Grantly Seafood is a calendar year taxpayer. In 2015, a hurricane destroyed three of Grantly's fishing boats with a $784,500 aggregate adjusted tax basis. On October 12, 2015, Grantly received a $1 million reimbursement from its insurance company. On May 19, 2016, 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 determine the recognized gain or loss on the involuntary conversion, we need to compare the amount of insurance proceeds received ($1 million) to the adjusted tax basis of the destroyed assets ($784,500). The excess of insurance proceeds over the adjusted tax basis is recognized as a gain.

$1,000,000 − $784,500 = $215,500 recognized gain

To determine the tax basis in the new boat, we start with the recognized gain and adjust for any reinvested funds. In this case, Grantly reinvested the entire insurance proceeds in a new boat, so there is no basis reduction required.

Tax basis in new boat = Cost of new boat − Gain not recognized
Tax basis in new boat = $750,000 − $0
Tax basis in new boat = $750,000

Grantly Seafood Is a Calendar Year Taxpayer