Tax Watch: Taxpayer burned again after warehouse fire

The U.S. Tax Court has ruled that a couple could not deduct a casualty loss on their burned warehouse because their adjusted basis in the converted property didn’t exceed their insurance recovery.

James and Nancy Boyle bought a warehouse in 1979 as an investment. A fire destroyed it in 1993, but their insurance claim wasn’t settled until 1995.

Before the fire, the warehouse had a book value of $700,000. After the fire, the adjusted basis was $40,000, and the fair market value was zero. The insurer reimbursed $553,800, and the Boyles spent $699,000 to build a new warehouse.

On their 1995 return, the Boyles claimed a $173,800 casualty loss, which the Internal Revenue Service disallowed because the insurance proceeds exceeded the allowable loss. The IRS argued that the Boyles’ adjusted basis had to be calculated as of the date the fire occurred.

Nancy Boyle and her husband’s estate argued that the regulations don’t say whether to calculate the adjusted basis as of that date or the date on which the loss was deemed sustained. They contended that the adjusted basis had to be calculated as of 1995 and had to include the cost of rebuilding.

Tax Court Judge L. Paige Marvel sustained the IRS. He noted that the Boyles’ calculation of the adjusted basis in the warehouse as of 1995 assumed that the new warehouse was merely an improvement of the old one and that the cost of the improvement increased the adjusted basis in the old warehouse for calculating their casualty loss.

The court found that the old and new warehouses were separate properties, and held that the Boyles’ adjusted basis was on the old warehouse as of the date of the fire, or $40,800.

The court concluded that the cost of constructing the new warehouse didn’t increase the Boyles’ adjusted basis in the old one.

Cite: Estate of James W. Boyle, et al., v. Commissioner, T.C. Memo 2001-235

Family partnership wins on discount

The U.S. Tax Court recently allowed a 40% discount on interests in a family limited partnership whose assets consisted entirely of marketable securities.

The husband died, leaving the wife marketable securities. He executed a will, a revocable living trust and an agreement creating a family limited partnership. The will provided that his estate would pass to the trust, from which the wife’s son would receive the corpus outright.

The decedent’s lawyer filed a gift-tax return claiming a 40% discount from the value of the partnership’s assets.

The court ruled that, at least for estate tax purposes, an aggregate marketability and minority interest discount of 40% was warranted and applied to the partnership interests conveyed by the decedent.

Although the court reportedly relied heavily on the testimony of expert witnesses, it concluded that the IRS expert’s testimony was contradictory, unsupported by the data and inapplicable to the facts.

Cite: Dailey Est. v. Commissioner, T.C. Memo 2001-263