## Facts

- George W. Finkbohner Jr. and Beverly R. Finkbohner owned and occupied a residence in Mobile, Alabama, adjacent to a creek on a cul-de-sac.
- Flooding in 1980 damaged only the property’s driveway and grounds, not the house structure.
- The property had no flood insurance.
- The parties’ experts agreed the pre-flood fair market value was $120,000.
- The taxpayers claimed a casualty loss deduction under I.R.C. § 165(c)(3) based on a post-flood fair-market-value decline.
- The taxpayers’ expert opined the property’s value fell to $95,000 and attributed the decrease to permanent impairment of marketability rather than temporary market reaction.
- The government’s expert conceded a small temporary diminution beyond repair costs but opined there was complete recovery and no permanent loss.
- Evidence showed neighboring homes were later demolished, and the taxpayers asserted the resulting neighborhood deterioration permanently reduced buyer demand for their property.
- The IRS disallowed all but $1,200 of the claimed deduction; the taxpayers paid the recomputed tax and sued for a refund.
- A jury awarded a $12,500 casualty loss deduction; the United States appealed, challenging the jury instructions and the denial of its directed verdict and judgment n.o.v. motions.

## Issues

1. Under I.R.C. § 165(c)(3) and Treas. Reg. § 1.165-7, may a casualty loss reflect a permanent post-casualty decrease in fair market value attributable to the flood (including lasting marketability effects), while excluding only temporary buyer resistance?
2. Did the district court err in instructing the jury on the measure of casualty loss and in denying the government’s motions for directed verdict and judgment notwithstanding the verdict?

## Decision

- The Eleventh Circuit affirmed the judgment for the taxpayers.
- The court held that Treas. Reg. § 1.165-7 permits measuring a casualty loss by the property’s fair market value immediately before and immediately after the casualty, subject to basis limitations.
- The court agreed that temporary buyer resistance must be excluded from the post-casualty valuation, but permanent market-value impairment caused by the casualty may be considered.
- The court held the permanence and amount of any market-value decline were factual questions supported by sufficient evidence for the jury.
- The court found no reversible error in the jury instructions when read as a whole and no basis to remove the case from the jury through directed verdict or judgment n.o.v.

## Legal Principles

- A personal-use casualty loss under I.R.C. § 165(c)(3) is generally measured by the decline in fair market value immediately before and immediately after the casualty, limited by the taxpayer’s adjusted basis.  
- Treas. Reg. § 1.165-7 requires excluding purely temporary, event-driven buyer resistance from the post-casualty valuation.
- A demonstrable, permanent diminution in market value attributable to the casualty, including enduring effects on the property’s marketability, may be included in the loss computation.
- Whether a post-casualty reduction is temporary or permanent, and the amount of any permanent decline, is a fact question for the trier of fact when supported by competent valuation evidence.

## Conclusion

The Eleventh Circuit upheld a jury award for a flood-related casualty loss where the evidence supported a permanent post-flood reduction in the property’s fair market value, while confirming that only temporary buyer resistance must be excluded from the valuation used to compute the deduction.


Finkbohner v. United States, 788 F.2d 723 (11th Cir. 1986)