Red Company had an involuntary conversion on December 23, 2017 . The machinery had been acquired on April 1, 2015, for $49,000 and its adjusted basis was $14,200 . The machinery was completely destroyed by fire and Red received $10,000 of insurance proceeds for the machine and did not replace it. This was Red's only casualty or theft event for the year. As a result of this event, Red initially
has:
a. $10,000 § 1231 loss.
b. $10,000 § 1245 recapture gain.
c. $4,200 casualty loss.
d. $4,200 § 1231 loss.
e. None of the above.
c
RATIONALE: Since the machine was held more than 12 months and was depreciated, it was a § 1231 asset. However, since it was disposed of at a $4,200 loss ($10,000 insurance proceeds – $14,200 adjusted basis), all of the loss is initially a casualty loss.
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