ISSUES RELATED TO INCOME FROM SALE OF

LIVESTOCK DUE TO WEATHER-RELATED

CONDITIONSTimothy D. Bachicha, CPA

Extension Farm Management SpecialistColorado State University Cooperative

Extension Telephone (719)852-2871 email slvfrma@coop.ext.colostate.edu

TWO SEPARATE ISSUES: 

IRS Code section 451(e):  

Think Sales of Market Livestock - primarily

IRS Code Section 1033(e):  

Think Sale or Exchange of Capital Asset Breeding Livestock, Draft or Dairy

Important points:

• 1. Election

• 2. Cash Basis Farmer

• 3. Forced to Sell

• 4. Area Designated

• 5.Under 451 – income recognized next year

• 6. Contrary to usual business practices

Must Attach Statement

• Basic information about taxpayer

• Evidence of weather related conditions

• Specific numbers and types of animals

• Normally sold (last three years)

• Sold this year

• Computation of income deferred

IMPORTANT

• Election must be made separately for each broad generic classification

• Hogs, Cattle, Sheep

• Not based on age, sex or breed

Why Defer Income?

• Federal Income Tax Brackets

• Time Value of Money

• Self-employment Tax Issues

• Social Security Limits on Earnings

• 2002 – $84,900

• 2001 - $80,400

Considerations

• Multi-year perspective

• Tax not main factor in decision

• Next Year?

• How does it fit with other elections?

• Sec. 179 ($24,000)

• 30% Bonus Depreciation

• Income Averaging

Considerations, 2

• NOL Carrybacks/carryforwards

• Crop Insurance Proceeds – Election?

Decisions, Decisions !!!

• Process is multi-faceted

• Consider your OWN situation

• Consult your own Tax Professional

Section 1033

• Involuntary Conversion

• Think Exchange

Defer Recognition of Gain

• Mandatory if directly converted

(exchanged)

• Optional under other situations

• Insurance Proceeds

• Sales due to Weather-related Conditions

• DROUGHT

Contingent

• Replacement

• Within a certain time frame

• Replacement Property must be

• SIMILAR OR RELATED IN SERVICE (OR IN USE)

• NOT “LIKE KIND”

CONTINGENT, 2

• Qualified Replacement property

• Cost at least as much as amount realized

• Cost less? - Recognize gain!

General Rules

• Property Involuntarily Converted

• Purchase Replacement Property

• Make a Valid Election

DEFINITION

• Compulsory or Involuntary

• Destruction – in whole or in part

• Deemed Involuntary Conversion:

• Destruction of Diseased Livestock

• Sales on Account of Drought

Drought Sales

• Solely on account of drought, flood, or other weather related conditions

Example:

• Normally sell 50 cull cows

• Drought – Sell 75

• Involuntary Conversion – 25 head

Replacement Property

• “Similar or related in service or use”

• Not = to “Like-Kind” definition

• “…similarity in the relationship of the services or uses which the original replacement properties have to the taxpayer-owner.”

Replacement, 2

• Substantially similar property

• Substantial Continuation of prior commitment

• Character of Investment has not changed

• not necessarily “duplicate”

• Return as close as possible to his/her original position

Special Rule

• Related party transactions

• Realized gain <$100,000, deferral of gain is denied.

Examples

• Similar in Use

• Not Similar in Use

Purchase Requirement

• Purchased

• Not Raised in Own Herd

• Purchase Price = Cost Basis

• Gift – N/A

• Tax-free Exchange – N/A

Special Definition

• If replacement is not Feasible

• Soil Contamination

• Other Environmental Condition

• Then replacement can be with any other property “used for farming purposes”

Replacement Period

• Two-years

• December 31, 2004

• Must be Completed

• Extension Possible

Making the Election

• Include only the Gain that may not be deferred

• Provide statement with details

• Deemed Election

What If…?

• Replacement not made or,

• All conditions not satisfied?

• Not Replaced within time frame

• Costs Less

• Decide to not replace

• Other conditions not met

AMEND!

• The Original Return for the Year of the Involuntary Conversion

• Any intervening years that are affected

• NOL carry forward or carry back

Change Election

• Didn’t Make Election?

• File amended return before replacement period ends

Change Election, 2

• Made Election, want to change?

• Replacement property doesn’t qualify

• Cost is less

• Change or revoke before actual replacement

Change Election, 3

• AMENDED RETURNS

BOTTOM LINE

• Get competent professional advice

• Know your operation

• Know your plans

• Know what is available

• Not an easy decision

Colorado Tax Credit

• FYI – Income 55

• Credit available to offset Colorado Tax

• 4.63% of amount actually deferred

• Under IRC Sec 451 – not 1033

• Principal trade or business is farming

• Carry forward unused credits – 5 years