Court Opinion

ID: 4631685
Source: CourtListenerOpinion
Date Created: 2020-11-21 03:10:10.017681+00
Date Added: 2024-06-11T07:57:45.848265
License: Public Domain

FRED FRAZER, PETITIONER, v. COMMISSIONER OF INTERNAL REVENUE, RESPONDENT.Frazer v. CommissionerDocket No. 9865.United States Board of Tax Appeals10 B.T.A. 409; 1928 BTA LEXIS 4113; January 31, 1928, Promulgated 1928 BTA LEXIS 4113">*4113  Where a portion of a building is destroyed by fire and is thereafter restored to its original condition, the owner's loss is not to be measured by the difference between the cost of restoration and the amount of insurance received, but cost or March 1, 1913, fair market value, properly depreciated to the date of the fire, is to be used as a basis in computing the loss.  Chas. E. Cooney, Esq., and Laurence Graves, Esq., for the petitioner.  Robert A. Littleton, Esq., for the respondent.  MURDOCK 10 B.T.A. 409">*409  This is a proceeding for the redetermination of a deficiency in income tax for the calendar year 1922, in the amount of $2,024.99.  It is alleged that the Commissioner was in error in refusing to allow the petitioner a deductible loss in excess of $3,919.56 on account of the destruction of part of the petitioner's property by fire.  The facts were stipulated.  FINDINGS OF FACT.  The petitioner, Fred Frazer, some time previous to March 1, 1913, had constructed a six-story stone and brick apartment house, known as "The Kasson," on premises at 622 James Street, Syracuse, N.Y., and the said apartment house was a source of income to him from the1928 BTA LEXIS 4113">*4114  date of its erection until the year 1925.  It was partially destroyed by fire on April 24, 1922.  The petitioner immediately thereafter proceeded in good faith to expend the money received on certain policies of insurance in the restoration of the building to its condition previous to the fire.  In so doing, he made no structural changes in the building.  At the time of the destruction of part of the building by fire the petitioner carried certain insurance policies thereon in the aggregate amount of $80,000.  After the fire the petitioner and the insurance companies agreed that the sound value and the replacement value of the building on the day of the fire was $220,000 and that the 10 B.T.A. 409">*410  probable cost to repair the damage done by the fire would be $41,001.35.  The petitioner had not carried insurance on the building equal to 80 per cent of the replacement value as required by his various policies and as a result of the provisions of these policies the insurance companies paid him only $18,636.98 on account of the damage from the fire.  The actual cost of restoring the building to its previous condition amounted to $44,361.60.  The difference between this amount and the amount1928 BTA LEXIS 4113">*4115  received from the insurance companies is the amount paid by the petitioner for the restoration of his building.  The fair market value of the building on March 1, 1913, was $147,000.  The Commissioner in ascertaining the loss to the petitioner for the year 1922, resulting from the fire, adopted $220,000 as the value of the building at the date of the fire, and $41,001.35 as the cost of restoring the building to its original condition.  He then subtracted this cost of restoration from the value of the building to arrive at the salvage value of the building after the fire.  From these figures he determined the percentage which the salvage value was of the sound value.  He then took the fair market value of the building on March 1, 1913, and subtracted from it depreciation from March 1, 1913, to the date of the fire to arrive at $121,030.98 as the depreciated value of the building at the time of the fire.  He subtracted from this amount $98,474.44, which represented the same fractional part of $121,030.98 as the salvage value of the building after the fire was of the sound value of the building just preceding the fire.  This left $22,556.54, from which he subtracted $18,636.98, the1928 BTA LEXIS 4113">*4116  amount of insurance received by the petitioner, and he held that the difference, or $3,919.56, represented the petitioner's loss not compensated for by insurance.  The petitioner in making his income-tax returns for the years 1913 to 1923, had never claimed any deduction on account of depreciation of this building.  OPINION.  MURDOCK: The petitioner relies on the fact that he merely restored the property and placed it in the same condition as it had been in before the fire occurred and contends that under sections 214(a)(12) and 202(d)(2) of the Act of 1921 his deductible loss during the taxable year resulting from the fire is the sum of $25,725.60, being the difference between the amount expended in the restoration of the building and the amount of the insurance received.  However, the above sections are relief provisions permitting a taxpayer to postpone the taxation of so much of a gain realized at the time of voluntary conversion of property as is used for replacement, ; 10 B.T.A. 409">*411 1928 BTA LEXIS 4113">*4117 , and are not applicable in the determination of a loss.  A loss must be measured not by the difference between the cost of restoration and the amount of insurance received, but upon the basis of cost or March 1, 1913, fair market value properly depreciated. ; ; . This is the case, whether or not the petitioner had claimed depreciation as a deduction in his previous returns.  See . The Commissioner has used a market value as of March 1, 1913, depreciated to the date of the fire as the basis for his computation, and it is agreed that the market value and the depreciation used are correct in their respective amounts.  His method appears to be in accord with the provisions of the Revenue Act of 1921.  However, it is now apparent that instead of the estimated cost of restoration, or $41,001.35, the petitioner has actually expended the sum of $44,361.60, and we are1928 BTA LEXIS 4113">*4118  of the opinion that the latter amount should take the place of the former amount in the Commissioner's computation of the petitioner's loss.  Judgment will be entered in accordance with the foregoing opinion on notice of 15 days, under Rule 50.