Question

Which of the following statements regarding section 1033 involuntary conversions is correct?

a) for an owner-user
b) the replacement property must pass the functional use test.
c) the taxpayer use test provides less flexibility than the functional use test.

Answer 1

The replacement property must pass the functional use test (option b) in section 1033 involuntary conversions.

Step-by-step explanation:

The correct statement regarding section 1033 involuntary conversions is b) the replacement property must pass the functional use test.

Under section 1033 of the Internal Revenue Code, taxpayers can defer recognizing gain on the involuntary conversion of property if they buy similar replacement property. The replacement property must have the same functional use as the converted property to qualify. The functional use test ensures that the replacement property serves the same purpose or function as the property that was involuntarily converted.

The taxpayer use test, on the other hand, examines whether the taxpayer holds the replacement property for a specified period of time and actually uses it in a similar manner as the converted property. This test provides more flexibility as it focuses on the taxpayer's usage and time of holding, rather than the specific function of the property.