Persistent droughts cause havoc to many businesses, forcing them to take actions they might otherwise not take. This is especially true for farmers, who may be forced to sell some livestock early because the cost of feed becomes too expensive. In these situations, the involuntary conversion provisions of the tax code provide some relief. Specifically, farmers, ranchers, and any other taxpayers who are forced to sell their livestock due to continuing drought conditions may be eligible to delay the recognition of the gain if they replace the sold livestock within four years. In cases where the drought is persistent beyond the four years, Treasury has the authority to increase the period for replacing the sold livestock, and the Internal Revenue Service (IRS) did just that when it issued Notice 2015-69 (September 29, 2015), which provides a list of counties and municipalities for which exceptional, extreme, or severe drought was reported during the preceding 12-month period ending August 31, 2015.

An involuntary conversion occurs when a taxpayer is forced to dispose of property for circumstances such as theft, seizure, or condemnation as well as drought conditions. Internal Revenue Code (IRC) §1033(e) provides that the sale or exchange of livestock (other than poultry) held by the taxpayer for pulling heavy loads, breeding, or dairy purposes will be treated as an involuntary conversion if the transaction is in excess of the taxpayer’s usual business practices and related to a drought, flood, or other weather-related condition. The taxpayer must then replace the property within a specified replacement period.

Consider the following example. Assume a farmer’s usual business practice is to sell five livestock during the year. Because of extreme drought conditions, the farmer is compelled to sell 20 livestock in the current year. The gain, if any, from the sale of 15 livestock is treated as an involuntary conversion for that tax year.

So long as the taxpayer replaces the 15 livestock within the specified replacement time period, any of the gain resulting from the sale, even if the property was sold for money, doesn’t need to be recognized.

While this has the appearance of a tax benefit, it’s actually an attempt to provide some relief for the taxpayer via the tax code. The underlying assumption is that the farmer or rancher is reducing inventory because of drought; otherwise, the livestock will perish or become ill from the lack of water and/or feed.

The usual replacement period for such involuntarily converted property is two years. The time period becomes four years in the case of drought, flood, or other weather-related conditions and if the area has been designated as eligible for assistance by the federal government. And if weather-related conditions continue for more than three years, the Treasury Secretary can provide even more relief to the four-year replacement period. IRS Notice 2006-82 (September 8, 2006) says that the replacement period for a “Persistent Drought” will be extended until the taxpayer’s first taxable year ending after the first drought-free year for the applicable region. The first drought-free year for the applicable region is generally considered to be the 12-month period ending August 31. Thus, with the one-year extension added to the four-year period for drought sale replacements, IRS Notice 2015-69 currently impacts drought sales that were done during 2011.

Appendix A of the notice provides a list of counties and municipalities by state for which exceptional, extreme, or severe drought were reported during the 12-month period ending August 31, 2015. Counties in 48 states and municipalities in Puerto Rico are listed, making this a seemingly far-reaching notice. But keep in mind that even though most states are listed, not all counties within a state qualify. It’s important to read Notice 2015-69 to see which counties in which state qualify. The U.S. Drought Monitor maps that are produced on a weekly basis by the National Drought Mitigation Center can be used to determine whether exceptional, extreme, or severe drought is reported for any location in the applicable region at

Notice 2015-69 is also found in the Farmer’s Tax Guide (IRS Publication 225) that was published October 13, 2015, for use in preparing 2015 returns. The Farmer’s Tax Guide is for taxpayers who are in the business of farming where they cultivate, operate, or manage a farm for profit as an owner or a tenant. A farm includes livestock as discussed here as well as dairy, poultry, fish, fruit, or a truck farm (a farm that produces vegetables for market). It also includes income from operating a plantation, ranch, range, orchard, grove, or the sale of crop shares if the taxpayer materially participates in producing the crop.

The IRS has issued several extensions of the replacement period in the past similar to Notice 2015-69, but it’s worth highlighting the notice to taxpayers who have sold livestock due to drought conditions so they don’t miss the opportunity to have more time to replace their livestock and to avoid gain on the involuntary conversion. Many of us may not deal with livestock in our businesses and professions, but we should be aware of these types of farming issues since there are many areas where livestock is a significant part of the market.

© 2016 A.P. Curatola


Along with the tax benefit provided by involuntary conversions, relief for drought disasters is also available from the U.S. Department of Agriculture’s Farm Service Agency. For example, the Emergency Conservation Program funds emergency water conservation measures, the Emergency Loan Program makes loans to recover from losses, and the Livestock Forage Disaster Program compensates for grazing losses.

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