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On their 1990 Federal income tax return, petitioners claimed
a $100,000 casualty loss. This amount represented the difference
between petitioners' estimate of the PEDRO's fair market value of
$475,000 before the casualty, and petitioners' estimate of the
PEDRO's fair market value of $265,000 immediately after the
casualty, which petitioners then further reduced by the $110,000
insurance recovery to arrive at the $100,000 casualty loss
figure.
On May 22, 1991, petitioners filed Form 1045 (Application
for Tentative Refund) carrying back their 1990 net operating loss
to the tax years 1987 and 1988.
On September 4, 1991, William Hodgens, Director, Northrop
and Johnson, advised by letter that, due to a number of factors
itemized in the letter (some of which related to the damage
suffered by the PEDRO), "I feel a realistic market value for
PEDRO is in the area of $285,000.00 to $320,000.00."
OPINION
Respondent concedes that petitioners incurred a casualty
loss as a result of the partial sinking of the PEDRO on February
7, 1989, but contends that the loss, if any, was sustained in
1994, and not in 1990, as claimed by petitioners. Respondent
argues that it was not until 1994, when the lawsuit against
Pedro-Holland was resolved, that petitioners knew whether or not
they would be further compensated. Respondent also challenges
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