Khen Thi and Hong Van Huynh - Page 8




                                        - 7 -                                         

          automobiles) where, in the latter instance, the insurance                   
          benefits do not constitute gross income.  That argument is                  
          inappropriate to the facts of this case.  The general rule is               
          that the taxability of recovery payments depends upon the nature            
          of the claim.  If the recovery represents damages for lost                  
          profits, the payment is considered income; however, if the                  
          recovery represents a replacement of capital destroyed or                   
          damaged, the recovery does not constitute taxable income to the             
          extent the recovery does not exceed the basis of the damaged or             
          destroyed property.  In the latter event, the recovery is a                 
          restoration or return of capital.  State Fish Corp. v.                      
          Commissioner, 48 T.C. 465, 473 (1967).  In this case, petitioners           
          had no basis in their credit card liabilities.  Therefore, the              
          payments by the insurance companies were not a recovery or                  
          restoration of capital.  These payments were income.                        
               Reviewed and adopted as the report of the Small Tax Case               
          Division.                                                                   


          Decisions will be entered                                                   
          for respondent.                                                             












Page:  Previous  1  2  3  4  5  6  7  8  

Last modified: May 25, 2011