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instance, the insurance benefits do not constitute gross income.
That argument is inappropriate in the present 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 income to the extent
the recovery does not exceed the basis of the damaged or
destroyed property. In the latter case, the recovery is a
restoration or return of capital. State Fish Corp. v.
Commissioner, 48 T.C. 465, 473 (1967). In the present case,
petitioner had no basis in his credit card liability. Therefore,
the payments by the insurance companies were not a recovery or
restoration of capital. These payments were income.7
Conclusion
We have considered all of the other arguments made by the
parties, and, to the extent that we have not specifically
addressed them, we conclude they are without merit.
7We note that the amounts reported as income could be
reduced or offset by the premiums paid by petitioner for the
insurance coverage for the benefits payable arising during the
period of petitioner’s unemployment. However, petitioner has
failed to establish the total amount of the premiums paid for the
year at issue or the portion of such premiums allocable to the
unemployment risk (as distinguished from the premiums
attributable to death or disability); therefore no such offset
will be allowed.
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