                        T.C. Memo. 2005-47



                      UNITED STATES TAX COURT



      LEE F. MCCLUNE AND HARRIET R. MCCLUNE, Petitioners v.
           COMMISSIONER OF INTERNAL REVENUE, Respondent



     Docket No. 6378-02.             Filed March 14, 2005.



     Lee F. McClune and Harriet R. McClune, pro sese.

     J. Anthony Hoefer, for respondent.



             MEMORANDUM FINDINGS OF FACT AND OPINION


     COHEN, Judge:   Respondent determined a deficiency of

$10,605.50 in petitioners’ Federal income tax for 1997.   The

issue for decision is the amount petitioners are entitled to

deduct as a casualty loss due to the destruction of a barn

located on property in which petitioner Lee F. McClune

(petitioner) held a remainder interest.   Unless otherwise
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indicated, all section references are to the Internal Revenue

Code in effect for the year in issue, and all Rule references are

to the Tax Court Rules of Practice and Procedure.

                         FINDINGS OF FACT

     Petitioners are cash basis taxpayers who resided in

Knoxville, Iowa, at the time that they filed their petition.

     On April 10, 1978, petitioner purchased a remainder interest

in 80 acres of land in Poweshiek County, Iowa, for $20,000.    At

the time of purchase and at least through 1997, petitioner’s

sister held a life estate in the 80 acres.   Petitioner held the

remainder interest with his three sons as tenants in common, each

owning a one-fourth interest in the property with an adjusted

basis of $5,000.   The transaction was entered into for profit.

     The 80 acres involved was made up of two 40-acre tracts of

land.   The two 40-acre tracts were approximately equal in value.

Located on one of the 40-acre tracts was a well-preserved barn

that was considered a showplace.   The value of the barn was

approximately 54 percent of the total value of the 40-acre tract

upon which it stood.   The barn was used for agricultural

purposes, and the remainder of the land was used for pasture by a

third party.

     In 1997, a windstorm or tornado swept through the area where

the property is located and destroyed the barn.   All that

remained was approximately $2,000 worth of salvageable lumber.
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Petitioners did not receive any compensation or insurance

payments for the loss.

     On their joint income tax return for 1997, petitioners

claimed a $44,000 casualty loss due to the destruction of the

barn.   The $44,000 loss was computed on their Form 4684,

Casualties and Thefts, by subtracting the estimated value of the

lumber, $2,000, from the value of the barn before the casualty,

which petitioner claimed to be $46,000.

     In the notice of deficiency, the Internal Revenue Service

(IRS) allowed petitioners a casualty loss of $500.   At trial of

this case, respondent conceded that petitioners should be allowed

a deduction of $1,350 for the loss of the barn.

                              OPINION

     The amount of a casualty loss deduction is generally

computed as the excess of the fair market value of the property

immediately before the casualty over the fair market value of the

property immediately after the casualty, limited by the adjusted

basis of the property.   Helvering v. Owens, 305 U.S. 468 (1939);

Millsap v. Commissioner, 46 T.C. 751 (1966), affd. 387 F.2d 420

(8th Cir. 1968); sec. 1.165-7(b)(1), Income Tax Regs.   These

respective values “shall generally be ascertained by competent

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

     The parties agree that petitioners sustained a casualty loss

within the meaning of section 165(c)(2).   That section states
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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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$11,000.    Petitioners claim that, at some point, a deduction of

$11,000 was offered to petitioner to settle his claim.

Petitioners agree that, if petitioner’s adjusted basis in the

barn is used to determine the amount deductible, $1,350 is

accurate.

     Petitioners presented only vague testimony regarding the

alleged statements or offers made by IRS personnel.    Petitioner

did not present any evidence corroborating his testimony at trial

as to the value of the barn immediately before the casualty.

     Erroneous statements concerning the law, even if made by an

IRS agent, would not bind respondent in his determination of

allowable casualty loss deductions.     See Auto. Club of Mich. v.

Commissioner, 353 U.S. 180, 183-184 (1957); Bookwalter v. Mayer,

345 F.2d 476, 478 (8th Cir. 1965); Geaga v. Commissioner, T.C.

Memo. 1998-234.   Offers of settlement are not admissible to prove

invalidity of a disputed claim or its amount, and evidence of

conduct or statements made in compromise negotiations is likewise

not admissible.   Rule 408, Federal Rules of Evidence.   Therefore,

any statements or offers made to petitioner prior to trial are

irrelevant.

     We have found neither reason nor authority to negate the

application of the general rule that the deductible loss is equal

to the adjusted basis simply because a remainder interest is

involved.
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     Petitioners deducted 100 percent of the alleged value of the

barn less the amount attributable to the salvageable lumber.

Under any theory, they are entitled to deduct only the value of

petitioner’s 25-percent interest in the barn.     However, the value

of petitioner’s 25-percent interest would be deductible only if

that value were less than the amount of his adjusted basis in the

barn.   Sec. 1.165-7(b)(1), Income Tax Regs.    Because the adjusted

basis is less than the value in this situation, petitioners are

limited to deducting the adjusted basis as a casualty loss.

     To reflect respondent’s concession as to the casualty loss

deduction,


                                            Decision will be entered

                                       under Rule 155.
