                  T.C. Summary Opinion 2001-115



                     UNITED STATES TAX COURT



     TOMMY LEE RANDLE AND JOYCE FAYE RANDLE, Petitioners v.
          COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 10014-00S.            Filed July 31, 2001.


     Tommy Lee Randle, pro se.

     Igor S. Drabkin, for respondent.


     ARMEN, Special Trial Judge:    This case was heard pursuant to

the provisions of section 7463 of the Internal Revenue Code in

effect at the time that the petition was filed.1   The decision to

be entered is not reviewable by any other court, and this opinion

should not be cited as authority.



     1
        Unless otherwise indicated, all subsequent section
references are to the Internal Revenue Code in effect for 1996,
the taxable year in issue, and all Rule references are to the Tax
Court Rules of Practice and Procedure.
                                - 2 -

     Respondent determined a deficiency in petitioners’ Federal

income tax for the taxable year 1996 in the amount of $2,437.

     After concessions,2 the issues for decision are as follows:

     (1) Whether a casualty loss arising from the Northridge

earthquake in 1994 was “sustained” in 1996 (the taxable year in

issue) or in some prior year.   We hold that the casualty loss was

not sustained in 1996 but in a prior year.

     (2) Whether the amount of the loss deductible under section

165 has been shown to be the amount claimed by petitioners on

their 1996 return.   We need not reach this issue because of our

holding in respect of the prior issue.

Background

     Some of the facts have been stipulated, and they are so

found.   Petitioners resided in San Dimas, California, at the time

that their petition was filed with the Court.




     2
        Petitioners concede that they failed to report a part
($5,199) of a distribution ($16,014) from petitioner Tommy Lee
Randle’s individual retirement account, all of which is taxable.
Petitioners also concede that the distribution is subject to the
10-percent additional tax under sec. 72(t) on early distributions
from qualified retirement plans.
     The parties agree that the adjustment made to the deduction
claimed by petitioners for medical expenses on Schedule A,
Itemized Deductions, is a computational matter.
     Finally, the parties agree that the deficiency determined by
respondent in the notice of deficiency does not take into account
a payment made by petitioners in the amount of $1,601. We expect
this payment to be reflected in the decision to be entered in
this case.
                                - 3 -

     Since March 1980, petitioners have owned and lived in a

single-family residence located in San Dimas, California.        On

January 17, 1994, petitioners’ residence was damaged by the

infamous Northridge earthquake.       Although petitioners maintained

homeowners’ insurance at the time, their policy did not cover

damage caused by earthquake.

     After the earthquake had occurred, petitioners sought

financial assistance from the Federal Emergency Management Agency

(FEMA).   Toward that end, petitioners filed an application (No.

62245) for Disaster Housing Assistance.         By letter dated August

26, 1994, FEMA advised petitioners, in part, as follows:

     This is in response to your application for Disaster
     Housing Assistance. You are eligible for financial
     assistance to make essential home repairs because your
     primary residence sustained damage as a result of the
     disaster.

     [FEMA] is issuing you a check for $2,641.96 to cover
     the cost of making essential repairs to your home.
     * * * It is important you understand that the law will not
     allow us to pay for all the repairs your home needs, but
     only those that are necessary to make it safe to live in.

                    *   *   *     *     *   *     *

     If you disagree with FEMA’s decision, you may appeal
     it. Your appeal must be in writing * * * . Your
     appeal letter must be postmarked no later than the 60th
     day after the date of this letter. * * * FEMA will
     respond in writing to your appeal no later than 15
     calendar days after we receive it.

     Although the record is not definitive on the matter, it

would appear that petitioners did not appeal FEMA’s August 26,

1994, decision.
                                 - 4 -

     Petitioners filed a second application (No. 5341A) with FEMA

on January 11, 1995, indicating a date of loss of January 6.3

Boxes 8 and 10 of the application indicate that the damage in

question was caused by flooding, rather than by earthquake.     FEMA

responded to this application on April 4, 1995, apparently

awarding $300 for damage to “foundation and masonry”.

     Petitioners appealed FEMA’s April 4, 1995, decision.    By

letter dated April 20, 1995, FEMA advised petitioners, in part,

as follows regarding Application No. 5341A:

     This is in response to your letter of appeal regarding
     your assistance from FEMA. We have reviewed your case
     again and determined that the original decision was
     correct because:

         X    FEMA’s Home Repair Program (HRP) covers only
              those damages caused directly by disaster.
              ALL ELIGIBLE items have been addressed in your
              initial award. [Emphasis in the original.]

                     *   *   *    *      *   *   *

     This determination is final regarding assistance from
     the FEMA Disaster Housing Program. * * *

     Petitioners filed a disaster loan application with the U.S.

Small Business Administration (SBA) on a date not disclosed in

the record.   By letter dated March 28, 1995, SBA advised

petitioners, in part, as follows:




     3
        The application does not specify the year of the loss;
however, based on the application as a whole, 1995 would appear
to be the year of the loss.
                                     - 5 -

     We have given careful consideration to your disaster
     loan application filed with this Agency.
     Unfortunately, we were unable to approve the loan
     application because of an apparent lack of reasonable
     assurance of your ability to repay the proposed SBA
     loan and other obligations from earnings. We have
     concluded that you cannot support any further debt
     obligations at this time, based upon a thorough review
     of your total monthly income and expenses as indicated
     in your loan application.

     If you disagree with this determination, you have the
     right to request a reconsideration. However, such a
     request must comply with the following requirements:

                    *      *     *    *      *   *   *

          b. It must be received by this office no later
          than six months from the date of this letter.

                    *      *     *    *      *   *   *

     We regret our inability to be of assistance to you.

     There is nothing in the record to suggest that petitioners

ever requested SBA to reconsider its denial of petitioners’

disaster loan application.

     Petitioners filed one or more applications for disaster

assistance with the Individual and Family Grant Program of the

Department of Social Services of the State of California

(California State Department of Social Services) on a date(s) not

disclosed in the record.       Petitioners’ application(s) covered

both transportation needs and personal property.          By letter dated

June 15, 1995, the California State Department of Social Services

replied to petitioners’ application(s).          This letter, which

referenced both the disaster relief file number assigned by the
                               - 6 -

State and petitioners’ FEMA Application No. 5341A (regarding the

January 1995 flood), advised petitioners, in part, as follows:

     We have reviewed your application for disaster
     assistance from the Individual and Family Grant Program
     and any verification you may have provided.

     We regret to inform you that we have determined that
     you do not qualify for assistance for transportation
     damages or losses because you have sufficient remaining
     vehicles to meet your serious needs.

     We are sorry that you do not meet our program
     guidelines. * * *

     Attached to the foregoing letter was an Appeals Process

Notice (the Notice) indicating that the California State

Department of Social Services had denied petitioners’ disaster

assistance application for personal property on May 13, 1995, and

petitioners’ disaster assistance application for transportation

on June 15, 1995.   The Notice also advised petitioners that if

they disagreed with either determination, they could file a

written appeal with the State within 60 days from the date of the

Notice.

     There is nothing in the record to suggest that petitioners

ever filed an appeal in respect of the denial of their disaster

assistance application(s) by the California State Department of

Social Services.

     Late in 1995, having met with only limited success in

obtaining disaster relief from State and Federal agencies and

apparently having limited credit, petitioners turned to their
                               - 7 -

relatives for financial assistance.    The following Spring, in

April or May, repairs to their residence began, which repairs

were completed in August or September 1996.

     Petitioners filed a U.S. Individual Income Tax Return, Form

1040, for 1996.   Petitioners attached to their return Schedule A,

Itemized Deductions, and claimed thereon a casualty loss in the

amount of $7,194.   In support of this loss, petitioners also

attached to their return Form 4684, Casualties and Thefts.    The

form suggests that petitioners used the cost of repairs as the

measure of their loss.

Discussion

     As a general rule, section 165(a) allows as a deduction any

loss sustained during the taxable year and not compensated for by

insurance or otherwise.   In the case of an individual, section

165(c) limits the deduction to:   (1) Losses incurred in a trade

or business; (2) losses incurred in any transaction entered into

for profit, even though not connected with a trade or business;

and (3) losses of property not connected with a trade or business

or with a transaction entered into for profit, if such losses

arise from fire, storm, shipwreck, or other casualty, or from

theft.

Issue (1): Year in Which the Loss Was Sustained

     Respondent properly concedes that the loss incurred by

petitioners from the Northridge earthquake arose from a casualty
                               - 8 -

within the meaning of section 165(c)(3).   However, respondent

contends that such loss was not “sustained” by petitioners in

1996 but rather in 1994 or, at the latest, in 1995.    In contrast,

petitioners contend that they sustained the loss in 1996 because

that was the year in which they “paid for the damage” by having

their home repaired.   We agree with respondent.

     A casualty loss, like any loss that is deductible under

section 165, is allowable only for the year in which the loss is

“sustained”.   Sec. 1.165-1(d)(1), Income Tax Regs.   A loss is

sustained during the year in which the loss occurs as evidenced

by closed and completed transactions and fixed by identifiable

events.   Id.; see Ramsay Scarlett & Co. v. Commissioner, 61 T.C.

795, 811 (1974), affd. 521 F.2d 786 (4th Cir. 1975); Gale v.

Commissioner, 41 T.C. 269, 272 (1963); Allied Furriers Corp. v.

Commissioner, 24 B.T.A. 457, 458 (1931); sec. 1.165-1(b), Income

Tax Regs.   In this regard, section 1.165-1(d)(2)(i), Income Tax

Regs., provides as follows:

          If a casualty or other event occurs which may
     result in a loss and, in the year of such casualty or
     event, there exists a claim for reimbursement with
     respect to which there is a reasonable prospect of
     recovery, no portion of the loss with respect to which
     reimbursement may be received is sustained, for
     purposes of section 165, until it can be ascertained
     with reasonable certainty whether or not such
     reimbursement will be received. * * *

     A reasonable prospect of recovery exists when the taxpayer

has a bona fide claim for reimbursement from a third party and
                                - 9 -

when there is a substantial possibility that such claim will be

resolved in the taxpayer's favor.   See Ramsay Scarlett & Co. v.

Commissioner, supra at 811.    The issue is one of fact, to be

decided on the basis of all of the facts and circumstances.      See

Boehm v. Commissioner, 326 U.S. 287, 292-293 (1945); Dawn v.

Commissioner, 675 F.2d 1077, 1078 (9th Cir. 1982), affg. T.C.

Memo. 1979-479; sec. 1.165-1(d)(2)(i), Income Tax Regs.

     Petitioners’ residence was damaged by the Northridge

earthquake on January 17, 1994.   Thereafter, petitioners filed an

application for Disaster Housing Assistance with FEMA and

obtained financial assistance no later than August 1994.

Although the check that petitioners received may have been for

less than they would have wished, the record suggests that

petitioners did not appeal FEMA’s August 26, 1994, decision.

     Although petitioners filed a second application with FEMA in

January 1995, this application was for damage caused by flooding

rather than by earthquake.    In any event, FEMA responded to this

application on April 4, 1995, and denied petitioners’ appeal

later that month.

     Finally, petitioners sought disaster relief from both SBA

and the California State Department of Social Services.    However,

the record is not clear whether the relief sought was in respect

of damage caused by the Northridge earthquake.   In any event,

both SBA and the California State Department of Social Services
                                - 10 -

denied petitioners’ applications in March 1995 and June 1995,

respectively, and there is nothing in the record to suggest that

petitioners appealed the denial of either application.

     In view of the foregoing, it is apparent that after June

1995 at the latest, petitioners had no reasonable prospect of

recovery with respect to any claim for reimbursement for damage

to their residence caused by the Northridge earthquake.

Accordingly, the casualty loss was not sustained in 1996 but

rather in 1994, the year in which the Northridge earthquake

occurred or, at the latest, in 1995, the year in which claims for

reimbursement possibly relating to damage caused by such

earthquake were finally resolved.

     Petitioners contend that they sustained the loss in 1996

because that was the year in which they “paid for the damage” by

having their home repaired.   However, petitioners’ contention

does not reflect the applicable law, which we discussed above and

which we are obliged to apply.

Issue (2): Amount of the Loss

     In view of our disposition of the prior issue, the issue

regarding the amount of petitioners’ deductible loss is moot.

Conclusion

     In view of the foregoing, respondent’s determination is

sustained.
                             - 11 -

     Reviewed and adopted as the report of the Small Tax Case

Division.

     In order to give effect to our disposition of the disputed

issue, as well as petitioners’ concessions,



                                        Decision will be entered

                                   pursuant to Rule 155.4




     4
         See supra note 2.
