Alpha sold machinery that it used in its business to Beta, a related entity, for $40,000. Beta used the machinery in its business. Alpha bought the machinery a few years ago for $50,000 and has claimed $30,000 of depreciation expense. What is the amount and character of Alpha's gain?
A)$20,000 ordinary income under §1239.
B)$10,000 ordinary gain and $10,000 §1231 gain.
C)$20,000 §1231 gain.
D)$20,000 capital gain.
E)None of the choices are correct.

Question

Quizplus · Accepted Answer

Since Alpha sold machinery to a related entity, it falls under §1239, which treats gains as ordinary income. The amount of gain is calculated as the selling price of $40,000 minus the adjusted basis of $20,000 ($50,000 cost - $30,000 depreciation), which results in a gain of $20,000. Therefore, the correct answer is A)$20,000 ordinary income under §1239.

Alpha Sold Machinery That It Used in Its Business to Beta