McBrayer v. Commissioner, T.C. Memo. 1999-360 (1999)
Ministers and lay church employees often travel on church-related business. What are the tax consequences associated with a loss of one's luggage while traveling on a business trip? The Tax Court addressed this question in a case.
A teacher claimed a Schedule C expense deduction in the amount of $530 for luggage that she claimed had been stolen while she was using a restroom at Reagan National Airport. The only evidence she produced in support of the deduction were receipts for two pieces of replacement luggage she purchased shortly after the loss. The IRS denied the deduction, and the Tax Court agreed. The court concluded that no loss deduction was available, for the following three reasons:
(1) The teacher failed to establish that her luggage had been stolen. The court noted that "to be entitled to a [loss] deduction a taxpayer is required to substantiate the deduction through the maintenance of books and records or other sufficient evidence." It acknowledged that the teacher had provided the court with receipts for two pieces of replacement luggage, but concluded that this did not constitute sufficient substantiation of the loss. It concluded: "It is well settled that we are not required to accept petitioner's self-serving testimony in the absence of corroborating evidence. [The teacher] failed to submit corroborating evidence, such as a police report. Such evidence would have been helpful in establishing the items stolen and the date of the theft."
(2) The teacher failed to prove the amount of the loss. The court pointed out that she failed to substantiate the amount of the loss by documenting the "adjusted basis" of the lost luggage. In general, the first step in determining amount of a theft loss is to compute the property's adjusted basis. This amount is the original cost of the property, with certain adjustments. Since the teacher failed to produce any evidence as to the original cost of her luggage, she failed to adequately substantiate her loss.
(3) The teacher failed to prove that the loss was not compensated for by insurance. A taxpayer must demonstrate that a loss was not covered by insurance.
What can church treasurers do to help? If a minister or lay church employee experiences a theft of personal property, here are some suggestions you can make soon after the loss to increase the likelihood of a loss deduction:
- Encourage the pastor or lay employee to immediately file a police report. As the Tax Court noted, this will help to substantiate that the property in fact was stolen, and the date of the loss.
- Encourage the pastor or lay employee to locate records substantiating the cost of the stolen property. This evidence will be required in order to support a loss deduction.
Key point. Even if all the required records are maintained, a loss deduction is subject to additional limitations. To illustrate, the amount of each loss (adjusted basis) must be reduced by $100, and total theft losses must be reduced by 10% of adjusted gross income (this rule is applied after the $100 reduction for each loss).