Reply to post by Guy, on February 27, 2003 at 10:36:07:
Glad to help.
But I think the paradigm may be changing but is not yet gone... nor should be gone. Note that the pardigm is "most commonly transplanted" as the base size for developing unit cost in TFM. That may not be the same as "beyond replaceable size" which has traditionally been in the 6-12" range.
We must understand TFM as a surrogate-proxy-substitute for data we do not have or that does not make sense to collect. (See my TFM article which Russ has graciously linked above). In some cases where full size data are availbale they are appropriae as a cost basis. In some cases wher you want these data you can't get them. In some cases where you can get them they are not appropropriate or would be depreciated back down to a point where the value is no greater than would have been indicated by a smaller TFM # or a CoC4" the actual cost will be less than the 4" based unit cost up to some size say 15" dia for sake of argument. From that point on the actual cost is greater than what would be indicated by the 4" based unit cost. In cases where the tree is in good condition and location and actual replacement cost is not constrained by a reasonable relationship to property value (which is a legal constraint not what you or the client think is fair or want) then actual costs will better represent value.
Reasonableness must still apply. If this wonderful species, great condition, big tree is half a mile from the house on the other side of a hill and out of site and across the swamp full of crockagators and the owner never even new it was there it does not have much value no matter what the actual replacment cost would be.
I saw one case of a hedge, not as crucial as yours, but in clear view, where the actual replacement cost proposed was all documentable but a big chunk of the cost was site restoration for damage caused by the large replacement not by the initial tree damage. That big number was just not reasonable in the context of the damage and the property value. That's what the judge told the parties. The judge also told the parties that the documented fact that the tree damage caused no reduction in property value was unreasonable. The judge told the parties to come back with a reasonable settlement number. The judge was not going to be happy if the parties could not settle more reasonably and demanded to go to trial. The settlement figure was not disclosed.
In any case an actual cost is more logical and defensible than a cost developed by compounding a smaller cost to "parity."
Reply to post by Scott, on February 27, 2003 at 10:36:07:
Scott, I understand your comments on TFM but have shied away from that formula for some time for many cases due to its lack of usefulness in declaring a casualty loss. Most clients want an appraisal they can use both in negotiating a settlement and deducting a capital loss on taxes.
"In any case an actual cost is more logical and defensible than a cost developed by compounding a smaller cost to "parity.""
We do agree on this, but I still find "parity" to be a useful concept in appraisal, as it means "equivalent contribution".
Digging for actual cost of replacing large tree is now easier thank goodness.
Reply to post by Guy, on February 28, 2003 at 07:32:18:
I think that casualty loss issue needs a little clarification. TFM is specifically rejected by IRS. But I don't know if that says other CTLA or other replacement or cure methods are acceptable.
IRS says that the difference in the value of the real estate immediately before and after the tree damage is the measure of loss. This may be indicated by qualified real estate appraisal. Or by the cost of actual repairs to restore the site but not to exceed it's precasualty condition. So if you have receipts for actual replacment why do you need an appraisal? If you haven't actually replaced will an apprasial suffice?
Sneaking a claim by in an unaduted return is not a sufficient test. If TFM would fail on audit maybe CoC would too if not actual.
And finally if there is a settlement (as in insurance) it must be deducted from any claim for casualty loss which is still subject to the constraints on acceptable measures of damages.
Reply to post by Scott, on February 28, 2003 at 09:50:14:
Good clarifications; nothing controversial there.
"TFM is specifically rejected by IRS. But I don't know if that says other CTLA or other replacement or cure methods are acceptable."
I'd like to know more clearly the other methods are useful to document casualty loss, and if past clients have been audited, they haven't told me about it. (of course they don't tell me about root canals either...)
What would help here is someone's experience of other methods passing an audit. Are there any?
Until that comes, the best approach seems to be that replacement and cure methods, since they act to directly restore lost value, are acceptable until rejected.
Reply to post by Guy, on March 02, 2003 at 12:11:20:
The IRS regs are clear that reduction in real estate value by compenet appraisal or actual expenditures to cure are acceptable.
Replacement Cost or Cost of Cure appraisals in lieu of actual costs seem not far removed from TFM and I think are pushing the envelope a little. You'd want to be very clear to your client that they are likely to be rejected at audit. Becasue you might get away with it at audit is not a very good reason to use an unacceptable method. Is that a client's call or a professional line not to be crossed?
Reply to post by Scott, on March 02, 2003 at 15:54:20:
Congrats, Guy on finding 50' trees---Good job!
It is my understanding that C of C and RCM satisfy the IRS requirements. However, the money actually has to be spent to qualify, and of course it does have to satisfy the 10% over ones' adjusted gross income.
Reply to post by lew bloch, on March 02, 2003 at 19:07:12:
So here's the question Lew. If the money has to have been spent to claim the deduction then you have receipts. So why do you need the CoC or RCM appraisal?
Serious question. Not trying to be a PITA. You might get hired to draw up specs to have bid but that might not be the same as an appraisal.
Reply to post by Scott, on March 02, 2003 at 15:54:20:
Scott wrote: "The IRS regs are clear that reduction in real estate value by compenet appraisal or actual expenditures to cure are acceptable."
OK, I hope we all agree that consulting arborists can be competent at appraising loss. Scott must not be saying that only RE appraisers can be competent in this area, because I've seen them at work and their formulae too rely on subjective judgments. Unquestionable competence requires full objectivity, and no human has that.
"Replacement Cost or Cost of Cure appraisals in lieu of actual costs seem not far removed from TFM and I think are pushing the envelope a little."
This I don't see at all; the envelope isn't stretched when they can be clearly applied. RC and CoC are far removed from TFM because they seek to put back what was lost, to replace or cure the loss in value to their property.
TFM imo had the same problem as gauging the health of a tree by measuring twig growth--remember that ISA thread on the trenched tree, SC? Both are holdovers from forestry, where trees are measured by mass, not contribution to humans and their property, which is where it truly lies.
No ethical line is crossed, no envelope is stretched by clear and defensible tree apraisals honestly delivered--right?
Reply to post by Scott, on March 03, 2003 at 17:45:41:
My dear friend, Scott (not a PITA)
C of C would establish a "reasonable" cost to cure the problem so that the damaged party would know what to do and how much it would cost to restore the area to near its pre-casualty status.
RCM would do the same so the client could know the cost to restore the property.
Reply to post by lew bloch, on March 06, 2003 at 17:49:19:
So we agree. CoC and RCM might be useful to the damaged party, the owner-taxpayer, but not suitable measure of damages to support an IRS Casualty Loss Deduction.
Reply to post by Scott, on March 11, 2003 at 17:48:31:
IMNTBHO C of C and RCM ARE acceptable IRS casualty loss methods....
Reply to post by lew bloch, on March 14, 2003 at 05:32:05:
That was not entirely clear in the sequence of earlier responses.
Have you had RCM or CoC accepted by the IRS on audit? Or seen some IRS publication or ruling stating RCM or Coc are acceptable measures of casualty loss?
Reply to post by Scott, on March 14, 2003 at 17:55:22:
The primary IRS document is Publication 547.
ÂLandscaping. The cost of restoring
landscaping to its original condition after a
casualty may indicate the decrease in FMV.
You may be able to measure your loss by
what you spend on the following.
Â· Removing destroyed or damaged trees
and shrubs, minus any salvage you receive.
Â· Pruning and other measures taken to
preserve damaged trees and shrubs.
Â· Replanting necessary to restore the
property to its approximate value before
What it appears to hinge on is the phrase Âwhat you spend...Â does this mean you MUST spend that money to be eligible?
If you use a RE appraisal but do not actually sell the property, you get a deduction anyway. If you use CoC or RCM, does that mean you canÂt claim the deduction, just because the restoration is not actually done?
Reply to post by Russ Carlson, on March 16, 2003 at 12:33:01:
Russ you've identified the issue exactly. THe Pub.547 language sure sounds like the money needs to actually be spent.
Your comparison to the RE Appraisal might not be a reliable test. The essence of the IRS test is value of property immediately before and after and r.e. appraisal is an explicitly accepted test as a surrogate or substitue for actual sale. The language explicitly says "value loss as indicated by appraisal" and does not say "what you lost when you actually sold the house." The plant replacement language explicitly says "what you SPEND" and does not say "what you MIGHT spend or COULD spend or SHOULD spend as indicated by appraisal." The history is that r.e. appraisal is accepted and tree appraisal methods are not. The IRS logic is not equity it's to maximize tax collection, i.e. minimize deductions.
In the absence of a clear IRS regulation, publication or ruling on RCM or CoC or documented cases of RCM or CoC surviving audit we do not know for sure. I think we or a client working with their tax advisor must consider the explict language, the history and the IRS logic as much or more than we consider what we or they might prefer to think. It is the taxpayer's choice how "aggressive" to be in taking deductions. Many tax pros say "be aggressive, take the deduction, maybe it will be unchallenged." But that's THEIR choice. I would want to be very careful about telling a client that RCM or CoC SHOULD be considered. We just don't know. We do know the IRS language says "what you SPEND" and we do know TFM has been rejected. For a client or tax pro to make and informed choice we cannot overstate the applicability of RCM or CoC as if we do know.
Reply to post by Scott, on March 14, 2003 at 17:55:22:
No, I have no knowledgw whether any of my C ofC or RCM have been or not been accepted by IRS. HOWEVER, as stated in THE GUIDE, both methods answer all of the IRS requirements. It is My understanding that Jim Ingram has discussed this with someone in IRS. HOWEVERAGAIN, we all know of TF appraisals that have gone thru IRS scrutiny; due to the intelligence (or lack of) in the IRS system. AND, IMNTBH, the money has to be actually spent before it is officially a casualty loss.....
|Powered by Social Strata|