Claiming a Casualty Loss for Property You Don’t Own – Houston Tax Attorneys

Natural disasters can be expensive. This is particularly true for those who own or have an interest in real estate.

Our tax laws provide some relief through casualty loss deductions and theft loss deductions. But what happens when someone pays to repair property they don’t legally own? This question is particularly relevant when parents continue to financially support their adult children by paying for property repairs after a disaster. Can they claim the casualty loss deduction on their own tax returns?

The recent case of Taylor v. Commissioner, T.C. Summary Opinion 2025-10 (March 3, 2025), addresses this situation and provides an opportunity to consider the ownership requirement for casualty loss deductions.

Facts & Procedural History

The taxpayer and his then-spouse acquired real estate in Texas in 1992. Following their divorce in 2000, the taxpayer-husband transferred his interest to his wife via a special warranty deed.

The taxpayer-wife died in 2007 and her minor daughters inherited the property. The taxpayer-husband was appointed guardian of the estate for his then-minor daughters.

The daughters reached adulthood by 2012, so the taxpayer-husband transferred the property to the children via a deed. When Hurricane Harvey struck in 2017, the property was owned by the taxpayer-husband’s now adult daughters. The taxpayer-husband did not live in the property in 2017.

The taxpayer-husband paid expenses to repair the damage to the property and he paid the insurance on the property. He claimed a $49,500 casualty loss deduction on his 2017 tax return for the damage.

The IRS conducted a tax audit and issued a Notice of Deficiency in 2021, determining a deficiency of $17,537 in federal income tax and an accuracy-related penalty under Section 6662(a). The IRS did not challenge the substantiation for the casualty loss deduction, as it normally does. Rather, it challenged the deduction on the basis of the taxpayer’s ownership of the property.

The taxpayer petitioned the U.S. Tax Court, challenging the IRS’s determination. The question for the court was whether the taxpayer-husband is entitled to a tax loss for the property that he used to own given that he paid for the repairs to the property.

About Casualty Loss Deductions

Section 165(a) of the tax code provides for a tax loss deduction for “any loss sustained during the taxable year and not compensated for by insurance or otherwise.” This is a very broad provision. This broad provision is then narrowed by specific limitations that are set out in the tax code.

Specifically, for individual taxpayers, Section 165(c) restricts deductible losses to three categories:

Losses incurred in a trade or business
Losses incurred in transactions entered into for profit, though not connected with a trade or business
Personal losses arising from “fire, storm, shipwreck, or other casualty, or from theft”

The third category—personal casualty losses—enables taxpayers to deduct losses from sudden, unexpected events like hurricanes, floods, and fires. These deductions provide important tax relief for taxpayers facing significant financial setbacks due to disasters and other unexpected events.

The Ownership Requirement for Casualty Losses

While Section 165 itself doesn’t explicitly say that there is an ownership requirement, the courts have consistently held that only the owner of property at the time of a casualty can claim the resulting loss deduction. This judicial interpretation reflects the fundamental purpose of the casualty loss provision: to provide tax relief to those who have suffered an economic loss from damage to their property.

The leading case establishing this principle is Draper v. Commissioner, 15 T.C. 135 (1950), where the Tax Court denied a casualty loss deduction to a taxpayer who replaced his adult daughter’s property destroyed in a fire. The court held that since the taxpayer didn’t own the property, he couldn’t claim the deduction, regardless of his financial contribution to replacing the items.

This ownership requirement continues to be enforced in more recent cases. In Rogers v. Commissioner, T.C. Memo. 2019-90, the Tax Court reaffirmed that “a casualty loss deduction is authorized only when the claimant is the owner of the property with respect to which the loss is claimed.”

Paying for Someone Else’s Property Repairs

Many taxpayers voluntarily pay expenses for property they don’t own–particularly when helping family members. That is the situation in the Taylor case.

These payments might include:

Parents paying repair costs for properties owned by their adult children
Individuals paying expenses for properties owned by elderly parents
Taxpayers contributing to repairs for damaged properties in their communities

When these payments are made out of generosity or family support, they generally do not create a deductible interest in the property for tax purposes. The IRS and courts consistently maintain that paying expenses for someone else’s property–regardless of the amount or reason–does not transfer the casualty loss deduction to the payer.

From a tax perspective, voluntary payments for property expenses are more akin to gifts than investments creating deductible interests. This principle applies even in cases where the taxpayer previously owned the property or has an emotional attachment to it.

The court in Taylor acknowledged that the taxpayer may have paid for the repairs to the damaged property. However, it found that these voluntary payments did not establish a deductible interest in the property under Section 165. The court noted that a tax deduction for a casualty loss for property is allocated to the person who owned the property and incurred the economic loss, not to those who voluntarily pay to repair it. Citing Draper v. Commissioner, the court reaffirmed that a taxpayer cannot claim casualty loss deductions for property owned by adult children, even if the taxpayer pays for expenses related to that property.

Exceptions to the Ownership Rule

While the general rule requires legal ownership for casualty loss deductions, tax law recognizes certain limited exceptions where non-title holders might claim such deductions. These exceptions generally involve taxpayers who have economic interests in the property despite not holding legal title:

Equitable ownership – where a taxpayer is making payments under a contract to purchase property but hasn’t yet received formal title
Leasehold interests – where a tenant has made substantial improvements to leased property
Life estates and remainder interests – where the taxpayer holds a legally recognized partial interest
Properties held in certain trust arrangements where the taxpayer maintains beneficial ownership

Taxpayers who wish to maintain tax benefits while supporting family members might consider alternative approaches based on these interests. With a little tax planning, such as converting a house to a rental property (rental property losses would fall under the business/profit-seeking categories of Section 165(c) rather than personal casualty losses), maximizing partial asset dispositions, etc., the taxpayer very well may be able to claim the casualty loss for property that they do not own. Suffice it to say that these approaches should be implemented with proper documentation and genuine economic substance to withstand IRS scrutiny.

The Takeaway

This case reiterates that a casualty loss deduction goes to the owner. The taxpayer has to own the property that suffered the damage. Simply paying for repairs or maintenance does not transfer the deduction to the payer, regardless of family relationships or previous ownership history. When supporting family members with property expenses, taxpayers should understand that these payments generally don’t create tax benefits. If tax considerations are important, alternative arrangements that maintain legitimate ownership interests should be established before a casualty occurs.

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Stephan Dorsey

Stephan is the sports journalist for the Maple Grove Report.

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Conduct During IRS Audit Evidence of Tax Return Fraud – Houston Tax Attorneys

The courts have taken an expansive view as to what counts as fraud for tax matters. Some courts have even said taxpayers can be held accountable for fraud committed by their tax return preparers.

When considering fraud, there is a question as to what activities are considered. Take for example the civil tax fraud penalty. This civil penalty applies to understatements of tax. This means that the relevant timeframe would seem to be the time leading up to and culminating with the filing of the tax return. Once the tax return is filed, the fraudulent has been completed.

What about additional actions by the taxpayer to further the fraud? For example, submitting false or altered documents to the IRS auditor who is examining the fraudulent tax return? Can those actions be considered evidence of fraud for the understatement of tax? The court recently answered this question Chopra v. Commissioner, T.C. Memo. 2025-2.

Facts & Procedural History

The taxpayer in this case is a healthcare consultant. She has several advanced college degrees.

The case involves her 2019 individual income tax return. The taxpayer filed her tax return and reported substantial business expense deductions and itemized deductions. This included more than $68,000 in medical expenses and nearly $90,000 in business expenses.

The IRS pulled her tax return for audit and requested documentation to substantiate the claimed deductions. The IRS auditor proposed adjustments for the larger items on the tax return and also proposed a civil fraud penalty.

The civil fraud penalty was due to the taxpayer’s failure to cooperate. This continued during the litigation in the tax court. The court described the conduct by the taxpayer as follows:

She provided only partial credit card statements to the IRS auditor (5 months out of 12)
She refused to produce partnership tax returns and agreements for the flow through income
She made false representations to the court about discussing matters with opposing counsel
She provided documents that appeared to be digitally altered
She offered implausible explanations when questioned about inconsistencies

The tax court ultimately upheld both the underlying tax deficiency and a civil fraud penalty. This article focuses on the fraud penalty.

Traditional Badges of Fraud vs. Procedural Conduct

The civil tax fraud penalty is found in Section 6663 of the tax code. It is a very short statute that just says that the taxpayer can be liable for a 75 percent penalty for any underpayment of tax that is attributable to fraud.

The IRS has the burden to prove that there was tax fraud. To do this, the IRS has to show that the taxpayer engaged in conduct with the intent to evade taxes that he knew or believed to be owing. The IRS also has to prove that the understatement of tax was due to the fraud.

There are several prerequisites implicit in these rules. For example, the taxpayer has to actually file a tax return. This provides one “out” for this penalty. For example, a document that is filed that does not qualify as a “tax return” cannot trigger this penalty. The tax return may not have to be signed for there to be fraud, but it does have to be intended to be a valid tax return and it has to be filed. Those who file a frivolous tax return or those do not file a tax return cannot be subject to this penalty.

As a separate note, it is often advisable to file a tax return, even if the tax return is being filed late, to get the statute of limitations for the IRS to audit and make an assessment. However, the tax return has to be an honest and truthful return to avoid for this to work and to avoid the fraud penalty. The taxpayer then has to contend with the late filing penalty.

Also, those who do not believe that intentionally file a false return under a genuine belief that they are complying with the law do not trigger this penalty. These concepts are not set out in the tax code. They are found in various court cases involving this penalty.

The Badges of Fraud

Section 6663 also does not provide a definition for the term “fraud.” The courts have developed factors that are used to establish fraud. These so-called “badges of fraud” typically focus on the taxpayer’s conduct at or before the time of filing of the tax return, such as:

Maintaining false books and records
Creating fictitious documents
Concealing income or assets
Making false statements to investigators
Dealing extensively in cash
Filing false documents

There are quite a few court cases that apply factors like these. The courts have largely said that no one factor is determinative, and then they essentially pick the set of factors that are relevant to the case. In many cases there is one fact triggers several of these factors, such as in cases where a fictitious business is reported on a tax return for a tax loss. The business is reported on the return, but the taxpayer may maintain false books and records or create false or fictitious documents to support it–as the court suggested that the taxpayer did in this case.

The tax court cases that address fraud penalties are largely sustained in the IRS’s favor. Even in those cases where the taxpayers prevail on the fraud penalty, the tax court still usually imposes the lesser 20 percent accuracy or negligence penalty.

Conduct After the Tax Return is Filed

This brings us to the question posed by this article. Can conduct after the tax return is filed be considered as one of the “badges of fraud” for the understatement of tax on the tax return?

The understatement of tax happened at the time the tax return was filed. By the time the IRS audits the tax return, several years have usually passed. By the time the case gets to tax court, several more years have passed.

This Chopra case is a prime example. It is a tax court case with an opinion issued in 2025 for a 2019 income tax return. The court in Chopra did in fact find that the taxpayer’s post-tax return filing conduct supports a finding of fraud for the civil tax fraud penalty.

The tax court specifically identified several aspects of the taxpayer’s procedural conduct as badges of fraud:

Failure to cooperate with tax authorities
Providing implausible or inconsistent explanations
Offering testimony lacking credibility
Refusing to produce relevant documents
Making false representations to the court

The tax court even noted that the taxpayer’s “duplicitous and obstructive behavior throughout this [court] case is a badge of fraud” for the Section 6663 penalty.

The court made this ruling even though it has its own separate penalty for fraudulent conduct during tax litigation which is found in Section 6673. The Section 6673 penalty is limited to $25,000, which the Section 6663 fraud penalty is not. The opinion does not address the Section 6673 penalty so, presumably, the court did not impose this additional penalty.

The Takeaway

This case shows that conduct during tax audit and litigation matters as it can be additional evidence of fraudulent intent for any understatement on the tax return. Producing fraudulent documents to the IRS auditors and making false statements to the court can be evidence of fraudulent intent. While taxpayers retain their rights to challenge IRS positions and limit document production, they should exercise these rights in a way that doesn’t create additional evidence of fraud.