(2)
(i) If a casualty or other event occurs which may result in a loss and, in the year of such casualty or event, there exists a claim for reimbursement with respect to which there is a reasonable prospect of recovery, no portion of the loss with respect to which reimbursement may be received is sustained, for purposes of section 165, until it can be ascertained with reasonable certainty whether or not such reimbursement will be received. Whether a reasonable prospect of recovery exists with respect to a claim for reimbursement of a loss is a question of fact to be determined upon an examination of all facts and circumstances. Whether or not such reimbursement will be received may be ascertained with reasonable certainty, for example, by a settlement of the claim, by an adjudication of the claim, or by an abandonment of the claim. When a taxpayer claims that the taxable year in which a loss is sustained is fixed by his abandonment of the claim for reimbursement, he must be able to produce objective evidence of his having abandoned the claim, such as the execution of a release.
(ii) If in the year of the casualty or other event a portion of the loss is not covered by a claim for reimbursement with respect to which there is a reasonable prospect of recovery, then such portion of the loss is sustained during the taxable year in which the casualty or other event occurs. For example, if property having an adjusted basis of $10,000 is completely destroyed by fire in 1961, and if the taxpayer's only claim for reimbursement consists of an insurance claim for $8,000 which is settled in 1962, the taxpayer sustains a loss of $2,000 in 1961. However, if the taxpayer's automobile is completely destroyed in 1961 as a result of the negligence of another person and there exists a reasonable prospect of recovery on a claim for the full value of the automobile against such person, the taxpayer does not sustain any loss until the taxable year in which the claim is adjudicated or otherwise settled. If the automobile had an adjusted basis of $5,000 and the taxpayer secures a judgment of $4,000 in 1962, $1,000 is deductible for the taxable year 1962. If in 1963 it becomes reasonably certain that only $3,500 can ever be collected on such judgment, $500 is deductible for the taxable year 1963.
(iii) If the taxpayer deducted a loss in accordance with the provisions of this paragraph and in a subsequent taxable year receives reimbursement for such loss, he does not recompute the tax for the taxable year in which the deduction was taken but includes the amount of such reimbursement in his gross income for the taxable year in which received, subject to the provisions of section 111, relating to recovery of amounts previously deducted.
(3) Any loss arising from theft shall be treated as sustained during the taxable year in which the taxpayer discovers the loss (see § 1.165-8, relating to theft losses). However, if in the year of discovery there exists a claim for reimbursement with respect to which there is a reasonable prospect of recovery, no portion of the loss with respect to which reimbursement may be received is sustained, for purposes of section 165, until the taxable year in which it can be ascertained with reasonable certainty whether or not such reimbursement will be received.
Failure to file a claim for reimbursement. If your property is covered by insurance, you should file a timely insurance claim for reim- bursement of your loss. If you don’t file an insur- ance claim, you can’t deduct the full unrecov- ered amount as a casualty or theft loss and only the part of the loss that isn’t covered by your in- surance policy is deductible.
The portion of the loss usually not covered by insurance (for example, a deductible) isn’t subject to this rule.
Example. Your car insurance policy in- cludes comprehensive coverage with a $1,000 deductible. Because your insurance doesn’t cover the first $1,000 of damages resulting from a storm, the $1,000 is deductible (subject to the $100 and 10% rules, discussed later). This is true, even if you don’t file an insurance claim, because your insurance policy won’t reimburse you for the deductible.
Nilodop wrote:It seems to me the IRS is questioning the taxpayer's judgment on the issue of whether to file a claim.
Nilodop wrote: Maybe taxpayer is on verge of a big jump in premiums or even a loss of coverage because of prior history of claims. Why should he lose the deduction in those circumstances?
Nilodop wrote:Because (a) he deducted the insurance premiums he paid, and (b) why should I and the other taxpayers take the place of the insurance company in making up for his risky business practices?. You mean like you and the other taxpayers subsidize all the business risks taken by millions of businesses, along with their other poor judgments in areas that result in deductions and credits?
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