I think the answer is not that it is 100% not taxable. You have to do a little gain (loss) analysis by comparing the money you received with the basis of the car.
You may be right as the end result more than likely is that she does not need to pay taxes for that money. but that does not mean the money is not subject to tax. it could simply be that more than likely she would have a loss rather than a gain. therefore, there is no tax due because there is no gain.
Let me give you an example. Assuming she bought a classic 1966 corvette 10 years ago, her cost was $10,000. During the 10 years, the Fair Market Value of the car doubled to $20,000. And then she got into an accident. The insurance company paid her $20,000 for the value of the car. In this case, she would need to pay tax on the $10,000 of the gain she had, as if she sold the car, even though the sale is involuntary.
Of course, this is an rather unusual situation, which does not happen all that often. I just want to make a point.
You may be right as the end result more than likely is that she does not need to pay taxes for that money. but that does not mean the money is not subject to tax. it could simply be that more than likely she would have a loss rather than a gain. therefore, there is no tax due because there is no gain.
Let me give you an example. Assuming she bought a classic 1966 corvette 10 years ago, her cost was $10,000. During the 10 years, the Fair Market Value of the car doubled to $20,000. And then she got into an accident. The insurance company paid her $20,000 for the value of the car. In this case, she would need to pay tax on the $10,000 of the gain she had, as if she sold the car, even though the sale is involuntary.
Of course, this is an rather unusual situation, which does not happen all that often. I just want to make a point.
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