Patty's Factory Building, Which Has an Adjusted Basis of $475,000

question 30

Essay

Patty's factory building, which has an adjusted basis of $475,000, is destroyed by fire on April 8, 2017. Insurance proceeds of $500,000 are received on June 1, 2017. She has a new factory building constructed for $490,000, which she occupies on October 1, 2017. Assuming Patty's objective is to minimize the tax liability, calculate her recognized gain or loss and the basis of the new factory building.

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Definitions:

Moral Hazard

The situation where one party in an agreement is tempted to take undue risks because the negative consequences of the risk will be suffered by the other party.

Efficient Level

The optimal point of production or operation where costs are minimized and productivity or utility is maximized.

Warranty

A guarantee, usually made by a seller to a buyer, promising to repair or replace a product if necessary within a specified period.

High Quality

The standard of something as measured against other similar things, indicating it is of superior grade.