Assignment Task:
On a fine sunny March afternoon in the spring of 2016, Saul and Stacy Spars toured several homes along the Bluffs in Belleair. Two of the homes caught their interest, one of the homes fronted the storied golf course and included views of the intercostal waterway and the Gulf of Mexico. The Spars consulted with their real estate agent and made a $3.5 million dollar offer on the home. The sellers, Stormy and Sunny Shad revealed that there were some windows with fogging but made no other disclosures about the condition of the home. Three months after the closing of the purchase by the Spars a number of developments led the Spars to regret their purchase. The balcony sundeck unexpectedly collapsed, the Spars' insurance company denied coverage for the damage noting that subsurface deterioration caused a slow deterioration of the structural steel. Further inspection revealed that the Shads had painted the support steel and then planted fast-growing shrubbery to conceal the condition of the balcony supports. The balcony collapse was not the only concealed defect. In February 2017 the swimming pool had been leaking large amounts of water eroding the foundation of the house resulting in both the collapse of the swimming pool structure and, more importantly, a portion of the living room of the house.
Extensive structural repairs were undertaken to address all of the concealed defects. The total cost was $400,000. The appraised value of the house decreased from $3.5 to $2.5 million. The Spars sued both the Shads and their real estate agent in state court in Florida claiming fraud by the Shads and their real estate agent. The fraud was concealing the defective condition of the home. The Spars won their lawsuit in 2018 and were awarded judgments of $500,000 in total. The real estate agent's errors and omissions insurance policy paid $125,000 leaving a judgment of $375,000 against the Shads. The Shads filed for bankruptcy in 2018 and did not pay their judgment. The Spars claimed a casualty loss of $1,375,000 on their 2018 tax return. In 2020, the IRS examined the return and denied the deductions. The IRS indicated that a finding of fraud against the Sellers of real estate was not a casualty. The Spars paid the tax and sued the IRS for a refund in US District Court for the Middle District of Florida. The Spars claimed that the losses were a result of a casualty perpetrated by fraud (as found by the state court).
What result?