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and waste water. By the end of 1986, petitioner had replaced the
front bumper, repainted the body, added a furnace, and completed
the bathroom and the kitchen, including cabinets.
Petitioners placed the bus in service as a business vehicle
in 1985. Petitioners reported that they made improvements
totaling $2,099 in 1985 and $2,883 in 1986. Petitioners claimed
deductions totaling $18,517 between 1985 and 1989 for
depreciation, including a $2,099 deduction in 1985 pursuant to
section 179.
In December 1990, the bus was destroyed by fire. In early
1991, petitioners received $58,475 from their insurance provider
for the replacement value of the converted bus. Rather than
repeat the conversion process on a different bus, petitioners
used the insurance proceeds to buy land.
Petitioners filed their 1991 tax return on January 26, 1993.
Petitioners did not request an extension of time to file their
income tax return for the year in issue. Petitioners never
reported any gain or loss from the disposition of the bus.
OPINION
Issue 1. Whether Petitioners Realized Capital Gain
Respondent determined that petitioners' adjusted basis in
the bus was $824, and that petitioners realized $18,517 of
section 1245 gain and $39,134 of capital gain from its
disposition. Petitioners concede the section 1245 gain; however,
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