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Alpha sold machinery that it used in its business to Beta, a related entity, for $40,450....

Alpha sold machinery that it used in its business to Beta, a related entity, for $40,450. Beta used the machinery in its business. Alpha bought the machinery a few years ago for $49,550 and has claimed $30,450 of depreciation expense. What is the amount and character of Alpha's gain?

Multiple Choice

  • $21,350 ordinary income under §1239.

  • $10,000 ordinary gain and $11,350 §1231 gain.

  • $11,350 §1231 gain.

  • $21,350 capital gain.

  • None of the choices are correct.

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Answer #1
Correct option is: $21,350 Ordinary Income under g1239
Workings:
Cash = $     40,450
Add: Accumulated Depreciation = $     30,450
Less: Cost of Machinery = $     49,550
Gain on Sale of Machinery = $     21,350
Total gain shall be taxed as Ordinary Income g1239 Because whole gain adjusted up to recaptured depreciation. (As depreciation is more than gain amount)
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