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calculating gain or loss on its disposition, calculated in
accordance with sections 1.1011-1, 1.1016-2, and 1.1016-3, Income
Tax Regs., was their adjusted basis in the old warehouse as of
the date of the casualty or $40,831.10
Summary
A taxpayer cannot deduct a casualty loss under section
165(a) unless his adjusted basis in the converted property
exceeds the reimbursement received. United States v. Koshland,
208 F.2d 636, 639 (9th Cir. 1953); LaFavre v. Commissioner, T.C.
Memo. 2000-297; Elliston v. Commissioner, T.C. Memo. 1973-4; sec.
1.165-7(b)(3), Examples (1) through (3), Income Tax Regs.
Despite this well-established principle, petitioners urge us, in
effect, to permit them to deduct as a casualty loss their entire
unrecovered investment in both the old and new warehouses. This
we cannot do for the reasons discussed herein. We hold that the
cost of constructing the new warehouse does not increase the
Boyles’ adjusted basis in the old warehouse for purposes of
section 165, and, therefore, the Boyles’ adjusted basis in the
10In his opening brief, respondent notes that the revenue
agent’s calculation of the allowable casualty loss showed the
Boyles’ adjusted basis as $33,408. This figure was calculated
(with a $1 discrepancy) by subtracting the 1994 depreciation
deduction of $7,424 from $40,831, the Boyles’ adjusted basis in
the old warehouse as of the date of the fire. Respondent states
that he does not concede that the 1994 depreciation deduction was
proper, but he takes the position that the issue is immaterial
because the insurance proceeds received exceed both $40,831 and
$33,408.
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