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In September of 2017, Mr. Humperdinck was clearing dry brush from behind his Mercer Island home. He became frustrated with how long it was taking using his clippers and weed-eater. 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.

Mr. Humperdinck took 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, in March 2017. His insurance refused to compensate him for the loss under the circumstances; however, his neighbor’s loss of his house was covered by insurance.

The IRS audited his 2017 Form 1040 and disallowed his entire casualty loss, stating that since he set the fire, the casualty loss was due to his own negligence and the deduction was not allowed under IRC §165 as a casualty loss.

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Mr. Humperdinck has come to you to help him prepare for appeals. Since the tax on the disallowed loss is greater than $25,000, your job is to write a formal protest letter countering the government’s position and requesting appeals to examine this issue.

Make sure you cite all primary authority you find in your protest letter and use Publication 5 as a guide on what needs included in your written protest letter. Do not worry about computing the amount of his casualty loss – this has already been determined and agreed upon during the audit. Ignore any state law that may apply to burning in Mercer Island…

 
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