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Prime Corporation's building was destroyed by a tornado. The fair market value of the building at the time of the tornado was $400,000 and its adjusted basis was $350,000. The insurance proceeds totaled $500,000 as follows:$400,000 for the building$100,000 for lost profits during rebuildingPrime does not defer any gain under the involuntary conversion provisions of Code Sec. 1033. What amount of the insurance proceeds is taxable to Prime?a. $0b. $50,000c. $100,000d. $150,000

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Answer:

D) $150,000

Explanation:

Insurance proceeds that are not reinvested in replacing damaged property are taxed. Apparently Prime corporation didn't reinvest into replacing the property, so this transaction should be taxed as a property sale. Prime received $400,000 for the building with a $350,000 basis which results in a net gain = $50,000.

The other $100,000 were given as replacement income and therefore should be taxed as such.

So the total taxable amount = $50,000 + $100,000 = $150,000

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