Notice 2023-67: Farmers, ranchers affected by drought allowed more time to replace livestock

The IRS today released an advance version of Notice 2023-67 as guidance for farmers and ranchers who were forced to sell livestock on account of drought in specific counties—generally, a county designated as eligible for federal assistance plus counties contiguous to that county.

Notice 2023-67 [PDF 161 KB] contains a list of counties that experienced exceptional, extreme, or severe drought conditions during the 12-month period ending August 31, 2023, which taxpayers may use to determine whether an extension of the replacement period under section 1033(e) for sales of livestock is available.

The IRS relief generally applies to capital gains realized by eligible farmers and ranchers on sales of livestock held for draft, dairy or breeding purposes. Sales of other livestock such as those raised for slaughter or held for sporting purposes, or poultry are not eligible.

To qualify, the sales must be solely due to drought, flooding or other severe weather causing the region to be designated as eligible for federal assistance. Under these circumstances, livestock generally must be replaced within a four-year period—instead of the usual two-year period. In addition, the IRS is authorized to further extend this replacement period if the drought continues. The one-year extension, announced today, gives eligible farmers and ranchers until the end of the tax year after the first drought-free year to replace the sold livestock. Details, including an example, are provided in prior IRS guidance, Notice 2006-82 [PDF 23 KB].

Notice 2006-82 further announced that the IRS would publish in September of each year a list of counties, districts, cities or parishes for which exceptional, extreme or severe drought was reported during the preceding 12 months. Taxpayers may use this list to determine whether they qualify for a four-year replacement period for livestock sold or exchanged on account of drought and whose replacement period is scheduled to expire at the end of 2021 (or for a fiscal year taxpayer, at the end of the tax year that includes August 31, 2021).

According to a related IRS release—IR-2023-179 (September 27, 2023):

• The relief generally applies to capital gains realized by eligible farmers and ranchers on sales of livestock held for draft, dairy or breeding purposes. Sales of other livestock, such as those raised for slaughter or held for sporting purposes, or poultry, are not eligible.
• The sales must be solely due to drought, causing an area to be designated as eligible for federal assistance. Livestock generally must be replaced within a four-year period, instead of the usual two-year period. The IRS is authorized to further extend this replacement period if the drought continues.
• The one-year extension, announced in the notice, gives eligible farmers and ranchers until the end of their first tax year after the first drought-free year to replace the sold livestock. Details, including an example of how this provision works, can be found in Notice 2006-82, available on IRS.gov.
• The IRS provides this extension to eligible farmers and ranchers that qualified for the four-year replacement period, if the applicable region is listed as suffering exceptional, extreme or severe drought conditions during any week between September 1, 2022, and August 31, 2023.
• As a result, eligible farmers and ranchers whose drought-sale replacement period was scheduled to expire on December 31, 2023, in most cases, now have until the end of their next tax year to replace the sold livestock. Because the normal drought-sale replacement period is four years, this extension affects drought sales that occurred during 2019. The replacement periods for some drought sales before 2019 are also affected due to previous drought-related extensions affecting some of these localities.

For more information, contact a KPMG tax professional in Washington National Tax:

Vish Amin | vamin@kpmg.com