IRS Extends Replacement Period under Section 1033 for Certain Livestock Sales

(Parker Tax Publishing October 2021)

The IRS is extending the time that farmers and ranchers in 36 states plus the U.S. Virgin Islands have under Code Sec. 1033(e) to replace livestock sold on account of weather-related conditions. The Appendix to the notice lists the localities of each state or U.S. possession that qualify for the extension. Notice 2021-55.

Code Sec. 1033(a) generally provides for nonrecognition of gain when property is involuntarily converted and replaced with property that is similar or related in service or use. A sale or exchange of livestock (other than poultry) held by a taxpayer for draft, breeding, or dairy purposes in excess of the number that would be sold following the taxpayer's usual business practices is treated as an involuntary conversion if the livestock is sold or exchanged solely on account of drought, flood, or other weather-related conditions.

Generally, gain from an involuntary conversion is recognized only to the extent the amount realized on the conversion exceeds the cost of replacement property purchased during the replacement period. If a sale or exchange of livestock is treated as an involuntary conversion and occurs solely on account of drought, flood, or other weather-related conditions that result in the area being designated as eligible for assistance by the federal government, Code Sec. 1033(e)(2)(A) provides that the replacement period ends four years after the close of the first tax year in which any part of the gain from the conversion is realized. The IRS has the authority to extend this replacement period on a regional basis for such additional time as it deems appropriate if the weather-related conditions that resulted in the area being designated as eligible for assistance by the federal government continue for more than three years.

Notice 2006-82 provides for extensions of the replacement period. If a sale or exchange of livestock is treated as an involuntary conversion on account of drought, the taxpayer's replacement period is extended until the end of the taxpayer's first tax year ending after the first drought-free year for the applicable region. For this purpose, the first drought-free year for the applicable region is the first 12-month period that:

(1) ends August 31;

(2) ends in or after the last year of the taxpayer's four-year replacement period determined under Code Sec. 1033(e)(2)(A); and

(3) does not include any weekly period for which exceptional, extreme, or severe drought is reported for any location in the applicable region.

The applicable region is defined as the county that experienced the drought conditions on account of which the livestock was sold or exchanged and all counties that are contiguous to that county. A taxpayer may determine whether exceptional, extreme, or severe drought is reported for any location in the applicable region by reference to U.S. Drought Monitor maps that are produced on a weekly basis by the National Drought Mitigation Center. In addition, Notice 2006-82 provides that the IRS will publish in September of each year a list of counties, districts, cities, or parishes for which exceptional, extreme, or severe drought was reported during the preceding 12 months. Taxpayers may use this list instead of U.S. Drought Monitor maps (which are archived at http://droughtmonitor.unl.edu/Maps/MapArchive.aspx) to determine whether exceptional, extreme, or severe drought has been reported for any location in the applicable region. In the Appendix of Notice 2021-55, the IRS lists the counties for which exceptional, extreme, or severe drought was reported during the 12-month period ending August 31, 2021.

Under the guidance in Notice 2006-82, the 12-month period ending on August 31, 2021, is not a drought-free year for an applicable region that includes any county on the list in Notice 2021-55. Accordingly, for a taxpayer who qualified for a four-year replacement period for livestock sold or exchanged on account of drought and whose replacement period is scheduled to expire at the end of 2021 (or, in the case of a fiscal year taxpayer, at the end of the tax year that includes August 31, 2021), the replacement period is extended under Code Sec. 1033(e)(2) and Notice 2006-82 if the applicable region includes any county on this list. This extension will continue until the end of the taxpayer's first tax year ending after a drought-free year for the applicable region.

For a discussion of the postponement of gain recognition on livestock sales or exchanges resulting from weather-related events, see Parker Tax ¶161,570.

Disclaimer: This publication does not, and is not intended to, provide legal, tax or accounting advice, and readers should consult their tax advisors concerning the application of tax laws to their particular situations. This analysis is not tax advice and is not intended or written to be used, and cannot be used, for purposes of avoiding tax penalties that may be imposed on any taxpayer. The information contained herein is general in nature and based on authorities that are subject to change. Parker Tax Publishing guarantees neither the accuracy nor completeness of any information and is not responsible for any errors or omissions, or for results obtained by others as a result of reliance upon such information. Parker Tax Publishing assumes no obligation to inform the reader of any changes in tax laws or other factors that could affect information contained herein.

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