Car Rental Company Can't Take Casualty Loss Deduction for Totaled Vehicles.

(Parker Tax Publishing August 26, 2015)

Collision damages to a company's rental vehicles, which had to be disposed of, did not arise from a casualty because the occurrence of the damage was not unusual in the ordinary course of the company's business of renting vehicles and, thus, the company could not deduct the estimated repair costs as a casualty loss. CCA 201529008.

Background

A vehicle rental company offers customers who rent a vehicle the opportunity to purchase a damage waiver. The waiver waives the company's right to seek recovery from the customer or the customer's insurance company for damage to the vehicle while the vehicle is in the customer's custody. If a customer declines the waiver and the vehicle is damaged, the company obtains a third-party estimate of the cost to repair the damage and seeks recovery for the damage from the customer or the customer's insurance company. If one of the company's vehicles is damaged and the customer purchased a waiver, the company either repairs the vehicle or sells it in damaged condition. The company only repairs vehicles it intends to keep in its fleet and does not repair damage to vehicles it determines should be disposed of. The company does not purchase any insurance coverage on its rental vehicles.

With respect to damaged vehicles for which the company could not seek recovery from its customers or their insurer because a waiver was purchased, and that were subsequently disposed of, the company claimed a casualty loss under Code Sec. 165 in the amount of its own estimate of the cost to repair the damage to these vehicles.

Under Reg. Sec. 1.165-7(a)(3), an automobile owned by a taxpayer, whether used for business purposes or maintained for recreation or pleasure, may be the subject of a casualty loss, including losses arising from fire, storm, or other casualty. In addition, a casualty loss occurs when an automobile owned by the taxpayer is damaged and if: (1) the damage results from the faulty driving of the taxpayer or other person operating the automobile but is not due to the willful act or willful negligence of the taxpayer or of one acting in the taxpayer's behalf, or (2) the damage results from the faulty driving of the operator of the vehicle with which the automobile of the taxpayer collides.

Rev. Rul. 72-592 provides that in order for a loss to qualify as a casualty loss under Code Sec. 165, the loss must result from some event that is:

(1) identifiable,

(2) damaging to property, and

(3) sudden, unexpected, and unusual in nature.

To be "sudden," the event must be one that is swift and precipitous and not gradual or progressive. To be "unexpected," the event must be one that is ordinarily unanticipated, which occurs without the intent of the one who suffers the loss. To be "unusual" the event must be one that is extraordinary and nonrecurring, one that does not commonly occur during the activity in which the taxpayer was engaged when the destruction or damage occurred, and one that does not commonly occur in the ordinary course of day-to-day living of the taxpayer.

Analysis

The IRS Office of Chief Counsel (IRS) advised that collision damages to the company's rental vehicles did not arise from a casualty within the meaning of Code Sec. 165 because the occurrence of such damage was not unusual in the ordinary course of the company's business of renting vehicles. The IRS noted that courts examined similar facts for years before the repeal of the excess profits tax and determined that certain events such as vehicle accidents were not unusual for a car rental business and were an ordinary and necessary expense of doing business. The tax treatment of damages from a vehicle collision as a casualty loss under Code Sec. 165 or as a business expense for the cost of the repairs under Code Sec. 162 made a difference before the repeal of the excess profits tax. Casualty losses could reduce the excess profits tax while business expense deductions did not.

The IRS cited Atlantic Greyhound Corporation v. U.S., 111 F. Supp. 953 (Ct. Cl. 1953), where the court had to determine if the costs of repairing collision damages to the taxpayer's buses were ordinary and necessary business expenses or were casualty losses. The court noted that, during the year at issue, the taxpayer had an average of 243 buses in service averaging 8,029 bus miles per month per bus operated. This amounted to almost 2,000,000 miles per month during that year. The court held that under such circumstances, accident collision damage was expected, normal, and inevitable, and the cost of repairing such damage was an ordinary and necessary expense of doing business.

The IRS noted that the Tax Court also considered a similar issue in Consolidated Motor Lines, Inc. v. Comm'r, 6 T.C. 1066 (1946). In Consolidated Motor Lines, the taxpayer, a freight transporter by motor, argued that it should be able to deduct as losses damages to cargo due to such events as theft, fire, turnover, collision and rain, as well as property damage that arose from accidents in which its vehicles were involved. The court noted that the taxpayer was a motor carrier of freight that operated on a large scale and over several states.

The court held that all the expenses at issue were normally incident to the business of the taxpayer and did not involve any concept of abnormality. The amounts expended were all for recurring expenses that were ordinary and necessary business expenses. The court found that this result applied not only because of the character of the taxpayer's business and operations but also because of the large amounts involved. The court held that a common carrier constantly shipping freight over the public highways may not reasonably be said to suffer unusual casualty or abnormal "loss" as a result of the matters here being considered. For a discussion of what constitutes a deductible casualty loss, see Parker Tax ¶84,505. (Staff Editor Parker Tax Publishing)

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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