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See Millsap v. Commissioner, 46 T.C. 751, 759 (1966), affd. 387
F.2d 420 (8th Cir. 1968). The reduction in the fair market value
of the property caused by the casualty must be compared to the
adjusted basis of the property. The lesser of the two amounts
equals the amount of the casualty loss for purposes of computing
the deduction allowed under section 165. See Helvering v. Owens,
305 U.S. 468 (1939); Pfalzgraf v. Commissioner, 67 T.C. 784
(1977); Cornelius v. Commissioner, 56 T.C. 976 (1971); Millsap v.
Commissioner, supra; sec. 1.165-7(b)(1), Income Tax Regs.
Subject to numerous exceptions, the general rule is that a
taxpayer’s basis in property equals the taxpayer’s cost of the
property. See secs. 1011 and 1012. Fair market value is defined
in countless cases as “the price at which the property would
change hands between a willing buyer and a willing seller,
neither being under any compulsion to buy or sell and both having
reasonable knowledge of relevant facts.” United States v.
Cartwright, 411 U.S. 546, 551 (1973); Gresham v. Commissioner, 79
T.C. 322, 326 (1982), affd. 752 F.2d 518 (10th Cir. 1985); sec.
1.170A-1(c)(2), Income Tax Regs.
Although less than clear from the manner in which the
casualty loss deduction was computed on petitioners’ return, the
relevant “property” over which the controversy centers in this
case is the personal property damaged or destroyed in the fire.
Reciting the well-established general principles that control
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