Problem 8-38 (LO. 6, 7) On December 1, 2016, Lavender Manufacturing Company (a corporation) purchased another company's assets, including a patent. The patent was used in Lavender's manufacturing operations; $49,500 was allocated to the patent, and it was amortized at the rate of $275 per month. On July 30, 2018, Lavender sold the patent for $95,000. Twenty months of amortization had been taken on the patent. a. Lavender has $ of ordinary income due to recapture and $ of 1231 gain . Feedback b. Complete the letter to Lavender's controller, Bill Cubit, discussing the treatment of the gain. Raabe, Young, Nellen, & Maloney, CPAs 5191 Natorp Boulevard Mason, OH 45040 November 23, 2018 Mr. Bill Cubit, Controller Lavender Manufacturing Company 6734 Grover Street Boothbay Harbor, ME 04538 Dear Mr. Cubit: Thank you for the opportunity to respond to your question concerning the tax treatment of the gain from the disposition of the patent. As you know, amortization of $275 per month has been taken on this patent since it was acquired on December 1, 2016. That amortization totaled $ when you disposed of the patent on July 30, 2018. This amount is taxable as ordinary income , because it is recaptured by 1245 . The balance of the gain is 1231, and it will be taxed as long-term capital gain , as no other business property dispositions have occurred this year. If you have any questions concerning this transaction or other tax matters, please feel free to telephone me. Sincerely, Rose Goodwin, CPA Partner