[Federal Register Volume 64, Number 195 (Friday, October 8, 1999)]
[Proposed Rules]
[Pages 54836-54840]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-26226]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-121063-97]
RIN 1545-AX01
Averaging of Farm Income
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking and notice of public hearing.
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SUMMARY: This document contains proposed regulations for averaging farm
income under section 1301 of the Internal Revenue Code. The regulations
reflect the enactment of the provision by the Taxpayer Relief Act of
1997, as amended by the Omnibus Consolidated and Emergency Supplemental
Appropriations Act, 1999. The regulations provide guidance to
individuals engaged in a farming business who may elect to reduce their
regular tax liability by treating all or a portion of the current
year's farming income as if it had been earned in equal proportions
over the prior three years. This document also provides notice of a
public hearing on these proposed regulations.
DATES: Written or electronic comments and requests to speak (with
outlines of oral comments) at a public hearing
[[Page 54837]]
scheduled for February 15, 2000, must be received by January 14, 2000.
ADDRESSES: Send submissions to: CC:DOM:CORP:R (REG-121063-97), room
5226, Internal Revenue Service, POB 7604, Ben Franklin Station,
Washington, DC 20044. Submissions may be hand delivered Monday through
Friday between the hours of 8 a.m. and 5 p.m. to: CC:DOM:CORP:R (REG-
121063-97), Courier's Desk, Internal Revenue Service, 1111 Constitution
Avenue, NW., Washington, DC. Alternatively, taxpayers may submit
comments electronically via the Internet by selecting the ``Tax Regs''
option on the IRS Home Page, or by submitting comments directly to the
IRS Internet site at http://www.irs.gov/tax__regs/regslist.html. The
public hearing will be held in room 2615, Internal Revenue Building,
1111 Constitution Avenue, NW., Washington DC.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
John M. Moran, at (202) 622-4940; concerning submissions of comments,
the hearing, and/or to be placed on the building access list to attend
the hearing, Guy Traynor, at (202) 622-7190 (not toll-free numbers).
SUPPLEMENTARY INFORMATION:
Paperwork Reduction Act
The collection of information contained in this notice of proposed
rulemaking has been submitted to the Office of Management and Budget
for review in accordance with the Paperwork Reduction Act of 1995 (44
U.S.C. 3507(d)). Comments on the collection of information should be
sent to the Office of Management and Budget, Attn: Desk Officer for the
Department of the Treasury, Office of Information and Regulatory
Affairs, Washington, DC 20503, with copies to the Internal Revenue
Service, Attn: IRS Reports Clearance Officer, OP:FS:FP, Washington, DC
20224. Comments on the collection of information should be received by
December 7, 1999. Comments are specifically requested concerning:
Whether the proposed collection of information is necessary for the
proper performance of the functions of the IRS, including whether the
information will have practical utility;
The accuracy of the estimated burden associated with the proposed
collection of information (see below);
How the quality, utility, and clarity of the information to be
collected may be enhanced;
How the burden of complying with the proposed collection of
information may be minimized, including through the application of
automated collection techniques or other forms of information
technology; and
Estimates of capital or start-up costs and costs of operation,
maintenance, and purchase of services to provide information.
The collection of information in this proposed regulation is in
Sec. 1.1301-1(c). This collection of information is required by the IRS
to verify compliance with section 1301. This information will be used
to determine whether the amount of tax has been calculated correctly.
The collection of information is required to obtain a benefit. The
respondents are certain individuals engaged in the trade or business of
farming.
Taxpayers provide the information on Schedule J, Farm Income
Averaging, which is attached to Form 1040, U.S. Individual Income Tax
Return, for the taxable year in which income averaging is elected. The
burden for this requirement is reflected in the burden estimate for
Schedule J. The estimated burden for the 1998 Schedule J is 1.31 hours
per respondent.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a valid
control number assigned by the Office of Management and Budget.
Books or records relating to a collection of information must be
retained as long as their contents may become material in the
administration of any internal revenue law. Generally, tax returns and
tax return information are confidential, as required by 26 U.S.C. 6103.
Background
This document contains proposed amendments to the Income Tax
Regulations (26 CFR part 1) for averaging farm income under section
1301 of the Internal Revenue Code (Code). Section 1301 was enacted by
section 933 of the Taxpayer Relief Act of 1997, Public Law 105-34 (111
Stat. 788) (the TRA of 1997), effective for taxable years beginning
after December 31, 1997, and ending before January 1, 2001. Section
2011 of the Tax and Trade Relief Extension Act of 1998, which is part
of the Omnibus Consolidated and Emergency Supplemental Appropriations
Act, 1999, Public Law 105-277, 112 Stat. 2681, amended section 933 of
the TRA of 1997 by deleting the January 1, 2001 ending date.
Section 1301(c) authorizes the Secretary to prescribe regulations
as may be appropriate to carry out the purposes of this section,
including regulations regarding (1) the order and manner in which items
of income, gain, deduction, or loss, or limitations on tax, shall be
taken into account in computing the tax imposed by chapter 1 (Normal
Taxes and Surtaxes) of subtitle A (Income Taxes) of the Code on the
income of any taxpayer to whom this section applies for any taxable
year, and (2) the treatment of any short taxable year.
Explanation of Provisions
I. In General
Under section 1301, an individual may elect to compute the section
1 tax for the current taxable year by designating all or a portion of
the individual's farm income (subject to certain limitations) as
elected farm income, and subtracting it from taxable income. One-third
of the elected farm income is allocated to each of the three prior
years' taxable income and the increase in the section 1 tax that
results from these additions is calculated. The prior years are
referred to as base years. The tax for the current year is the sum of
(1) The section 1 tax for the current year without the elected farm
income and (2) The increase in the section 1 tax for the three base
years that is attributable to elected farm income.
II. Engaged in a Farming Business
The proposed regulations provide that the term farming business has
the same meaning as provided in section 263A(e)(4) and the regulations
thereunder. The proposed regulations also provide that an individual
engaged in a farming business includes a sole proprietor of a farming
business, a partner of a partnership engaged in a farming business, and
a shareholder of an S corporation engaged in a farming business.
III. Making, Changing, or Revoking an Election
The proposed regulations provide that a farm income averaging
election is made by filing Schedule J, Farm Income Averaging, with an
individual's timely filed Federal income tax return (including
extensions). In general, the proposed regulations provide that if an
individual has an adjustment for an election year or base year, the
individual may also make a late farm income averaging election or
change or revoke a previous election. An adjustment is any change in
taxable income or tax liability that is permitted to be made by filing
an amended Federal income tax return, or a change in taxable income or
tax liability resulting from an IRS examination. If
[[Page 54838]]
there is no adjustment for an election year or a base year, a late
election, change, or revocation may be made only with the consent of
the Commissioner. The IRS and the Treasury Department anticipate that
the Commissioner's consent will be obtained by requesting a letter
ruling from the national office.
IV. Calculation of Section 1 Tax
Farm income averaging allocates one-third of elected farm income
from an election year to each of the base years only for the purpose of
calculating the section 1 tax attributable to the elected farm income
allocated to each base year. The proposed regulations provide that the
section 1 tax for the election year is determined by allocating elected
farm income to the base years only after all other adjustments and
determinations have been made. For example, any net operating loss
carryover is applied to an election year before allocating elected farm
income to the base years.
The regulations provide that the allocation of elected farm income
to the base years does not affect any determination (other than the
calculation of the section 1 tax attributable to the elected farm
income) with respect to the election year or the base years. Thus, for
example, in applying the section 68 overall limitation on itemized
deductions to the election year, adjusted gross income for the election
year includes any elected farm income allocated to the base years.
Similarly, the section 68 limitation for a base year is not recomputed
to take into account any allocation of elected farm income to such base
year.
The proposed regulations provide that calculation of the section 1
tax on elected farm income allocated to a base year is made without any
additional adjustments or determinations with respect to that year. For
example, if a base year had a partially used capital loss, the
remaining capital loss may not be applied to reduce the elected farm
income allocated to such year. Similarly, if a base year had a
partially used credit, the remaining credit may not apply to reduce the
section 1 tax attributable to the elected farm income allocated to such
year.
V. Elected Farm Income
The proposed regulations provide that farm income includes all
income, deductions, gains, and losses attributable to an individual's
farming business. An individual may designate what type, and how much
of each type, of farm income is to be treated as elected farm income.
The elected farm income may not exceed an individual's taxable income.
In addition, elected farm income from net capital gain attributable to
a farming business may not exceed total net capital gain. One-third of
each type of elected farm income is then allocated to each base year.
Proposed Effective Date
The regulations, as proposed, apply to any taxable period ending on
or after the date of publication of a Treasury decision adopting these
rules as final regulations in the Federal Register. However, the rules
in these proposed regulations may be relied on by individuals for
taxable periods ending before the publication of the Treasury decision.
Special Analyses
It has been determined that this notice of proposed rulemaking is
not a significant regulatory action as defined in Executive Order
12866. Therefore, a regulatory assessment is not required. It has also
been determined that section 553(b) of the Administrative Procedure Act
(5 U.S.C. chapter 5) does not apply to these regulations. It is hereby
certified that the collection of information in these regulations will
not have a significant economic impact on a substantial number of small
entities. This certification is based upon the fact that the collection
of information imposed by this regulation is not significant as
reflected in the estimated burden of information collection for
Schedule J, which is 1.31 hours per respondent. Therefore, a Regulatory
Flexibility Analysis under the Regulatory Flexibility Act (5 U.S.C.
chapter 6) is not required. Pursuant to section 7805(f) of the Code,
this notice of proposed rulemaking will be submitted to the Chief
Counsel for Advocacy of the Small Business Administration for comment
on its impact on small business.
Comments and Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any electronic or written comments (a
signed original and eight (8) copies) that are submitted timely to the
IRS. The IRS and Treasury Department request comments on the clarity of
the proposed rules and how they can be made easier to understand. In
addition, comments are specifically requested regarding whether wages
paid to a shareholder of an S corporation may be electible farm income.
All comments will be available for public inspection and copying.
A public hearing has been scheduled for February 15, 2000,
beginning at 10 a.m. in room 2615 of the Internal Revenue Building,
1111 Constitution Avenue, NW., Washington, DC. Due to building security
procedures, visitors must enter at the 10th Street entrance, located
between Constitution and Pennsylvania Avenues, NW. In addition, all
visitors must present photo identification to enter the building.
Because of access restrictions, visitors will not be admitted beyond
the immediate entrance area more than 15 minutes before the hearing
starts. For information about having your name placed on the building
access list to attend the hearing, see the FOR FURTHER INFORMATION
CONTACT section of this preamble.
The rules of 26 CFR 601.601(a)(3) apply to the hearing. Persons who
wish to present oral comments at the hearing must submit electronic or
written comments and an outline of the topics to be discussed and the
time to be devoted to each topic (signed original and eight (8) copies)
by January 14, 2000. A period of 10 minutes will be allotted to each
person for making comments. An agenda showing the scheduling of the
speakers will be prepared after the deadline for receiving outlines has
passed. Copies of the agenda will be available free of charge at the
hearing.
Drafting Information: The principal author of these regulations is
John M. Moran, Office of Assistant Chief Counsel (Income Tax &
Accounting). However, other personnel from the IRS and Treasury
Department participated in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendment to the Regulations
Accordingly, 26 CFR part 1 is proposed to be amended as follows:
PART 1--INCOME TAXES
Paragraph 1. The authority citation for part 1 is amended by adding
an entry in numerical order to read as follows:
Authority: 26 U.S.C. 7805 * * *
Section 1.1301-1 also issued under 26 U.S.C. 1301(c). * * *
Par. 2. An undesignated center heading and Sec. 1.1301-1 are added
immediately following the center heading ``Readjustment of Tax Between
Years and Special Limitations'' to read as follows:
[[Page 54839]]
Income Averaging
Sec. 1.1301-1 Averaging of farm income.
(a) Overview. An individual engaged in a farming business may elect
to compute his or her current year (election year) income tax liability
under section 1 by averaging, over the prior three-year period (base
years), all or a portion of the individual's current year electible
farm income (as defined in paragraph (e)) of this section. To average
farm income, the individual--
(1) Designates all or a portion of his or her electible farm income
for the election year as elected farm income;
(2) Allocates one-third of the elected farm income to each of the
three base years; and
(3) Determines the election year section 1 tax by determining the
sum of--
(i) The election year section 1 tax without regard to the elected
farm income; plus
(ii) For each base year, the increase in section 1 tax attributable
to the elected farm income allocated to such year.
(b) Individual engaged in a farming business. Farming business has
the same meaning as provided in section 263A(e)(4) and the regulations
thereunder. An individual engaged in a farming business includes a sole
proprietor of a farming business, a partner in a partnership engaged in
a farming business, and a shareholder of an S corporation engaged in a
farming business. An individual is not required to have been engaged in
a farming business in any of the base years in order to make a farm
income averaging election.
(c) Making, changing, or revoking an election--(1) Making an
election. A farm income averaging election is made by filing Schedule
J, Farm Income Averaging, with an individual's timely filed (including
extensions) Federal income tax return for the election year.
(2) Making a late election, or changing or revoking an election--
(i) Adjustments in an election or base year. An individual who has an
adjustment for an election year or any base year may make a late farm
income averaging election, change the amount of elected farm income in
a previous election, or revoke a previous election, if the period of
limitation on filing a claim for credit or refund has not expired for
the election year. For purposes of this paragraph (c)(2), an adjustment
is any change in taxable income or tax liability that is permitted to
be made by filing an amended Federal income tax return or a change in
taxable income or tax liability made as the result of an IRS
examination.
(ii) No adjustment. If an individual does not have an adjustment
described in paragraph (c)(1)(i) of this section, the individual may
not make a late farm income averaging election, change the amount of
elected farm income in a previous election, or revoke a previous
election, without the consent of the Commissioner.
(d) Calculation of section 1 tax--(1) In general. The section 1 tax
for the election year is determined by allocating elected farm income
to the base years only after all other adjustments and determinations
have been made. For example, any net operating loss (NOL) carryover or
net capital loss carryover is applied to an election year before
allocating elected farm income to the base years. Similarly, the
determination of whether there is a net section 1231 gain or loss in
the election year and the determination of the character of the section
1231 items are made before allocating elected farm income to the base
years. The allocation of elected farm income to the base years does not
affect any determination (other than the calculation of the section 1
tax attributable to the elected farm income) with respect to the
election year or the base years. Thus, for example, in applying the
section 68 overall limitation on itemized deductions to the election
year, adjusted gross income for the election year includes any elected
farm income allocated to the base years. Similarly, the section 68
limitation for a base year is not recomputed to take into account any
allocation of elected farm income to such base year. The calculation of
the section 1 tax on elected farm income allocated to a base year is
made without any additional adjustments or determinations with respect
to such year. For example, if a base year had a partially used capital
loss, the remaining capital loss may not be applied to reduce the
elected farm income allocated to such year. Similarly, if a base year
had a partially used credit, the remaining credit may not be applied to
reduce the section 1 tax attributable to the elected farm income
allocated to such year.
(2) Base year was previously an election year or another base year.
If a base year for a current farm income averaging election was
previously an election year for another farm income averaging election,
the base year's section 1 tax is determined after reducing the base
year's taxable income by the elected farm income for that prior
election year. If a base year for a current farm income averaging
election was previously a base year for another farm income averaging
election, the base year's section 1 tax is determined after increasing
the base year's taxable income by the elected farm income allocated to
that year by that prior election.
(3) Example. The rules of paragraph (d)(2) of this section are
illustrated by the following example:
Example. (i) In each of years 1996, 1997 and 1998, T had taxable
income of $20,000. In 1999, T had taxable income of $30,000 (prior
to any farm income averaging election) and electible farm income of
$10,000. T makes a farm income averaging election with respect to
$9,000 of his electible farm income for 1999. Thus, $3,000 of
elected farm income is allocated to each of years 1996, 1997 and
1998. T's 1999 tax liability is the sum of--
(A) The section 1 tax on $21,000 (1999 taxable income minus
elected farm income); plus
(B) For each of years 1996, 1997, and 1998, the section 1 tax on
$23,000 minus the section 1 tax on $20,000 (the increase in section
1 tax attributable to the elected farm income allocated to such
year).
(ii) In 2000, T has taxable income of $50,000 and electible farm
income of $12,000. T makes a farm income averaging election with
respect to all $12,000 of his electible farm income for 2000. Thus,
$4,000 of elected farm income is allocated to each of years 1997,
1998 and 1999. T's 2000 tax liability is the sum of--
(A) The section 1 tax on $38,000 (2000 taxable income minus
elected farm income); plus
(B) For each of years 1997 and 1998, the section 1 tax on
$27,000 minus the section 1 tax on $23,000 (the increase in section
1 tax attributable to the elected farm income allocated to such
years after increasing such years' taxable income by the elected
income allocated to such year by the 1999 farm income averaging
election); plus
(C) For year 1999, the section 1 tax on $25,000 minus the
section 1 tax on $21,000 (the increase in section 1 tax attributable
to the elected farm income allocated to such year after reducing
such year's taxable income by the 1999 elected farm income).
(e) Electible farm income--(1) Identification of items attributable
to a farming business--(i) In general. Farm income includes items of
income, deduction, gain, and loss attributable to the individual's
farming business. Farm losses include a NOL carryover or carryback, or
a net capital loss carryover, to an election year that is attributable
to a farming business. Income, gain or loss from the sale of
development rights, grazing rights, and other similar rights is not
treated as attributable to a farming business. Farm income does not
include wages.
(ii) Gain or loss on sale or other disposition of property--(A) In
general. Gain or loss from the sale or other disposition of property
(other than land,
[[Page 54840]]
but including a structure affixed to the land) that was regularly used
in the individual's farming business for a substantial period of time
is treated as attributable to a farming business. Whether property was
regularly used for a substantial period of time depends on all of the
facts and circumstances.
(B) Cessation of a farming business. If gain or loss described in
paragraph (e)(1)(ii)(A) of this section is realized after cessation of
a farming business, such gain or loss is treated as attributable to a
farming business if the property is sold within a reasonable time after
cessation of the farming business. A sale or other disposition within
one year of cessation of the farming business is presumed to be within
a reasonable time. Whether a sale or other disposition that occurs more
than one year after cessation of the farming business is within a
reasonable time depends on all of the facts and circumstances.
(2) Determination of amount that may be elected farm income--(i)
Electible farm income. The maximum amount of income that an individual
may elect to average (electible farm income) is the sum of any farm
income and gain minus any farm deductions or losses (including loss
carryovers and carrybacks) that are allowed as a deduction in computing
the individual's taxable income. However, electible farm income may not
exceed taxable income. In addition, electible farm income from net
capital gain attributable to a farming business cannot exceed total net
capital gain. An individual who has both ordinary and net capital gain
farm income may elect (up to electible farm income) any combination of
such ordinary and net capital gain farm income.
(ii) Examples. The rules of paragraph (e)(2)(i) of this section are
illustrated by the following examples:
Example 1. A has farm gross receipts of $200,000 and farm
ordinary deductions of $50,000. A's taxable income is $150,000
($200,000-$50,000). A's electible farm income is $150,000, all of
which is ordinary income.
Example 2. B has ordinary farm income of $200,000 and nonfarm
losses of $50,000. B's taxable income is $150,000 ($200,000-
$50,000). B's electible farm income is $150,000, all of which is
ordinary income.
Example 3. C has a farm capital gain of $50,000 and a nonfarm
capital loss of $40,000. C also has ordinary farm income of $60,000.
C has taxable income of $70,000 ($50,000-$40,000+$60,000). C's
electible farm income is $70,000. C can elect up to $10,000 of farm
capital gain and up to $60,000 of farm ordinary income.
Example 4. D has a nonfarm capital gain of $40,000 and a farm
capital loss of $30,000. D also has ordinary farm income of
$100,000. D has taxable income of $110,000 ($40,000-
$30,000+$100,000). D's electible farm income is $100,000 ordinary
farm income minus $30,000 farm capital loss, or $70,000, all of
which is ordinary income.
Example 5. E has a nonfarm capital gain of $20,000 and a farm
capital loss of $30,000. E also has ordinary farm income of
$100,000. E has taxable income of $97,000 ($20,000-$23,000
+$100,000). E has a farm capital loss carryover of $7,000 ($30,000-
$23,000 allowed as a deduction). E's electible farm income is
$100,000 ordinary farm income minus $23,000 farm capital loss, or
$77,000, all of which is ordinary income.
(f) Miscellaneous rules--(1) Short taxable year--(i) In general. If
a base year or an election year is a short taxable year, the rules of
section 443 and the regulations thereunder apply for purposes of
calculating the section 1 tax.
(ii) Base year is a short taxable year. If a base year is a short
taxable year, the increase in section 1 tax attributable to the elected
farm income allocated to such year is determined after the taxable
income for such year has been annualized.
(iii) Election year is a short taxable year. If an election year is
a short taxable year, any elected farm income is first annualized
before being allocated to the base years. The increase in section 1 tax
attributable to the elected farm income allocated to the base years is
the same part of the tax computed on an annual basis as the number of
months in the short election year is of 12 months.
(2) Changes in filing status. An individual is not prohibited from
making a farm income averaging election solely because the individual's
filing status is not the same in an election year and the base years.
For example, an individual who files married filing jointly in the
election year, but filed as single in all of the base years, may still
elect to average farm income.
(3) Employment tax. A farm income averaging election has no effect
in determining the amount of wages for purposes of the Federal
Insurance Contributions Act (FICA), the Federal Unemployment Tax Act
(FUTA), and the Collection of Income Tax at Source on Wages (Federal
income tax withholding), or the amount of net earnings from self-
employment for purposes of the Self-Employment Contributions Act
(SECA).
(4) Alternative minimum tax. A farm income averaging election does
not apply for purposes of determining the section 55 alternative
minimum tax in the election year or any base year. However, an election
will apply for purposes of determining the regular tax under sections
53(c) and 55(c).
(5) Unearned income of minor child. In an election year, if a minor
child's investment income is taxable under section 1(g) and a parent
makes a farm income averaging election, the tax rate used for purposes
of applying section 1(g) is the rate determined after application of
the election. With respect to a base year, however, the tax on a minor
child's investment income is not affected by a farm income averaging
election.
(g) Effective date. The rules of this section apply to taxable
years ending on or after the date of publication of the Treasury
decision adopting these rules as final regulations in the Federal
Register.
John M. Dalrymple,
Acting Deputy Commissioner of Internal Revenue.
[FR Doc. 99-26226 Filed 10-7-99; 8:45 am]
BILLING CODE 4830-01-U
