Grantly Seafood is a calendar year taxpayer. In 2020, a hurricane destroyed three of Grantly's fishing boats with a $784,500 aggregate adjusted tax basis. On October 12, 2020, Grantly received a $1 million reimbursement from its insurance company. On May 19, 2021, Grantly purchased a new fishing boat for $750,000. Compute Grantly's recognized gain or loss on the involuntary conversion and its tax basis in the new boat.

Question

Quizplus · Accepted Answer

To compute the recognized gain or loss on the involuntary conversion, we need to first calculate the realized gain.

Realized gain = Insurance reimbursement - Adjusted tax basis of the destroyed assets 
Realized gain = $1,000,000 - $784,500 = $215,500

Since the insurance reimbursement exceeds the adjusted tax basis, we have a recognized gain of $215,500.

To determine the tax basis in the new boat, we use the following formula:

Tax Basis = Cost of new asset - (Realized gain not recognized + Deductible loss)

Since this was an involuntary conversion, we can defer recognition of the realized gain until after the replacement period (two years from the end of the tax year in which the gain was realized). Therefore, the realized gain not recognized is $0. And since there are no deductible losses, we can simply subtract the realized gain from the cost of the new boat to get the tax basis:

Tax Basis = $750,000 - $215,500 = $534,500

Thus, the answer is A) $215,500 recognized gain; $750,000 basis in the boat.

Grantly Seafood Is a Calendar Year Taxpayer