Excess of the Total Cost of Reconstruction of the Insured Assets that Were Burned Over The Total Acquisition Cost is Not a Deductible Loss

November 23, 1987 BIR RULING NO. 373-87 30 000-71 373-87 Gentlemen : This refers to your letter dated October 28, 1987 requesting confirmation of your opinion on how Sections 29(a) and 30(d)(2) of the Tax Code would be applied in connection with the fire losses sustained by your client, Mercury Group of Companies under the following circumstances. "In the morning of February 16, 1987, one of the company's properties located at corner Shaw Blvd., and Pioneer Streets, Mandaluyong, Metro Manila, was razed by fire. As a consequence thereof, a major portion of the property together with almost all assets therein were burned. The property and most of the assets were insured." So that it would be able to resume its operations at the earliest possible time, the company immediately filed the insurance claim with the insurance company to generate funds necessary for the reconstruction, rehabilitation, restoration and replacement of the assets burned. In the course of the said work and activities, the following facts were ascertained: "1) That the total reconstruction, rehabilitation, restoration and replacement costs of the insured assets burned are much higher than the original construction and acquisition costs of the said assets; "2) That the total reconstruction, rehabilitation, restoration and replacement costs of the insured assets burned are also higher than the amount of insurance proceeds received by the company on account of the fire mentioned above; "3) That the amount of insurance proceeds is higher than the total net book value of the insured assets burned; and "4) That the entire reconstruction, rehabilitation, restoration and replacement of the assets burned can be completed this year." In reply thereto, I have the honor to inform you that your opinion is hereby confirmed. The excess of the total cost of reconstruction, rehabilitation, restoration and replacement of the insured assets that were burned over their total acquisition cost or their adjusted cost basis is not a deductible loss. However, such excess shall be considered as additional capital expenditure for which depreciation may be claimed. The excess of the amount of the insurance proceeds over the net book value of the insured assets is not taxable income to the corporation, it having been used in restoring the burned assets. The rule is where insurance proceeds are actually reinvested in similar property no gain is recognized. (Herder v. Helvering, 23 AFTR, p. 322) However, for purposes of depreciation, your client, can claim depreciation only to the extent of the net book value of the insured property plus any additional capital outlay incurred in restoring the property, if any. cdta Very truly yours, (SGD.) EUFRACIO D. SANTOS Deputy Commissioner