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which was totaled in petitioners’ automobile accident that
occurred in early November 1994. Petitioners calculated that
claimed casualty loss deduction by subtracting their $27,000
estimate of the amount of insurance to be paid by State Farm from
$67,500, the amount that they paid to purchase that automobile.
Respondent disallowed petitioners’ claimed casualty loss deduc-
tion for 1994.
Section 165(a) allows a deduction for any loss sustained
during the taxable year and not compensated for by insurance or
otherwise.6 A loss is treated as sustained during the taxable
year in which the loss occurs, as evidenced by closed and com-
6The amount of any deductible casualty loss sustained gener-
ally is equal to the lesser of (1) the amount equal to the fair
market value of the property in question immediately before the
casualty reduced by the fair market value of that property
immediately after the casualty or (2) the amount of the adjusted
basis of the property prescribed in sec. 1.1011-1, Income Tax
Regs., for determining the loss from the sale or other disposi-
tion of the property involved. See sec. 1.165-7(b), Income Tax
Regs. However, if property used in a trade or business or held
for the production of income is totally destroyed by casualty,
and if the fair market value of such property immediately before
the casualty is less than the adjusted basis of such property
prescribed in sec. 1.1011-1, Income Tax Regs., the amount of the
adjusted basis of such property is to be treated as the amount of
the loss for purposes of sec. 165(a). See id.
Moreover, in the case of a personal casualty loss (i.e., a
casualty loss of an individual of property not connected with a
trade or business or a transaction entered into for profit), the
amount of such loss otherwise properly calculated under sec. 165
and the regulations thereunder is deductible for the taxable year
only to the extent such loss (assuming there are no personal
casualty gains) exceeds 10 percent of the individual taxpayer’s
adjusted gross income. See sec. 165(h)(2)(A).
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