IRS Proposed Regulations on Installment Tax Payment Election upon Sale of Certain Farmland Property
The IRS recently has issued proposed regulations implementing section 1062 of the Internal Revenue Code.[1] A product of the One Big Beautiful Bill Act, new section 1062 provides an election to pay off net income tax attributable to gain from the sale of qualified farmland property to a qualified farmer in four equal installments.[2]
Section 1062
Definitions
Section 1062 defines “qualified farmland property” as property located in the United States that:
- has been used by the seller as a farm for farming purposes or leased by the seller to a qualified farmer for farming purposes during substantially all of the 10-year period ending on the date of the qualified sale or exchange, and
- is subject to a covenant or other legally enforceable restriction that prohibits the use of the property other than as a farm for farming purposes for 10 years after the date of the sale or exchange.[3]
A “qualified farmer” means any individual who is actively engaged in farming.[4] A “farm” includes stock, dairy, poultry, fruit, furbearing animal, and truck farms, plantations, ranches, nurseries, ranges, greenhouses or other similar structures used primarily for the raising of agricultural or horticultural commodities, and orchards and woodlands.[5]
A “farming purpose” means:
- cultivating the soil or raising or harvesting any agricultural or horticultural commodity (including the raising, shearing, feeding, caring for, training, and management of animals) on a farm;
- handling, drying, packing, grading, or storing on a farm any agricultural or horticultural commodity in its unmanufactured state, but only if the owner, tenant, or operator of the farm regularly produces more than one-half of the commodity so treated; and
- planting, cultivating, caring for, or cutting of trees, or the preparation (other than milling) of trees for market.[6]
Making the Election
A seller must make section 1062 election by the due date for the tax return for the year in which the sale or exchange occurred.[7] If the seller is a partnership or S corporation, then the election generally is made at the or shareholder level.[8] A seller making an election must include a copy of the covenant or other legally enforceable restriction with their tax return for the year of the sale or exchange.[9]
Payment
The first of the four installments under section 1062 must be paid by the due date (determined without regard to any extension of time for filing the return) for the tax return for the taxable year in which the sale or exchange occurred.[10] Each succeeding installment must be paid on the due date for the tax return for the taxable year following the taxable year with respect to which the preceding payment was made.[11]
Acceleration Events
If there is an addition to tax for the seller’s failure to pay any installment, the unpaid portion of all remaining installments become due on the date of such failure.[12] Along the same lines, if the seller is an individual, the unpaid portion of all remaining installments must be paid on the due date for the tax return for the taxable year in which the individual dies.[13] And if the seller is a C corporation, trust, or estate and there is a liquidation of substantially all the assets of the seller, a cessation of business, or any similar circumstance, the unpaid potion of all remaining installments generally will be due on the date of such event.[14]
Deficiency with Respect to Sale
If a deficiency is assessed with respect to tax liability arising from the sale or exchange, then the deficiency is prorated to the installments, with the amount of deficiency prorated to an installment whose date of payment has not arrived being payable at the same time as an as part of the installment, and the potion of the deficiency prorated to installments that have already been paid being payable on notice and demand.[15]
Proposed Regulations
The proposed regulations provide guidance on such matters as the meaning of a section 1062 covenant, calculating the prior 10-year holding period, and exceptions to the acceleration of payments upon the occurrence of an acceleration event.
Section 1062 Covenants
A section 1062 covenant would mean a covenant or other legally enforceable restriction that:
- prohibits the use of the real property other than as a farm for farming purposes for 10 years after the date of the sale or exchange of the property
- is executed prior to or contemporaneously with the closing of the sale or exchange;
- is recorded in the land records of the jurisdiction in which the real property is located prior to or contemporaneously with the filing of the deed of transfer of the real property;
- is enforceable against the buyer and all future owners of the real property for a period of 10 years after the sale or exchange.[16]
A section 1062 covenant would include an easement or other interest in real property that, under applicable law, has attributes similar to a covenant.[17]
Calculating the Prior 10-Year Holding Period
The proposed regulations would treat sellers who acquired the real property in the prior 10-year period to have used or leased the real property during the full 10-year period if the seller acquired the real property in a transaction in which the seller’s holding period was calculated by including the holding period of the person from whom the seller acquired the property and the person from whom the seller had acquired the property used the real property as farm for farming purposes or leased the real property to a qualified farmer for farming purposes.[18]
The proposed regulations would provide that certain periods of non-use during the prior 10-year period would be disregarded for purposes of determining whether real property is qualified farmland property.[19] Such periods of non-use would include 1) the real property is taken out of production pursuant to a Federal, State, Tribal, or local government program; 2) the real property is taken out of production pursuant to recognized good farming practices; or 3) the real property is taken out of production due to unforeseen events caused by factors outside the taxpayer’s control.[20] During these periods of non-use, all necessary functions, such as land management activities (for example protecting the soil from erosion), must continue to be performed to maintain the real property for farming purposes in order for such periods to be disregarded.[21]
Partial Use for Farming Purposes
Residential buildings and related improvements would be considered to be used or leased by the seller for farming purposes. If only part of the real property is used or leased for farming purposes or if only a portion of the real property is subject to a section 1062 covenant, only that portion of the real property would be considered to be qualified farmland property.[22] Property used or leased by a pass-through entity is treated as used or leased by any person who owns a direct or indirect beneficial or equity interest in that pass-through entity during that period.[23]
Acceleration Event Exceptions
The acceleration rules under section 1062 would not apply if the acceleration event is a sale of substantially all the assets of the eligible section 1062 transferor, and the eligible section 1062 transferor and the eligible section 1062 transferee enter into an transfer agreement meeting certain requirements.[24]
An ‘‘eligible section 1062 transferor’’ would mean a C corporation, trust, or estate that makes a section 1062 election, and with respect to which an acceleration event has occurred.[25]An ‘‘eligible section 1062 transferee’’ would mean a United States person that is not a partnership or an S corporation, a debtor in a title 11 or similar case, or insolvent.[26]
The transfer agreement would be a Form 1062-T, Transfer Agreement under Section 1062(b)(2)(C), signed under penalties of perjury by both the eligible section 1062 transferor and eligible section 1062 transferee, which would have to be filed with 30 days after the date of the acceleration event.[27] The transfer agreement would have to include:
- the name, address, and taxpayer identification number of the eligible section 1062 transferor and the eligible section 1062 transferee;
- the amount of the eligible section 1062 transferor’s remaining unpaid tax liability under section 1062;
- the date and a description of the acceleration event that led to the transfer agreement;
- a statement that the document constitutes an agreement by the eligible section 1062 transferee to assume the liability of the eligible section 1062 transferor for any unpaid installment payments of the eligible section 1062 transferor under section 1062;
- a statement that the eligible section 1062 transferee agrees to comply with all conditions and requirements of section 1062 and accompanying regulations;
- a representation that the eligible section 1062 transferee has the financial ability to make the remaining installment payments required under section 1062 with respect to the tax liability being assumed by the eligible section 1062 transferee.
- a certification by the eligible section 1062 transferee stating that the eligible section 1062 transferee waives the right to a notice of liability and consents to the immediate assessment of the remaining unpaid portion of the eligible section 1062 transferor’s tax liability under section 1062; and
- if the eligible section 1062 transferor continues to exist immediately after the acceleration event, an acknowledgement that the eligible section 1062 transferor (and any subsequent successor to the eligible section 1062 transferor) will remain jointly and severally liable for any unpaid tax liability under section 1062 of the eligible section 1062 transferor.[28]
Conclusion
As these are just proposed regulations, they are not the final say on the implementation of Section 1062. Stay tuned for more information.
[3] I.R.C. § 1062(d)(2)(A).
[4] I.R.C. § 1062(d)(3).
[5] I.R.C. §§ 1062(d)(2)(B), 2032(e)(4).
[6] I.R.C. §§ 1062(d)(2)(B), 2032(e)(5).
[7] I.R.C. § 1062(c)(1).
[8] I.R.C. § 1062(c)(2).
[9] Id. § 1062(e).
[10] Id. § 1062(b)(1).
[11] Id. § 1062(b)(1).
[12] Id. § 1062(b)(2)(A).
[13] I.R.C. § 1062(b)(2)(B).
[14] Id. § 1062(b)(2)(C).
[15] Id. § 1062(b)(3).
[16] 91 Fed. Reg. 61377 (Prop. Reg. § 1.1062-1(t)(1)).
[17] Id. (Prop. Reg. § 1.1062-1(t)(2)).
[18] Id. (Prop. Reg. § 1.1062-1(o)(3)).
[19] 91 Fed. Reg. 61376-77 (Prop. Reg. § 1.1062-1(o)(2)).
[20] Id.
[21] Id.
[22] 91 Fed. Reg. 61376-77 (Prop. Reg. § 1.1062-1(o)(4)-(6)).
[23] 91 Fed. Reg. 61377 (Prop. Reg. § 1.1062-1(o)(7)).
[24] 91 Fed. Reg. 61,381(Prop. Reg. § 1062-3(c)).
[25] 91 Fed. Reg. 61376 (Prop. Reg. § 1.1062–1(i)).
[26] Id. (Prop. Reg. § 1.1062–1(g).
[27] 91 Fed. Reg. 61381 (Prop. Reg. § 1.1062-3(c)(2)(i), (ii)).
[28] Id. (Prop. Reg. § 1.1062-3(c)(2)(iv)).
