The Tax Court held that the collapse of a poorly maintained retaining wall after a spring with heavy rain is not a casualty within the meaning of Section 165(c)(3) and the taxpayer is not entitled to a deduction under Sections 165(a) or (h) related to any loss from that casualty.
In Alphonso v. Commissioner, T.C. Memo. 2016-130, the government’s expert opined that existing structural and other deficiencies in and around that wall caused by progressive deterioration over at least 20 years would have and did cause the eventual collapse. Under cross-examination, the taxpayer’s expert conceded that the lack of proper maintenance of the wall and resulting deficiencies did not indicate a properly behaving retaining wall. Consultants had observed and pointed out the adverse conditions — through letters, reports, proposals and/or memoranda sent to the taxpayer —over a period of at least 20 years before the wall collapsed.
The Tax Court found that the retaining wall collapsed because of
progressive deterioration in and around the wall that began at
least 20 years before the collapse occurred in 2005. Following this
determination, the court held the collapse of the retaining wall
wasn’t a casualty within the meaning of Section 165(c)(3) and
that the taxpayer wasn’t entitled to any deduction under
Section 165(a) related to that collapse.
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