Chamales v. Commissioner

On June 2, 1994, Gerald and Kathleen Chamales (plaintiffs) opened escrow for the purchase of property in the Brentwood Park neighborhood of Los Angeles, California. On June 12, 1994, O. J. Simpson, a famous neighbor of the Chamaleses, was accused of murder. Simpson’s sudden notoriety brought outsiders and increased traffic into the neighborhood, threatened to decrease neighborhood real-estate values, and led to minor damage to the property as a result of the outsiders’ presence in the neighborhood. The Chamaleses considered canceling their escrow but decided to proceed with their real-estate closing on June 29, 1994, to avoid liability for cancellation. The Chamaleses estimated that their property lost 30 percent of its value due to the Simpson incident. On their 1994 federal tax return, the Chamaleses deducted this Simpson-related loss of value as a casualty loss. The commissioner of internal revenue (commissioner) (defendant) determined that the decrease in the value of the Chamaleses’ property was not a tax-deductible casualty and disallowed the deduction. The commissioner also imposed an accuracy-related penalty on the Chamaleses for understating their tax liability. Between 1994 and 1999, the Chamaleses and their neighbors continued to invest significant sums of money to maintain and improve their properties, even though low levels of Simpson-related disruption continued in the neighborhood. The Chamaleses petitioned the United States Tax Court for a redetermination.