44. Red Company had an involuntary conversion on December 23, 2014. The machinery had been acquired on April 1, 2012, 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

44.	Red Company had an involuntary conversion on December 23, 2014. The machinery had been acquired on April 1, 2012, 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.

Quizplus · Accepted Answer

Since the machine was held more than 12 months and was depreciated,it was a § 1231 asset.However,since it was disposed of at a $4,200 loss ($10,000 insurance proceeds - $14,200 adjusted basis),all of the loss is initially a casualty loss.

44 Red Company Had an Involuntary Conversion on December 23, 2014