Mandel v. Commissioner of Revenue

         Office of Appellate Courts Tax Court

          Mark A. Pridgeon, David L. Zoss, Edina, Minnesota, for relators.

          Lori Swanson, Attorney General, Michael Goodwin, Assistant Attorney General, Saint Paul, Minnesota, for respondent.

         SYLLABUS

         1. The tax court did not err in holding that the taxpayer's post-casualty-loss appraisal was not a "competent appraisal" under Treas. Reg. § 1.165-7(a)(2)(i) (as amended in 1977).

         2. The tax court did not err in granting summary judgment to the Commissioner of Revenue.

         Affirmed.

         Considered and decided by the court without oral argument.

          OPINION

          GILDEA, Chief Justice.

         This case comes to us after the tax court upheld the Commissioner of Revenue's partial disallowance of a casualty-loss deduction. Relators Jennifer and Eric Mandel argue that the tax court erred in holding that the post-casualty-loss appraisal they relied on to support their casualty-loss deduction was not "competent" within the meaning of the applicable treasury regulation. Additionally, the Mandels argue that the tax court improperly granted summary judgment to the Commissioner. Because we conclude that the tax court did not err in determining that the Mandels' post-casualty-appraisal was not "competent" and the tax court properly granted summary judgment, we affirm.

         In May 2010, the Mandels purchased a home in Minnetonka for $391, 000. On March 22, 2011, rainwater entered the Mandels' home, damaging the foundation wall and the floors and walls in the laundry room. The Mandels installed drain tile and a sump pump; replaced sheetrock, electrical components, and flooring that had been damaged by the water intrusion; and performed some landscaping. The Commissioner accepted proof that the Mandels spent $27, 411 to repair the property.^[1] There is no evidence that any other home in the Mandels' area suffered a loss around the same time. And there is no evidence of a general market decline that would have affected the fair market value of the Mandels' property at the time of the damage.

         In March 2012, the Mandels had Reliatel Appraisals perform two retrospective appraisals in anticipation of claiming a casualty loss on their 2011 tax return. Reliatel appraised the property as of March 21, 2011 (the day before the property was damaged), and as of March 23, 2011 (just after the property was damaged, but before it was repaired). The appraiser determined that the fair market value of the Mandels' property before the damage was $400, 000. In reaching this valuation, the appraiser relied on a sales comparison approach, comparing the Mandels' property with similar homes in the area and making adjustments on the basis of lot size, home size, number of bedrooms, and other similar metrics. The appraiser then determined the fair market value of the property just after the damage to be $298, 000, a $102, 000 decline from the initial appraisal.^[2] The appraiser calculated the estimated value by subtracting from the pre-casualty market value the cost of repairs multiplied by 2.6. The appraiser determined the cost of repairs to be roughly $40, 000, including the nearly $30, 000 the Mandels already spent to repair the property in addition to $10, 000 for further landscaping to reduce the risk of future flooding. The appraiser multiplied these costs for repairs and improvements by 2.6 because, in his experience, buyers are reticent to purchase homes with water damage, "as they carry a stigma in the marketplace." According to the appraiser, the buyer pool for water-damaged homes is typically limited to investors, who will only purchase a home if the cost of the property is reduced by roughly 2.6 times the cost of repairs.

         Based on the Reliatel appraisal, the Mandels deducted $82, 247 from their income reflected on their 2011 federal tax return.^[3] This deduction also affected the Mandels' Minnesota taxable income because Minn. Stat. § 290.01, subd. 19 (2014), defines "net income" as "federal taxable income."

         Following an audit, the Commissioner disallowed much of the Mandels' casualty-loss deduction. Specifically, the Commissioner reduced the allowable tax deduction to $7, 658, based on the cost ...