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$148,479. The Boyles depreciated the old warehouse using the
straight-line method and a 20-year useful life, beginning in
1979, claiming annual depreciation deductions of $7,424.3 On
January 1, 1993, the Boyles’ adjusted basis in the old warehouse
was $48,255.
On December 13, 1993, the old warehouse was completely
destroyed by fire. Immediately prior to the fire, the fair
market value of the old warehouse was between $600,000 and
$700,000. Immediately after the fire, the fair market value of
the old warehouse was zero. As of the date of the fire, the
Boyles’ adjusted basis in the old warehouse was $40,831.
When the fire occurred, the old warehouse was covered by a
replacement cost fire insurance policy (insurance policy) issued
by Pacific Insurance Co. (Pacific). The Boyles anticipated that
the insurance policy would cover all the costs of constructing a
new warehouse to replace the old warehouse and submitted a claim
to Pacific. A dispute, however, arose between the Boyles and
Pacific as to whether the insurance policy would cover that part
of the construction costs associated with changes in building
code requirements that occurred between the time the old
warehouse originally was constructed and the date of the fire.
As a result of that dispute, the amount of insurance
reimbursement the Boyles reasonably expected to receive under the
3 In 1979, the Boyles deducted only $3,712.
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