Sale of Livestock on Account of Drought

Post Date: 10/19/12
Last Updated: 10/19/12

Summary

Cross References
• Notice 2012-62

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. Under the normal involuntary conversion rules, replacement property must be purchased within two years in order to defer any gain on the conversion.

There is a special rule for livestock sold under weather-related conditions. If more than the normal amount of livestock, including poultry, is sold because of a drought, flood, or other weather-related condition, gain from the additional animals can be postponed until the following year. Gain can also be postponed under the involuntary conversion rules if replacement property is purchased within the replacement period. If it is not practical to invest the sales proceeds in other livestock, the sales proceeds can be used to purchase other property (except real property) used in farming. A special rule extends the replacement period to four years if weather-related conditions occur in an area eligible for federal assistance.

The IRS is authorized to extend this period if the drought continues. Notice 2012-62 says the 12-month period ending on August 31, 2012 is not a drought-free year. Accordingly, for taxpayers who qualified for a four-year replacement period, and whose replacement period is scheduled to expire at the end of 2012, the replacement period is extended until the end of the taxpayer’s first taxable year ending after a drought-free year for an applicable region.

Regions eligible for this extension can be found in the appendix to Notice 2012-62. Numerous counties in 43 different states are included in the list.
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