We know that Disaster Relief’s Loss Reports have been accepted by the IRS as proof of a home’s diminished value over 10,000 times and have never been challenged. But are there other options?
Let’s take a look at a tax court case from 2023 when Tom Richey and Maureen Cleary tried to take on the IRS with a “best guess” estimate and some MLS listings to back up their 4684 claim.
Thomas Richey and his wife Maureen Cleary both had had successful careers and retired well before 2017. Richey was lured out of retirement to become head of global cybersecurity for Raytheon Technologies.
In 2007, Richie's new job enabled them to buy a second home in Stone Harbor on Cape May in the south of New Jersey.
Their home is on the waterfront with docks, bulkheads, and access to the open ocean. Richey and Cleary also became boat owners the next year when they acquired a 40-foot boat they named Celtic Dreams.
They still owned the home and the boat ten years later in March 2017, when Winter Storm Stella hit Stone Harbor and flooded the city's streets. Richey and Cleary claim the storm damaged the waterside portion of their property and their boat.
They filed form 4684 for the house and the boat which produced a $740,000 loss. The large loss caught the attention of the IRS, resulting in an audit. In reviewing the filing, the Tax Commissioner said that the couple had not substantiated the cost of the damage that they suffered and had not even proved that any of the damage was caused by the storm. He therefore issued a notice of deficiency for 2017 in which he disallowed the casualty-loss deduction in its entirety. Richey and Cleary made a timely petition to the Federal Tax Court, and though they resided in Maryland, asked for a hearing in Los Angeles.
It probably didn’t help that on the first day of the trial neither one of them showed up. Their lawyer explained that the five month’s notice had not been enough time to schedule a flight. Richey ended up testifying via Zoom.
When Richey was asked to substantiate the loss, all he showed were some photos from 2018 after the house had been repaired. He did not have any photos of the damage from 2017 or the subsequent construction. The court ruled that the photos were insufficient to prove that the property was damaged let alone that the damage was attributable to Stella and did not find Richey's testimony credible on this point. Add to this the fact that Richie could not even substantiate the home’s cost basis which he listed on his 4684 as $2.45M. It turns out that sales records showed he only paid $2.25M, further reducing his deduction. He also refused to file an insurance claim indicating the processing of a claim he made for damage from Superstorm Sandy in 2012 was so unsatisfactory that he simply didn't want to try again.
Moreover, Richey and Cleary did not get an appraisal of their own home valuing it before and after the storm. Richey instead consulted a real-estate agent who provided him with Multiple Listing Service (MLS) printouts, similar to a ZILLOW page, of his and other people's homes. This is a problem for several reasons. The first is that he didn't talk to this agent until after the audit had begun. This led the court to conclude that the values reported on the return were not a result of a “competent appraisal”, but rather of the couple's own estimate. And the MLS printouts are not an appraisal at all, but rather a rationalization of the couple's guess about the before and after values of their home.
It's not impossible for a homeowner to conduct an appraisal himself — but he has to show sufficient knowledge of the property and its value and the market immediately before and after the casualty event. For instance, In Coates, 112 T.C.M. the court found that a landowner who had worked on his ranch for more than 30 years did have sufficient knowledge to adequately appraise it — especially since he also had substantial experience in buying and selling property in the surrounding county. Richey and Cleary, on the other hand, merely vacationed at their second home and showed little knowledge of the market in the area. In the end, the court found there to be no adequate appraisal of the before and after values of the house. The MLS printouts provided no actual valuation of the vacation home. This would be a similar situation to providing a Zillow ZEstimate.
While Richie provided some receipts for the work on the house, the problem with these receipts and estimates is that many include items less related to restoration than to improvement. One estimate, for example, included the cost of building a deck and installing a swimming pool, neither of which had been part of their home before the storm. He also claimed that many future repairs would be required, but failed to produce any evidence, such as contractor agreements to substantiate this. The Court agreed to accept a much lower figure for the repairs but the couple still had the burden of proving that the repairs were for storm damage.
Ultimately, the Court decided that Richey and Cleary had failed to prove that Stella caused damage to either their vacation home or boat. Even if they had, they had not given sufficient evidence to substantiate the value of their losses. And even if they had substantiated the losses, they filed no insurance claims for property that was protected by insurance. In the end the Court decided to remove their deduction and the couple paid a 20% tax penalty under section 6662(a).
It’s too bad Disaster Relief didn’t exist in 2017.
Granted, Richey and Cleary made a LOT of mistakes but it all started with an invalid “guess” at the diminished value of their property instead of starting with a valid appraisal.
A $250 Loss Report would have provided Richey with the supporting documentation that he needed to get his 4684 right and to defend his claim. Also, had he still been audited, Disaster Relief would have been ready to stand behind the appraisal with a series of documents that were used to formulate it. Disaster Relief uses up to eight different methodologies to determine the "before" and "after" values of a property. These values are blended together and weighted with annotations and explanations which are all available to the IRS in case of an audit. But then again, in over 10,000 cases, over 7 years, not one of our appraisals has ever been questioned.
The lesson is simple, if you've suffered a Casualty Loss, you need a "real appraisal" as substantiating evidence for your Form 4684.
Disaster Relief has been in the business of providing affordable, reliable 4684 Appraisals since 2018.
Want to read the whole story? check it out at https://www.taxnotes.com/research/federal/court-documents/court-opinions-and-orders/couple-failed-to-prove-storm-damage-to-claim-loss-deduction/7g8nw
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