Red Company had an involuntary conversion on December 23, 2014. The machinery had been acquired on April 1, 2012, 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:

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The involuntary conversation of the machinery is a § 1231 event because it was used in Red's trade or business and held for more than one year. Red received $10,000 of insurance proceeds, which is less than its adjusted basis of $14,200, resulting in a § 1231 loss of $4,200. Red did not replace the machinery, so there is no § 1245 recapture gain. This event is not a casualty loss because the machinery was completely destroyed and could not be repaired.

Red Company Had an Involuntary Conversion on December 23, 2014