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We disagree with petitioners, however, that the failure of
the above-cited regulations to specify when the adjusted basis of
the property involved must be calculated means that petitioners
are free to calculate the adjusted basis of the old warehouse by
adding to it the cost of constructing the new warehouse.
Although the above-cited regulations do not explicitly address
the timing question posed by petitioners, the answer, we believe,
flows from section 1.165-7(b)(1), Income Tax Regs.
Petitioners’ calculation of the Boyles’ adjusted basis in
the old warehouse as of 1995 assumes that the new warehouse is
merely an improvement of the old warehouse and that the cost of
that improvement increases the Boyles’ adjusted basis in the old
warehouse for purposes of calculating their casualty loss under
section 165(a). This assumption, which is critical to the
success of petitioners’ position, is incorrect because the record
in this case clearly establishes that the old warehouse and the
new warehouse were separate and distinct properties. Only the
old warehouse was involved in the casualty on December 13, 1993,
and it was completely destroyed before the new warehouse was even
in existence.
7(...continued)
provided by sec. 1016. Secs. 1.1016-2 and 1.1016-3, Income Tax
Regs., provide that a taxpayer’s cost basis must be increased by
the cost of improvements and betterments made to property, and
decreased by amortization, depreciation, and obsolescence.
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