The Internal Revenue Service is allowing cattle producers impacted by the nation’s ongoing drought additional time to purchase replacement property for livestock they were forced to sell

The agency has granted an extension of the capital gains tax deferment for cattle producers who previously sold cattle as a result of drought-related conditions. Producers will have until one year after the drought ends to defer their capital gains or purchase replacement cattle.

The modification was made in response to efforts by Nebraska Cattlemen, the National Cattlemen’s Beef Association (NCBA) and letters from key senators such as Nebraska’s Chuck Hagel to Treasury Secretary Henry Paulson requesting that he extend the tax relief for ranchers who were forced to sell off large portions of their breeding stock as a result of drought conditions during 2002.

Senator Nelson also supported the rule change and has named the drought “David” to demonstrate that drought is a natural disaster and should be treated by Congress the same as other natural disasters like hurricanes.

In the past, NC and NCBA worked to support the American Jobs Creation Act, which contained a provision to amend Section 1033 (e) of the Uniform Tax Code. This amendment extended the tax deferment period for weather-related sales of livestock – known as involuntary conversions – from two years to four years.  The language also gives the Secretary of the Treasury authority to further extend the deferral period.

Extending the tax deferment period will allow producers to replace breeding animals they were forced to sell at a more feasible time.  Some producers are coming to the end of their four-year replacement period.  But this announcement means that ranchers still dealing with the effects of the drought will not have to restock their herds until one year after the official end of their drought conditions.

This IRS announcement offers relief not only for producers who have already been forced to liquidate herds, but also for any producer who is currently faced with selling livestock as a result of drought.

 IRS Notice 2006-82 explains how a taxpayer can determine whether additional time is available. To assist a taxpayer in determining whether his replacement period has been extended, the IRS plans to publish a list of counties that experienced exceptional, extreme or severe drought for the 12-month period ending on August 31, 2006. The list will be compiled after consultation with the National Drought Mitigation Center. The IRS expects to publish a similar list for succeeding years.

Taxpayers also may determine whether a county has experienced exceptional, extreme or severe drought conditions by referencing Drought Monitor maps produced by the National Drought Mitigation Center. For example, in determining whether the 12-month period ending on August 31, 2006, includes a period for which these drought conditions are reported, all maps with dates after August 31, 2005, and before September 8, 2006, are taken into account. U.S. Drought Monitor maps can be found at: www.drought.unl.edu/dm/archive.html.    Mike Fitzgerald is NC’s vice president of communications.

Calculating Livestock Replacements

The following example prepared by the IRS illustrates the livestock replacement rule announcement.  Drought conditions and designations of eligibility for federal assistance are described in this example solely for illustrative purposes and are not intended to reflect actual conditions and designations.

Example.  Taxpayer A, a calendar year taxpayer, raises cattle in Keith County.  In 2002, all of A’s cattle held for breeding purposes are sold solely on account of drought conditions in Keith County.  Under A’s normal business practices, only 25 percent of A’s cattle held for breeding purposes would have been sold in 2002.  In 2003, the Secretary of Agriculture designates Keith County as eligible for federal assistance on account of the drought conditions.

Under § 1033(e)(1), the sale of 75 percent of the cattle held for breeding purposes is treated as an involuntary conversion.  Section 1033(a) provides that the gain from this portion of A’s sale is not recognized except to the extent it exceeds the cost of replacement property (property that is related in service or use) purchased during the replacement period.  Because the Secretary of Agriculture has designated Keith County as being eligible for federal assistance on account of the drought conditions, A’s replacement period is determined under § 1033(e)(2)(A) and ends on December 31, 2006.

Under § 1033(e)(2) and this notice, A’s replacement period is extended until the end of A’s first taxable year ending after the first drought-free year for the applicable region.  For this purpose, the applicable region is the county that experienced the drought conditions on account of which the livestock was sold (Keith County) and all counties contiguous to Keith County (Deuel, Garden, Arthur, McPherson, Lincoln, and Perkins Counties, Nebraska, and Sedgwick County, Colorado).  Sedgwick County is contiguous even though it is in a different state and touches Keith County only at Keith County’s southwest corner.

For the 12-month period ending on August 31, 2006, severe drought conditions are reported on U.S. Drought Monitor maps for all counties in the applicable region, and all of those counties are included on the list published by the IRS.  For the 12-month period ending on August 31, 2007, the only drought conditions reported for the applicable region on U.S. Drought Monitor maps are severe drought conditions for Sedgwick County for the first week in September 2006.  A is unable to determine from the maps whether drought conditions have been reported for the applicable region, but the list published by the IRS for the 12-month period ending on August 31, 2007, includes Sedgwick County.  For the 12-month period ending August 31, 2008, U.S. Drought Monitor maps do not report drought conditions for any county in the applicable region and none of the counties are included on the list published by the IRS.

Neither the 12-month period ending on August 31, 2006, nor the 12-month period ending on August 31, 2007, is a drought-free year for the applicable region because, in each of the 12-month periods, severe drought conditions have been reported for at least one county in the applicable region for a part of the 12-month period.  Accordingly, the 12-month period ending on August 31, 2008, is the first drought-free year for the applicable region.   Under § 1033(e)(2) and this notice, A’s replacement period is extended through December 31, 2008 (the last day of A’s first taxable year ending after the first drought-free year for the applicable region).