Finkbohner v. United States

George and Beverly Finkbohner (plaintiffs) owned and occupied an Alabama property. In 1980, flood waters damaged several homes on the Finkbohners’ cul-de-sac and damaged the Finkbohners’ driveway and yard. The Finkbohners claimed a casualty-loss deduction of $24,900 for the flood damage on their 1980 tax returns under § 165(c)(3) of the Internal Revenue Code. The Commissioner of Internal Revenue (the commissioner) disallowed most of that deduction and allowed the Finkbohners to take a deduction for only the cost of physically repairing their property, less a $100 deductible for each taxpayer. The Finkbohners paid the taxes as recomputed by the commissioner and then sued the United States (defendant) for a refund. At trial, the Finkbohners’ expert testified that he had calculated a reduction in the property’s value from $120,000 to $95,000. The Finkbohners presented evidence that, after the flood, municipal authorities had demolished seven of the 12 homes on the Finkbohners’ cul-de-sac, which had significantly diminished their home’s attractiveness and made their neighborhood unappealing. The government argued at trial that any loss of fair market value beyond physical damage should be excluded from consideration as buyer resistance, which the government defined as any reason that an otherwise-willing buyer would have for not buying the property at the full asking price. The jury awarded the Finkbohners $12,500 as a casualty-loss deduction, and the government appealed.