Red Company had an involuntary conversion on December 23, 2017. The machinery had been acquired on April 1, 2015, 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 the above.

Question

Quizplus · Accepted Answer

The insurance proceeds of $10,000 received by Red for the machinery that was destroyed by fire is a casualty loss. Red's adjusted basis in the machinery was $14,200 and the amount of insurance proceeds received is $10,000, so the casualty loss is $14,200 - $10,000 = $4,200. This loss is reported as a deductible loss on Red's tax return.

Red Company Had an Involuntary Conversion on December 23, 2017