Scott L. Lafavre and Shari L. Lafavre - Page 3




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          These insurance proceeds were reinvested in the reconstruction of             
          the apartment buildings.  Additionally petitioners invested                   
          $483,000 in the reconstruction of the damaged apartments.                     
               On their income tax return for 1994 the petitioners claimed              
          a casualty loss of $455,720.  This loss was calculated by                     
          subtracting an after casualty fair market value of $1,544,280                 
          from a precasualty fair market value of $2 million.                           
                                      Discussion                                        
               Respondent determined that petitioners are not entitled to               
          the casualty loss claimed on their 1994 Federal income tax return             
          because petitioners’ adjusted basis in the property was less than             
          the insurance proceeds received by petitioners for the loss.                  
          Petitioners argue that since the insurance proceeds were                      
          reinvested in qualifying property under section 1033 the full                 
          amount of the economic loss should be deductible.  Petitioners                
          calculate their loss as follows:                                              

                 Fair market value prior to casualty $2,000,000                         
                 Fair market value after casualty    -750,000                           
                 Gross casualty loss                 1,250,000                          
                 Less insurance proceeds               -767,000                         
                 Net casualty loss                   483,000                            
                 (Casualty loss less than basis)                                        
               Section 165 provides for the deduction of a loss and in                  
          pertinent part provides:                                                      







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