tax research and decision making assignment
Travis A. Wise
Tax Research & Decision Making
Unit 4 – Written Assignment 3 (Chapter 4, Question 34)
a. Henry Hills, 76 TC 484 was decided by the United States Tax Court
Henry Hills v. Commissioner, 691 F2d 997 was decided by the United States Court of Appeals for the Eleventh Circuit
Miller v. Commissioner, 733 F2d 400 was decided by the United States Court of Appeals for the Sixth Circuit
b. The material facts in the Henry Hills cases are that the taxpayer’s home was burglarized, as a result of the burglary the taxpayer suffered an economic loss. The taxpayer had insurance that would have likely covered the loss, but the taxpayer choose not to file a claim to avoid an increase in insurance premiums. Instead, the taxpayer deducted the loss under §165(a).
The immaterial (but enlightening) facts in Henry Hills are that the home was a vacation home, the burglary was the fourth in a series of burglaries, and that the taxpayer lived sufficiently far away from the nearest fire station that he was concerned about his ability to maintain fire coverage should his policy be cancelled for excessive claims.
The material facts in the Miller case are that the taxpayer’s boat was damaged, and the taxpayer did not submit an insurance claim for the damage for fear his policy would be cancelled.
The immaterial (but enlightening) facts in Miller are that the boat was damaged by a friend, and that the taxpayer had previously claimed insurance benefits for damage to the boat.
c. The code section at issue in both cases is §165(a) and (c)(3). The cases raise the issue of whether the meaning of “not compensated for by insurance” should be interpreted to mean that the loss was “not covered by insurance” (i.e., that the taxpayer had insurance but choose not to be compensated by it for the loss).
d. In all three cases, the courts decided that the covered but not compensated losses were deductible under §165.
The Henry Hills courts used (1) the plain language of the statute and the everyday meanings of “compensated by”; (2) the legislative history to help interpret the language of the statute, including the Senate Finance Committee report, which supported the court’s conclusion by distinguishing between “covered” and “compensated”; (3) Kentucky Utilities case law, which the court distinguished on the fact that the taxpayer in that case suffered a “loss” because rather than not filing a claim with his insurance company, he settled for a lesser amount in exchange for a release; (4)in Axelrod, the taxpayer failed to claim reimbursement from his insurance policy for damage to his boat, but the court distinguished the holding in that case denying the deduction under § 165 on the basis that the taxpayer failed to prove either the amount or that the foul weather arose to a “casualty”.
In Miller, the court used (1) the Treasury regulations under §165 to distinguish the meanings of “covered by” and “compensated under”; (2) the court decided not to distinguish Kentucky Utilities but rather reject the holding in that case, with very similar facts, in light of the arguments made in the Hills cases; (3) in both cases, the courts looked to the plain language of the statute and the everyday meanings of “compensated by”.
e. Corporation X should deduct the $10,000 flood damage (less $100 minimum) to its office building under §165(a). The issue is whether a loss that results from a flood and which is “not compensated for by insurance or otherwise” is deductible under §165(a) notwithstanding the company’s voluntary failure to file an insurance claim for reimbursement.
Under the Hills case, the fact that damage is covered by insurance but the taxpayer voluntarily declines to submit the claim does not render the damage “compensated for by insurance.” This is supported by the plain language of §165(a) and the common distinction in definitions between “compensated” and “covered.” Reg. § 1.165-1(a) supports this interpretation by stating that a deduction is allowed for “any loss actually sustained during the taxable year and not made good by insurance or some other form of compensation.” This interpretation is also supported by the Senate Finance Committee, which purposefully removed the words “covered by” from the language of the statute.
The claim for losses resulting from flood damage can be distinguished from the Kentucky Utilities case because in this case, the company is not receiving a financial settlement or any other intangible benefits (i.e., a release) from the insurance company. The claim is also not like the facts in Axelrod, where the amount of the claim was unproven, and the classification of the claim as a loss from “casualty” was unsubstantiated. In this case, the dollar amount of the loss is fixed, and it is known that insurance would cover this loss as a casualty.
This case fits squarely within the holdings of Hills and Miller, in which the courts decided that the failure to file a claim for insurance reimbursement for legitimate reasons does not therefore mean that the taxpayer cannot deduct the loss under §165(a).
f. The facts are different in that we do not know if Corporation X has filed prior claims with its insurance company, and therefore has a stronger basis for fear that its policy may be cancelled as a result of making the claim. This should not be a material fact in that the code does not require a bona fide reason for not filing the insurance claim, but this would be a helpful fact to know to put the taxpayer’s position in context.