Red Company had an involuntary conversion on December 23, 2019.The machinery had been acquired on April 1, 2017, 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 these.

Question

Quizplus · Accepted Answer

The correct answer is a $4,200 casualty loss. This is calculated by subtracting the insurance proceeds ($10,000) from the adjusted basis of the machinery ($14,200). Since the machinery was not replaced, the loss is treated as a casualty loss.

Red Company Had an Involuntary Conversion on December 23, 2019