Exeter Savings and Loan is located in a two-story building in downtown Exeter. The building has a basement in which the heating system for the bank is located. The bank also uses the basement to store records and photocopying equipment. Last fall, the Saugutuxet River overflowed and flooded the basement. The flood destroyed all the bank’s records and damaged all the equipment. The building suffered no serious structural damage.
This is the second time in ten years that the basement has flooded. The state and county conducted a flood control study after the first flood but adopted no formal flood control plans. Fearful of another flood, the bank now stores all its records on the first and second floors.
The bank has claimed a casualty loss for the damaged records and equipment, and the decline in the market value of the building. It contends that because the basement of the building can no longer be used for storage, it is entitled to a casualty loss equal to the difference between the fair market value of the building before the casualty and the fair market value after the casualty. Explain whether Exeter Savings and Loan can deduct as a casualty loss the building’s decline in fair market value.