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165(h) only to the extent (1) the loss exceeds $100, and (2) the
net casualty loss exceeds 10 percent of the AGI of the taxpayer.
The amount of the casualty loss from a partial destruction
of property is the lesser of the taxpayer’s adjusted basis of the
property or the difference in the property’s fair market value
immediately before and after the casualty. Sec. 1.165-7(b)(1),
Income Tax Regs. The amount of the loss is reduced by any
insurance recovery and salvage value. Sec. 165(a); sec.
1.165-1(c)(4), Income Tax Regs. To establish the amount of the
loss, the relevant fair market values of the property “shall
generally be ascertained by competent appraisal” conducted in a
manner to ensure that any casualty loss deduction “be limited to
the actual loss resulting from damage to the property.” Sec.
1.165-7(a)(2)(i), Income Tax Regs. As an alternative, the
taxpayer may use the cost of repairs to prove the casualty loss
(the cost of repairs method). See sec. 1.165-7(a)(2)(ii), Income
Tax Regs.
3. Cause of Damages
Petitioners presented credible evidence that Hurricane
Georges damaged the beach lot by causing loss of sand that
persisted until the sand was replenished by ocean tides and the
beach replenishment program of the City of Gulf Shores, Alabama.
Beach erosion from Hurricane Georges revealed the remains of the
wreck. Petitioners claim the visibility of the wreck and
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