## Facts

- Gerald and Kathleen Chamales, married California residents, purchased a residence in Brentwood Park, Los Angeles, opening escrow on June 2, 1994, and closing on June 29, 1994.
- Their property directly adjoined the residence associated with widely publicized murders and ensuing criminal proceedings that began during their escrow period.
- After the events, the neighborhood experienced extensive media activity and sustained influx of sightseers, which petitioners claimed disrupted use and enjoyment of their property.
- Petitioners asserted the notoriety caused an approximately 30% permanent reduction in their home’s fair market value.
- On their 1994 federal income tax return, petitioners claimed a net casualty loss deduction of $751,427 under I.R.C. § 165(c)(3).
- The IRS disallowed the deduction, determined a 1994 income tax deficiency of $291,931, and asserted a § 6662(a) accuracy-related penalty of $58,386 for negligence or disregard of rules or regulations.
- Evidence showed that over subsequent years disruptions diminished and petitioners and neighbors continued to invest substantial amounts in maintaining and improving their properties.

## Issues

1. Whether petitioners were entitled to a casualty loss deduction under I.R.C. § 165(c)(3) for an asserted permanent decline in residential property value attributable to neighborhood notoriety and related disturbances.
2. Whether petitioners were liable for the I.R.C. § 6662(a) accuracy-related penalty for negligence or disregard of rules or regulations arising from the claimed casualty-loss deduction.

## Decision

- The court sustained the deficiency and held petitioners were not entitled to the claimed § 165(c)(3) casualty loss deduction.
- The court held the asserted loss was a non-deductible fluctuation in market value, not a casualty loss of the type contemplated by § 165(c)(3).
- The court declined to impose the § 6662(a) penalty, finding petitioners acted with reasonable cause and in good faith.

## Legal Principles

- A personal casualty loss under I.R.C. § 165(c)(3) generally requires a sudden, unexpected, and unusual event that causes damage or destruction to the taxpayer’s property, not merely adverse external conditions.
- A decline in fair market value caused by stigma, notoriety, public perception, or neighborhood disruptions constitutes a market-value fluctuation and is not a deductible casualty loss absent qualifying property damage.
- The § 6662(a) accuracy-related penalty for negligence does not apply if the taxpayer shows the underpayment was due to reasonable cause and the taxpayer acted in good faith under § 6664(c), including where the position is taken in an unusual factual setting with reliance on professional advice.

## Conclusion

The Tax Court denied a casualty-loss deduction for a claimed stigma-driven drop in residential property value because § 165(c)(3) does not allow deductions for market-value fluctuations unconnected to qualifying property damage, but it rejected a negligence penalty because the taxpayers claimed the deduction with reasonable cause and in good faith.


Chamales v. Commissioner, T.C. Memo. 2000-33 (T.C. 2000)