Sale of Livestock on Account of Drought

Post Date: 9/29/21
Last Updated: 9/29/21

Summary

Cross References
• Notice 2021-55

An involuntary conversion occurs when property is destroyed, stolen, condemned, or disposed of under a threat of condemnation, and the taxpayer receives other property, or money, in payment for the property, such as insurance proceeds or a condemnation award. The involuntary conversion is treated as a sale or exchange. Gain or loss is the difference between the net payment received and the adjusted basis of the converted property.

Gain from an involuntary conversion is postponed if the taxpayer receives or purchases replacement property within a specified replacement period. There is a special rule for livestock sold under weather-related conditions in an area designated as eligible for assistance by the federal government. IRC §1033(e)(2)(A) states that the replacement period ends 4 years after the close of the first taxable year in which any part of the gain from the conversion is realized. IRC §1033(e)(2)(B) states that the IRS may extend this replacement period on a regional basis if the IRS determines weather-related conditions continue to affect a region for more than three years. Thus, if a sale or exchange on account of drought qualifies for this special rule, the 4-year replacement period can be extended. The IRS issued Notice 2006-82 which states 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 4-year replacement period, and
3) Does not include any weekly period for which exceptional, extreme, or severe drought is reported for any location in the applicable region.

Notice 2006-82 also states the IRS will publish in September of each year a list of counties, boroughs, census areas, islands, municipalities, or parishes for which exceptional, extreme, or severe drought was reported during the preceding 12 months. Taxpayers may use this list to determine whether exceptional, extreme, or severe drought has been reported for any location in the applicable region.

Notice 2021-55 states the 12-month period ending August 31, 2021 is not a drought-free year for the following applicable regions listed below. Accordingly, for a taxpayer who qualified for a 4-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 fiscal year that includes August 31, 2021), the replacement period is extended if the applicable region includes any of the following regions listed below. This extension will continue until the end of the first taxable year ending after a drought-free year for the applicable region.

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