Alpha sold machinery that it used in its business to Beta, a related entity, for $40,400. Beta used the machinery in its business. Alpha bought the machinery a few years ago for $49,600 and has claimed $30,400 of depreciation expense. What is the amount and character of Alpha's gain?
A)$21,200 ordinary income under §1239.
B)$10,000 ordinary gain and $11,200 §1231 gain.
C)$21,200 §1231 gain.
D)$21,200 capital gain.
E)None of the choices are correct.

Question

Quizplus · Accepted Answer

The gain is $21,200, calculated as the selling price ($40,400) minus the adjusted basis ($49,600 - $30,400 = $19,200). Under §1239 of the Internal Revenue Code, sales of depreciable property between related parties are treated as ordinary income, not capital gains or §1231 gains.

Alpha Sold Machinery That It Used in Its Business to Beta