Question - Scott and Sally own a boat, which they purchased several years ago for $60,000 and use for recreational purposes. They had it appraised earlier this year for insurance purposes at $40,000, but they had not yet obtained the insurance coverage when a severe storm damaged the boat. After the storm, Scott and Sally had the boat appraised at $30,000. They pay $7,000 to repair the storm damage. Without regard to any possible casualty loss deduction, Scott's and Sally's AGI for this year is $70,000.
a. How much, if any, can Scott and Sally deduct under §§ 165(c)(3) and (h)?
b. How would your answer change if they also receive an insurance check in the same year for $8,000 to compensate them for the documented theft of Sally's insured diamond engagement ring, which Scott had purchased years ago for $6,000? Scott and Sally decide not to purchase another diamond ring with the insurance payment but rather to use the money for a romantic trip to Paris.