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that, in the case of an individual, the deduction under section
165(a) shall be limited to losses incurred in any transaction
entered into for profit, though not connected with a trade or
business. Sec. 165(c)(2). Petitioner entered into the
transaction to purchase a remainder interest in the land, upon
which the barn stood, for profit. Respondent, however, argues
that petitioners may claim only a loss equal to petitioner’s
adjusted basis in the barn at the time of the casualty.
Petitioner took title to the remainder interest in the
property with his three sons as tenants in common for a total of
$20,000. Therefore, respondent argues that one-fourth of the
purchase price is attributed to petitioner, making his adjusted
basis in the 80 acres equal to $5,000. The adjusted basis in the
40-acre tract upon which the barn stood would be $2,500. Because
54 percent of the value of the 40-acre tract was allocable to the
barn, respondent concludes that petitioner’s adjusted basis in
the barn would be no more than $1,350.
Petitioners, on the other hand, argue that, according to
statements made by one of respondent’s agents, the general rule
under section 165 does not apply to remainder interests and,
therefore, that they should be able to deduct at least
petitioner’s share of the fair market value of the barn
immediately before the casualty less the salvageable amount of
the remaining lumber, an amount equal to one-fourth of $44,000 or
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Last modified: May 25, 2011