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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.
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