Taxpayer had the diamond appraised a few years ago at $30000. So if the insurance company pays her $20000 cash for the insurance claim, it seems, Nilodrop, that you are saying she has no taxable gain, and no taxable loss. I like it. I am still looking for anything that supports this in writing.
To help me understand your position, let's say for example's sake taxpayer can establish a $10000 adjusted basis in the diamond. If the insurance company paid her $9000 for the loss, then she might have a $1000 taxable loss. And if they paid her $31000 for it, then she might have a $1000 gain ($30000 appraised value). And anything in between (the $20000) would have no tax effect. Is this what you are suggesting with " . . . neither a loss nor income in a tax sense. That's my story and I'm stickin' to it."
Well, not exactly. I'm saying that unless you give us more facts, this is not a casualty, but rather a personal item/event/transaction, a personal asset that got lost. If there were no insurance, the loss, measured by value decline (30k down to zero) but limited to basis, would be not deductible. If insurance pays 9k, the formula is the same and so is the result.
But that formula works like this if the insurance pays more than basis. The economic gain is still, in your example of 31k insurance proceeds, just 1k, but the tax gain is still measured against tax basis, so there'd be a gain of 21k (31k proceeds minus 10k basis).
My theory, for which I have no case, reg., ruling, etc., but my notion of the applicable tax principle, is something like a tax-benefit approach. There was indeed an economic loss, in your example, 30k, the market value. But had it not been insured, it would have been, as stated above, a non-deductible personal loss; therefore, goes the theory, the recovery to the extent of 30k, is an offset to a non-deductible loss, and not an item of income. What little looking I did produced no authority for the theory. Then I threw in that bit that shifting the risk of loss, at your personal, non-deductible cost of insurance premiums, somehow plays into the analysis, kind of like with life insurance, where your beneficiary collects $x but it's not taxable. The obvious flaw in that theory is that sec 101 covers the death benefit, and no section covers my theory. Yet I said I'd stick with it, and I do.
It occurs to me that the various cases, rulings, whatever on destruction of personal property by slow damage that is held to not be a casualty loss might address my theory. How aboutn you take a look. Let us know.
And I almost forgot the argument that there has been no accession to wealth if the insurance co.pays 39k or less. It can be challenged based on whether the loss and reimbursement are viewed together, or as separate transactions/events.
Since it's not a theft or casualty, we also need to address the year of the event, i.e., is it when you dicovered it was lost (like the theft rule) or would IRS want you to prove (don't aak me how) that it was lost on a specific date.