ACCT 550T Tax Accounting Methods

Business Casualty Loss, Writing a Client Letter 

Facts: Your client, Mr. Brakes Inc., owns and operates an auto-motive repair shop in Cooperstown, New York. Mr. Brakes specializes in replacing and repairing brakes on cars, sport utility vehicles, and pickup trucks. In November of last year, the roof over two-thirds of Mr. Brakes’ building collapsed due to the weight of the snow on the roof. Since then, the portion of the building damaged by the roof collapse has been demolished, an addition was built onto the undamaged (one-third) portion of the building, and Mr. Brakes reopened for business on September 1st of this year. The fair market value of the building (immediately before the roof collapse) was $1,800,000, and Mr. Brakes’ adjusted federal tax basis in the building was $300,000. The fair market value of the building immediately after the roof collapse was $600,000. Mr. Brakes received $1,200,000 of insurance proceeds due to the destruction of two-thirds of the building. Mr. Brakes spent $1,500,000 in demolition and construction costs (including $300,000 of its own funds and the $1,200,000 of insurance proceeds). Mr. S. Perry Tyre, the president of Mr. Brakes Inc., would like to know the federal income tax consequences of this matter.

First Step: Identify the relevant Code Sections and regulations and find a court decision that is relevant to Mr. Brakes’ situation. Be sure to check the citator to make sure that the case is current and that subsequent authority has not affected the precedential value of the decision. 

Second Step: Based on your findings in the First Step, write a brief letter to Mr. Tyre advising him of Mr. Brakes’ federal income tax consequences with respect to this matter.