
The taxpayers then sought the help of the local Sheriff’s office to obtain their goods, resulting in the following situation:
After discovering that furniture was missing, petitioners contacted the Sheriff's Office and made a formal complaint that the tenant had illegally removed petitioners' personal property from the rental home. The tenant had left a rental truck in front of the rental home which contained some of the items, including artwork, but some of the items had been “damaged and destroyed.” Later that day, a deputy sheriff found the tenant and her husband, who had another rental truck and a pickup truck, both containing petitioners' household items along with some of the tenant's own items. The tenant and her husband confirmed that they had removed furniture and items from the rental home that the tenant had not agreed to purchase. The tenant agreed to return them.
Petitioners were permitted to look through the trucks in front of the rental home and to remove their items in the presence of the deputy sheriff. The process was complicated and time consuming because petitioners' and the tenant's property had been commingled. They worked at this task for some time, and the deputy sheriff decided that the process would be finished the next day after the tenant had removed her personal property from the trucks. Upon petitioners' return the next day, the trucks and the remaining items were gone. Ultimately, the tenant did not make any further payments and did not return any other items. Petitioners did not receive the report of the Sheriff's Office until late in December 2011. No criminal charges were made or filed against the tenant or her husband.
Though the theft took place in 2011, the taxpayers properly delayed claiming the deduction until 2012, since at the end of 2011 they were attempting to evaluate their options for recovering the remaining property or getting reimbursement for their loss from the tenants. As the Court describes their continuing saga:
Early in 2012 petitioners completed their cataloging of the items that were removed from the rental home, and they consulted with a couple of attorneys regarding their legal options to recover the items and/or to seek damages. During 2012 petitioners were in touch with attorneys and law enforcement officers in an attempt to determine whether they would be able to recover their furnishings or seek monetary damages. Petitioners discovered that the tenant and her husband had been involved in this type of activity before and had routinely made offers to purchase furniture and then disappeared without making payment. During 2012, after petitioners were able to assess the tenant's financial situation, they determined that it would be a “waste of time” to pursue the tenant and her husband, either civilly or criminally. It was at this point in 2012 that petitioners became aware that they would not recover their furniture and other household items.
The Court did not dispute that they had suffered a casualty loss and, frankly, had been drawn into a rather nasty situation. But the fact they had a casualty loss did not mean they could claim the losses they placed on their 2012 return.
The taxpayers had claimed a total loss of $29,979 on their tax return. But the court found there was no evidence whatsoever that could be used to estimate items they claimed were worth $6,785. As well, the Court found that the taxpayers had claimed excessive values for other items, using replacement for draperies and valuing two beds at $6,000 with no information on their age or condition. Eventually the Court found that the allowed deduction was to be $9,194, or over $20,000 less than initially claimed.
The IRS had asked the Court to apply the substantial underpayment penalty under IRC §6662 to the tax due and the Court agreed it was appropriate. As the opinion concluded:
Although petitioners sought advice about how to report a theft loss, they have not shown the specific source of the advice and whether it was reasonable for them to rely on the advice received. We accordingly hold that petitioners, on account of their negligence or disregard of rules or regulations, are liable for a section 6662(a) accuracy-related penalty with respect to the underpayment.