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

question 6

Essay

Patty's factory building, which has an adjusted basis of $475,000, is destroyed by fire on April 8, 2016. Insurance proceeds of $500,000 are received on June 1, 2016. She has a new factory building constructed for $490,000, which she occupies on October 1, 2016. Assuming Patty's objective is to minimize the tax liability, calculate her recognized gain or loss and the basis of the new factory building.

---

Definitions:

Circulating Security Interest

A floating charge over all of a company.

Floating Charge

A security interest over a fluctuating pool of assets, such as inventory or receivables, which allows the borrower to use the assets in the course of business.

Liquidator

A person or entity appointed to wind up the affairs of a company and dispose of its assets in the event of its liquidation.

Winding Up

The process of concluding a company's affairs, settling its liabilities, and distributing the remaining assets to the shareholders or owners.