taxpayer may have a casualty gain which would be taxable.
from instructions 4684
Gain on Reimbursement
If the amount you receive in insurance or other
reimbursement is more than the cost or other
basis of the property, you have a gain. If you
have a gain, you may have to pay tax on it, or
you may be able to postpone the gain.
Don't report the gain on damaged,
destroyed, or stolen property if you receive
property that is similar or related to it in service
or use. Your basis in the new property is the
same as your basis in the old property.
To postpone all of the gain, the cost of the
replacement property must be equal to or more
than the reimbursement you received for your
property. If the cost of the replacement property
is less than the reimbursement received, you
must recognize the gain to the extent the
reimbursement exceeds the cost of the
replacement property.
