Subject: Nonbusiness casualty and theft losses

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Johnna Brock

The following question was on one of my RTRP Practice Exams:

Question:
Frank's car was completely destroyed in an automobile accident for which Frank was at fault. He did not file a claim with his insurance company because he feared his premiums would be raised. His loss was $4,500. His policy had a $1,000 deductible. How much casualty loss can Frank claim on his return (before the deduction limits)?

A. $0
B. $4,500
C. $3,500
D. $1,000

Rationale:
If your property is covered by insurance, you must file a timely insurance claim for reimbursement of your loss. Otherwise, you cannot deduct this loss as a casualty or theft. The portion of the loss usually not covered by insurance (for example, a deductible) is not subject to this rule. Therefore, ONLY the $1,000 deductible can be claimed.

Correct Answer: D

From Publication 17: Nondeductible losses. A casualty loss is not deductible if the damage or destruction is caused by the following:

· Accidentally breaking articles such as glassware or china under normal conditions.

· A family pet.

· A fire if you willfully set it or pay someone else to set it.

· The taking of money or property through fraud or misrepresentation

· A car accident if your willful negligence or willful act caused it. The same is true if the willful act or willful negligence of someone acting for you caused the accident.

· Progressive deterioration.

Question: If Frank was at fault for the accidient, isn't that willful negligence, making any loss nondeductible? 

What is the definition of  "willful negligence"? To me, Frank was willfully driving a car, and negligent when he caused an accident.


Expert Level Question
Comments
If it is an "accident" by definition the act is not intentional. If he crashes his car on purpose that is "willful negligence." Now, if he was drinking and driving, or driving in a negligent manner your point is made. The question does not state those facts, rather it says he is in an accident that is his fault, which alone does not necessarilly make him negligent.
Posted by Rain on 04/27/2012 @ 9:13 PM
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