Early this year, a taxpayer was clearing dry brush from behind his Malibu home in California. He became frustrated with how long it was taking using his clippers. He decided instead to light the brush on fire, believing this would be safe because it was an overcast day. The taxpayer brought out a fire extinguisher in case the fire got out of control. Unfortunately, some wind kicked up and fanned the fire out of control. The fire completely consumed both his house and his neighbor's house. The two children staying in the neighbor's house died of smoke inhalation. The taxpayer was charged with negligent homicide. The trial is pending.
The taxpayer wishes to take a casualty loss deduction for the loss of his house, which was worth an estimated $1,000,000 at the time of the fire. The taxpayer purchased the home for $900,000 only six months earlier. Insurance has refused to compensate for the loss under the circumstances. The taxpayer is currently out on bail. He is the brother of one of your very significant clients, who has asked you to provide tax advice to the taxpayer. After review of pertinent documents, you conclude that his adjusted gross income will be $200,000 for the year before considering the loss.
a. What Code section addresses the research question?
b. Does your study of the relevant Code section help you to refine or add to the initial research question(s)?
c. Does the Code adequately address the research question? If so, what are your conclusions, and on what are they based?
d. Are there questions remaining that require further research?