CORPORATION FAILED TO PROVE DIMINUTION IN VALUE CAUSED BY FLOOD.

                   NOT RECOMMENDED FOR PUBLICATION

I.

[2] Petitioner Trinity Meadows Raceway, Inc. incorporated in 1988 and elected "S Corporation" treatment as of January 1, 1989. Trinity purchased property in Texas containing a racetrack and buildings in disrepair. After obtaining a Horse Racing License in 1989 from the Texas Racing Commission, it began restoring the facility to make it suitable for horse racing. The land was prone to flooding, a fact known to Trinity when it purchased the property. Trinity obtained a permit allowing it to develop the floodplain and hired engineers to do the design work. Trinity opened the track in May 1991, which developed problems immediately, even before any flooding. The track was slippery in places and, after several horses had to be destroyed as a result of falls at the track, several jockeys boycotted the track. Minor repairs were done on the track in an effort to alleviate the slippery spots. In December 1991 portions of the property, including the track and some parking lots, were flooded after the nearby river overflowed. As a result, races were canceled on December 20, 21 and 22, 1991. Repairs were immediately undertaken on the track and a portion of the canceled races were made up on December 30 and 31, 1991.

[3] Trinity claimed a deduction for a casualty loss pursuant to 26 U.S.C. section 165 for tax year 1991. The Commissioner deter- mined that Trinity did not provide adequate proof of the value of the properties before and after the flood and disallowed the deduction. Notice of Final S Corporation Administrative Adjustment dated Apr. 16, 1996. Jack M. Lenavitt, a shareholder other than the tax matters person, filed a petition in the United States Tax Court claiming that Trinity had sustained a casualty loss of $2,028,750. Following trial, the Tax Court determined that the flood constituted a casualty loss under section 165 for tax year 1991. The Tax Court found, however, that the record did not permit a finding as to the loss of any single, identifiable piece of property as required by the regulations. The Tax Court went on to hold that in any event it was unpersuaded by Trinity's expert testimony at trial that there was any diminution in the value of the property as a whole and upheld the Commissioner's disallowance of the loss deduction. This appeal followed.

II.

[4] At issue is the proper computation of Trinity's casualty loss deduction for tax year 1991 due to damage to Trinity's property after flooding. Both parties agree that the damage to the property from the flood would qualify as a casualty loss under section 165, which allows a deduction for "any loss sustained during the taxable year and not compensated for by insurance or otherwise." 28 U.S.C. section 165(a). If a property used in trade or business or held for the production of income is damaged, a casualty loss may be taken. A casualty loss is limited to the lesser of (1) the adjusted basis of each "single, identifiable property damaged or destroyed" or (2) the diminution in value of such property as a result of the casualty, in this case a flood. Treas. Reg. section 1.165-7(b)(1). In addition the Treasury Regulations require that a property appraised for casualty loss purposes must reference a "single, identifiable property damaged or destroyed." Sec 1.165-7(b)(2)(i). These limitations exist because a "taxpayer may not borrow basis from his unharmed property in order to increase the amount of his loss deduction for an injury to his other property." Rosenthal v. Commissioner, 416 F.2d 491, 497-98 (2d Cir. 1969).

[5] When an aggregation of properties is involved, as here, and the loss claimed is one incurred in a trade or business, the amount of the loss is determined with reference to each "single, identifiable property" damaged or destroyed. Treas. Reg. section 1.165-7(b)(2). "The 'single, identifiable property lost or destroyed' must be ascertained in order to delineate the casualty loss, the fair market values, the adjusted basis, and, ultimately, to determine the allowable deduction, if any." Westvaco Corp. v. United States, 639 F.2d 700, 708 (Ct. Cl. 1980). In the case of land with improvements, which is the case here, the regulations require that a separate basis be assigned to each depreciable improvement to distinguish it from the land, which is not depreciable, and from any improvements that were not damaged. The reason for the separating out the value of business realty and improvements on that realty is that the buildings are depreciating assets for which deductions are allowed but the land is not. The land and the buildings therefore have separate bases and there can be no "single adjusted basis" for the land and the buildings as a unit. Carloate Indus., Inc. v. United States, 354 F.2d 814, 817-18 (5th Cir. 1966) (citing United States v. Koshland. 208 F.2d 636, 639-40 (9th Cir. 1953)).

[6] Under the regulations, Trinity, as the party bearing the burden of proof, was required to prove both the adjusted basis of each "single, identifiable property damaged or destroyed" and the diminution in value of such property as a result of the casualty in order to allow the proper calculation for the claimed loss. Instead, Trinity's expert assessed the diminution in value of the entire facility in the aggregate without regard to the individual properties that make up the race facility, some of which were not affected by the flood. The Tax Court therefore properly rejected Trinity's claim to a casualty deduction because the record would not allow it to "determine the basis or diminution in value of any single, identifiable property." Op. at 11.

[7] To value the property as a whole as Trinity's expert did permits it to "borrow basis from its unharmed property in order to increase the amount of its loss deduction for injury to its other property. Without identifying the required "single, identifiable property damaged or destroyed" and the adjusted basis of such property, it cannot be determined whether Trinity violated the "no borrowing basis" rule.

[8] As an example of the problems in sorting out Trinity's claimed loss in this case, Trinity spent approximately $300,000 paying its own employees to clean up and make repairs after the flood. Of this $250,000 was spent in 1992 and $50,000 in 1993. The costs were documented only in the form of hourly wages and Trinity conceded that "there was no way . . . to sort that out" from other maintenance undertaken by the workers during the same timeframe. As a business, section 162 allows Trinity to deduct all its "ordinary and necessary expenses" associated with running the business, including the expense of performing repairs. However, Trinity may deduct the repairs as "ordinary and necessary expenses" under section 162 or take the loss in value under section 165 -- it cannot take both deductions. The Treasury regulations expressly provide that a tax aver may not deduct the item as a business expense "to the extent that it is used by the taxpayer. . . in determining the gain or loss basis of its . . . property." Treasury Reg. section 1.162-1(a). Therefore, if Trinity deducted the $300,000 as "ordinary and necessary" expenses in its 1992 and 1993 returns, and Trinity concedes it had no way to sort out the $300,000, it took a double deduction for that $300,000. This is only one example of why Trinity's recordkeeping is simply inadequate to allow the casualty loss amount.

[9] For the foregoing reasons, we affirm the holding of the Tax Court and disallow Trinity's casualty loss for tax year 1991.