                   T.C. Memo. 1996-202



                 UNITED STATES TAX COURT


GARY L. LONSINGER AND NANCY L. LONSINGER, Petitioners v.
      COMMISSIONER OF INTERNAL REVENUE, Respondent



Docket No.   13729-94.                   Filed April 25, 1996.



     In 1989, Ps' boat, the PEDRO, partially sank as a
result of an underwater valve explosion causing three
feet of salt water to enter the steel hull. In the
following year, Ps received a reimbursement from their
insurance company, but claim that they suffered a
casualty loss in excess of the amount for which they
were reimbursed. Held: Ps have not established their
entitlement to a casualty loss deduction under sec.
165(a), (h), I.R.C.



Gary L. Lonsinger and Nancy L. Lonsinger, pro se.

Louise R. Forbes, for respondent.
             MEMORANDUM FINDINGS OF FACT AND OPINION


     NIMS, Judge:   Respondent determined that the following

deficiencies are due from petitioners:

                                         Additions to Tax
     Year            Income Tax            Sec. 6662(a)*

     1989            $10,242                  $2,048
     1990              1,639                     -0-
     1991              2,972                     594

     *We note that in 1989, Pub. L. 101-239, sec. 7721(a), 103
Stat. 2395, 2400, as part of the amendments to subchapter A of
chapter 68, repealed previous section 6662(a), which had provided
for certain additions to tax. The repeal was effective for
returns the due date for which (determined without regard to
extensions) was after December 31, 1989. Thus, respondent's
determination as to additions to tax under former sec. 6662(a) is
improper.


     Unless otherwise indicated, all section references are to

sections of the Internal Revenue Code in effect for the years at

issue, and all Rule references are to the Tax Court Rules of

Practice and Procedure.

     Respondent has made a number of concessions, including the

concession that there are no additions to tax.   The only issue

remaining for decision is whether petitioners are entitled to a

casualty loss deduction for 1990.

                          FINDINGS OF FACT

     Some of the facts have been stipulated and are incorporated

herein by this reference.

     Petitioners resided in Durham, New Hampshire, when they

filed their petition.
                               - 3 -


     In late 1985, Gary L. Lonsinger (petitioner) began

discussions with Pedro-Holland about the possibility of bringing

a line of vessels manufactured by Pedro-Holland to the United

States for resale.   These vessels had no performance history in

the United States.   Petitioner and his wife, Nancy L. Lonsinger

(petitioners), negotiated with Pedro-Holland for about a year,

and in 1986, ultimately reached an agreement whereby petitioners

would represent Pedro-Holland in the United States and would

bring the first boat into the United States for eventual sale.

The boat, called the "PEDRO", was built in Holland and delivered

to petitioners in the United States in July, 1987.

     Petitioners understood that one of the requirements of U.S.

Customs is that, if a foreign-built boat is imported, it cannot

be sold for a commercial use within the 12 succeeding months, and

if the boat is imported as a pleasure craft, then a substantial

import duty must be paid.   Consequently, it was agreed that the

PEDRO would be delivered "stripped" and would be outfitted by

petitioners in the United States, which would take a substantial

amount of time to complete.   When delivered to petitioners in the

United States, the boat had no electronics on it, and lacked an

oven, a refrigerator, generators, a washer-dryer, furniture,

drapes, and carpeting.
                               - 4 -


     The PEDRO was a 47-foot twin diesel motor yacht, the hull of

which was made of carbon steel.   The exterior of the hull was

zinc chromate bonded for corrosion resistance purposes, but the

interior of the hull was not so bonded.

     The outfitting of the PEDRO was completed in July or August

of 1988.   In December, 1987, before the outfitting was completed,

Northrop and Johnson, petitioners' marketing representative, had

suggested an asking price of $520,000 for the boat.   In

September, 1988, Durham Trust Bank issued a mortgage on the

completed boat in the amount of $321,000, which was approximately

the amount petitioners were required to pay Pedro-Holland, having

been given one year "free financing" from the delivery date in

July, 1987.

     Shortly thereafter, petitioners and Northrop and Johnson

agreed to advertise the boat for sale at a price of $465,000.    In

November, 1988, petitioners decided that, due to their heavy

carrying charges and to obtain a quick sale, they would reduce

the asking price to $396,000, which petitioners figured was just

below their "total base cost" of $402,000.

     On February 7, 1989, a valve exploded on the boat, creating

a two-inch hole five feet below the water line.   Since the boat

weighed 40 tons, the explosion created a "geyser" inside the

hull.   With the prompt intervention of the U.S. Coast Guard, the

boat was kept from totally sinking, but took three feet of water
                                - 5 -


in the engine room, which destroyed both engines, transmissions,

all electrical gear, all of the electronics, the wiring, and the

air conditioning system.   In 1990, petitioners accepted $110,000

from USF&G in settlement of their insurance claim.     After the

partial sinking, the PEDRO was repaired, and was declared

seaworthy in September, 1990.

     In the summer of 1990, petitioners filed suit against Pedro-

Holland in an attempt to recover both the devaluation of the boat

caused by salt water contamination, and unreimbursed expenses.

USF&G filed jointly with petitioner to recover from Pedro-Holland

the $110,000 it paid to have the boat repaired.

     At the suggestion of the bank mortgagee, petitioners moved

the boat to Florida in November, 1991.     On November 15, 1991,

Durham Trust Bank, the mortgagee, was closed by the FDIC and

"froze" petitioner's assets.    It was petitioner's understanding

that this action was taken because of criminal activity that

happened in the bank.   In March, 1994, the FDIC permitted

petitioners to sell the boat.   Petitioners realized $85,000 on

the sale.

     Petitioners' lawsuit against Pedro-Holland came to trial in

January, 1994.   The judge in the case excluded petitioners'

expert witnesses on motion of opposing counsel, so petitioners

did not recover from Pedro-Holland.     Petitioners did, however,

recover $30,000 from their attorney.
                               - 6 -


     On their 1990 Federal income tax return, petitioners claimed

a $100,000 casualty loss.   This amount represented the difference

between petitioners' estimate of the PEDRO's fair market value of

$475,000 before the casualty, and petitioners' estimate of the

PEDRO's fair market value of $265,000 immediately after the

casualty, which petitioners then further reduced by the $110,000

insurance recovery to arrive at the $100,000 casualty loss

figure.

     On May 22, 1991, petitioners filed Form 1045 (Application

for Tentative Refund) carrying back their 1990 net operating loss

to the tax years 1987 and 1988.

     On September 4, 1991, William Hodgens, Director, Northrop

and Johnson, advised by letter that, due to a number of factors

itemized in the letter (some of which related to the damage

suffered by the PEDRO), "I feel a realistic market value for

PEDRO is in the area of $285,000.00 to $320,000.00."

                              OPINION

     Respondent concedes that petitioners incurred a casualty

loss as a result of the partial sinking of the PEDRO on February

7, 1989, but contends that the loss, if any, was sustained in

1994, and not in 1990, as claimed by petitioners.    Respondent

argues that it was not until 1994, when the lawsuit against

Pedro-Holland was resolved, that petitioners knew whether or not

they would be further compensated.     Respondent also challenges
                               - 7 -


the amounts used by petitioners in computing the amount of the

casualty loss on their 1990 return.

     Petitioners argue generally in support of the position taken

on their return.

     Section 165(a) provides a deduction for losses not

compensated for by insurance or otherwise.   Section 165(h) deals

with the treatment of casualty gains and losses.   Although

petitioner testified that he was in the business of buying and

selling boats, for which he held two franchises, and petitioners

included a Schedule C relating to boat sales with their 1990

return, they claimed the loss from the partial sinking of the

PEDRO as a loss from a casualty relating to personal use

property, for reasons not readily apparent, and reduced the loss

by $100, as provided by section 165(h)(1), and 10 percent of

their adjusted gross income, or $4,032, as provided by section

165(h)(4)(A).

     As already noted, respondent challenges both the year in

which any casualty loss deduction may be claimed by petitioners,

and the amount of the loss.   For reasons hereafter discussed, we

believe that petitioners have correctly chosen 1990 as the year

for which to claim any casualty loss, but, based on the record

before us, that petitioners are entitled to claim no casualty

loss in any year from the partial sinking of the PEDRO.
                               - 8 -


     The regulations provide the method for determining the

amount deductible.   Section 1.165-7(b)(1), Income Tax Regs.,

provides:

          (b) Amount deductible--(1) General rule. In the
     case of any casualty loss whether or not incurred in a
     trade or business or in any transaction entered into
     for profit, the amount of loss to be taken into account
     for purposes of section 165(a) shall be the lesser of
     either--

               (i) The amount which is equal to the fair
     market value of the property immediately before the
     casualty reduced by the fair market value of the
     property immediately after the casualty; or

               (ii) The amount of the adjusted basis
     prescribed in sec. 1.1011-1 for determining the loss
     from the sale or other disposition of the property
     involved. However, if the property used in a trade or
     business or held for the production of income is
     totally destroyed by casualty, and if the fair market
     value of such property immediately before the casualty
     is less than the adjusted basis of such property, the
     amount of the adjusted basis of such property shall be
     treated as the amount of the loss for purposes of
     section 165(a).


Fair market values are "generally" to be ascertained by

"competent appraisal".   Sec. 1.165-7(a)(2)(i), Income Tax Regs.

     Section 1.165-1(a), Income Tax Regs. (citing section 165(a))

provides that in computing taxable income under section 63, any

loss actually sustained during the taxable year and not made good

by insurance or some other form of compensation is allowable as a

deduction, subject to certain limitations not relevant here.

Section 1.165-1(d)(2)(i), Income Tax Regs., provides in general

that a casualty loss is not "sustained" before the year in which
                               - 9 -


it can be ascertained with reasonable certainty that

reimbursement for the loss will (or will not) be received.

     As described in our Findings of Fact, petitioners computed

the amount of their loss by subtracting their asserted $265,000

fair market value of the PEDRO immediately after the casualty

from $475,000, petitioners' estimated fair market value of the

PEDRO before the casualty, thereby arriving at a casualty loss of

$210,000, further reduced by the $110,000 insurance recovery paid

to them by USF&G in 1990.   We believe some adjustments must be

made to petitioners' computation, the effect of which is to

eliminate any casualty loss deduction for any year.

     Petitioners were unable to provide any formal appraisals

that would establish the fair market value of the PEDRO, both

immediately before and immediately after the underwater valve

explosion that caused the loss.   However, the record contains

sufficient evidence by which these values can be established.

Petitioner testified that in November, 1988, hoping to make a

quick sale for reasons outlined in our Findings of Fact, he and

his wife decided to lower the asking price to $396,000.   We find

this to be the "immediately before" fair market value of the

PEDRO.   Petitioner testified that "We had six appointments set

for March and April of 1989 to show the boat, buyers that were

coming in, flying in from out of town.   Obviously, in New

England, you don't show boats in January and February until the
                               - 10 -


weather starts to break."    Since the $396,000 asking price was

slightly below the PEDRO's $402,000 adjusted basis, and there

appears to have been considerable interest in the boat, there is

no reason to suppose petitioners could not have gotten their

asking price.    But since they were willing to sell the PEDRO for

this amount, no higher fair market value figure was shown to be

appropriate.    Since the adjusted basis of the PEDRO, $402,000,

was greater than the $396,000 fair market value immediately

before the casualty loss, the regulations require that the latter

figure be used.

     Based on the record before us, we also find that the

$110,000 insurance recovery accurately measures the decrease in

the fair market value of the PEDRO as a result of the valve

explosion.   Thus, the fair market value of the PEDRO immediately

after the February 7, 1989 explosion was $286,000.    We recognize

that section 1.165-7(a)(ii), Income Tax Regs., provides that the

cost of repairs to the property damaged can be acceptable, under

certain circumstances, as evidence of the loss of value.

Petitioner testified that he spent "about $38,000 in repairs out

of my own pocket of things that they [USF&G] wouldn't pay for."

But petitioner neither specified the items he claims to have paid

for that were not reimbursed, nor supported his claim by any

receipts, checks, or other evidence that would, in an objective
                              - 11 -


manner, support his claim.   We cannot, therefore, allow the

$38,000 as a deductible casualty loss.

     We need not address respondent's argument that 1994, and not

1990, was the proper year in which petitioners could claim a

casualty loss deduction.   Respondent makes this argument because

1994 was the year in which petitioners settled their claim

against Pedro-Holland for $30,000.     We would simply point out

that this recovery had no bearing on the computation of the

amount of any unreimbursed loss suffered by petitioners.

     As a final word, we would note that with regard to 1994,

petitioners' accountant, Charles C. Brewster, testified that in

computing the tax consequences of petitioners' ultimate

disposition of the PEDRO in 1994, he subtracted from basis the

$100,000 casualty loss taken on the 1990 return.     Since we have

sustained respondent's disallowance of this deduction,

petitioners may be in position to recompute to their advantage

the tax consequences of the sale of the PEDRO.

     To reflect the foregoing and concessions by respondent,


                                     Decision will be entered under

                               Rule 155.
