Orange Company had machinery destroyed by a fire 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 and Orange received $30,000 of insurance proceeds for the machine and did not replace it. This was Orange's only casualty or theft event for the year. As a result of this event, Orange has:
a. $4,200 ordinary loss.
b. $15,800 § 1245 recapture gain.
c. $14,200 § 1245 recapture gain.
d. $30,000 § 1231 gain.
e. None of the above.
b
RATIONALE: 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 $15,800 gain ($30,000 insurance proceeds – $14,200 adjusted basis), all of the gain is initially § 1245 depreciation recapture gain and not casualty gain.
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