Proposed Rule2026-19888
Election To Pay in Installments Tax on Gain From Certain Farmland Property
Primary source
Metadata and text below are from the Federal Register, a public-domain U.S. government work. Always verify the official published version before relying on it for any legal matter.
Published
September 29, 2026
Issuing agencies
Treasury DepartmentInternal Revenue Service
Abstract
This document contains proposed regulations regarding the statutory election to pay in four equal annual installments the tax on the gain from the sale or exchange of qualified farmland property to a qualified farmer. The proposed regulations would affect taxpayers who sell or exchange qualified farmland to a qualified farmer and elect to pay the tax on the gain from that sale or exchange in equal annual installments over four years.
Full Text
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<title>Federal Register, Volume 91 Issue 187 (Tuesday, September 29, 2026)</title>
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[Federal Register Volume 91, Number 187 (Tuesday, September 29, 2026)]
[Proposed Rules]
[Pages 61367-61383]
From the Federal Register Online via the Government Publishing Office [<a href="http://www.gpo.gov">www.gpo.gov</a>]
[FR Doc No: 2026-19888]
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DEPARTMENT OF THE TREASURY
Internal Revenue Service
26 CFR Part 1
[REG-117095-25]
RIN 1545-BR83
Election To Pay in Installments Tax on Gain From Certain Farmland
Property
AGENCY: Internal Revenue Service (IRS), Treasury.
ACTION: Notice of proposed rulemaking.
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SUMMARY: This document contains proposed regulations regarding the
statutory election to pay in four equal annual installments the tax on
the gain from the sale or exchange of qualified farmland property to a
qualified farmer. The proposed regulations would affect taxpayers who
sell or exchange qualified farmland to a qualified farmer and elect to
pay the tax on the gain from that sale or exchange in equal annual
installments over four years.
DATES: Written or electronic comments and requests for a public hearing
must be received by November 30, 2026.
ADDRESSES: Commenters are strongly encouraged to submit public comments
electronically via the Federal eRulemaking Portal at <a href="https://www.regulations.gov">https://www.regulations.gov</a> (indicate IRS and REG-117095-25) by following the
online instructions for submitting comments. Requests for a public
hearing must be submitted as prescribed in the ``Comments and Requests
for a Public Hearing'' section. Once submitted to the Federal
eRulemaking Portal, comments cannot be edited or withdrawn. The
Department of the Treasury (Treasury Department) and the IRS will
publish for public availability any comments submitted to the IRS's
public docket. Send paper submissions to: CC:PA:01:PR (REG-117095-25),
Room 5503, Internal Revenue Service, P.O. Box 7604, Ben Franklin
Station, Washington, DC 20044.
FOR FURTHER INFORMATION CONTACT: Concerning the proposed regulations,
Nathan Cox of the Office of Associate Chief Counsel (Income Tax &
Accounting) at (202) 317-7006 (not a toll-free number); concerning
submissions of comments and requests for a public hearing, the
Publications and Regulations Section at (202) 317-6901 (not a toll-free
number) or by email at <a href="/cdn-cgi/l/email-protection#2d5d584f41444e45484c5f44434a5e6d445f5e034a425b"><span class="__cf_email__" data-cfemail="205055424c494348454152494e4753604952530e474f56">[email protected]</span></a> (preferred).
SUPPLEMENTARY INFORMATION:
Authority
This notice of proposed rulemaking contains proposed amendments
that would add new regulations to the Income Tax Regulations (26 CFR
part 1) under section 1062 of the Internal Revenue Code (Code), which
was enacted by section 70437 of Public Law 119-21, 139 Stat. 72, 248-
250 (July 4, 2025), commonly known as the One, Big, Beautiful Bill Act
(OBBBA). Section 1062(a) provides an election to pay in equal
installments over a four-year period the tax on the gain from the sale
or exchange of qualified farmland property to a qualified farmer
(qualified sale or exchange).
The proposed regulations are issued under the authority of section
7805(a) of the Code, which authorizes the Secretary of the Treasury or
the Secretary's delegate (Secretary) to prescribe all needful rules and
regulations for the enforcement of the Code, including all rules and
regulations as may be necessary by reason of any alteration of law in
relation to internal revenue.
The proposed regulations also are issued under the authority of
section 1062(c)(2). Section 1062(c)(2) authorizes the Secretary to
prescribe regulations or other guidance as necessary to carry out the
purposes of section 1062(c)(2), which provides that, in the case of a
qualified sale or exchange by a partnership or an S corporation, the
election under section 1062(a) is made at the partner or shareholder
level.
In addition, the proposed regulations that would address
consolidated groups are also issued under the authority of section
1502. Section 1502 authorizes the Secretary to prescribe regulations in
order that the tax liability of any affiliated group of corporations
making a consolidated return and of each corporation in the group, both
during and after the period of affiliation, may be returned,
determined, computed, assessed, collected, and adjusted, in such manner
as clearly to reflect the income-tax liability and the various factors
necessary for the determination of such liability, and in order to
prevent avoidance of such tax liability.
Background
Section 70437(a) of the OBBBA redesignated former section 1062 of
the Code as new section 1063 of the Code and added a new section 1062.
This new section 1062 allows taxpayers who sell or exchange qualified
farmland property in a qualified sale or exchange to make an election
to pay the tax on the gain from the qualified sale or exchange in equal
installments over a four-year period (section 1062 election). Section
70437(c) of the OBBBA provides that the section 1062 election applies
to qualified sales or exchanges made in taxable years beginning after
July 4, 2025, the date of enactment of the OBBBA.
Section 1062(b)(1) provides that, if a section 1062 election is
made with respect to a qualified sale or exchange, the first
installment payment is due on the due date (without regard to
extensions) for the Federal income tax return (return) for the taxable
year of the qualified sale or exchange, and each successive installment
payment is due on the due date (without regard to extensions) for the
return for the taxable year following the taxable year for which the
previous installment payment was made.
[[Page 61368]]
Section 1062(b)(2) provides three rules that may result in the
acceleration of one or more installment payments prior to the date(s)
for which the installment payment(s) otherwise would be due. First,
section 1062(b)(2)(A) provides that, if there is an addition to tax for
failure to timely pay an installment required under section 1062, the
unpaid portion of all remaining installments is due on the date of that
failure. Second, section 1062(b)(2)(B) provides that, in the case of an
individual taxpayer who dies, the unpaid portion of all remaining
installments is due on the due date for the return for the taxable year
in which the taxpayer dies. Third, section 1062(b)(2)(C) provides that,
for a taxpayer that is a C corporation, a trust, or an estate, if there
is a liquidation or sale of substantially all the assets of the
taxpayer, including in a case under title 11 of the United States Code
or a similar case (title 11 or similar case), a cessation of business
by the taxpayer (in the case of a C corporation), or any similar
circumstance, the unpaid portion of all remaining installments is due
on the date of that event (or, in the case of a title 11 or similar
case, the day before the petition is filed). However, the rule in
section 1062(b)(2)(C) does not apply in the case of a sale of
substantially all the assets of the taxpayer to a buyer if the buyer
enters into an agreement with the Commissioner of Internal Revenue
(Commissioner) under which the buyer is liable for the remaining
installment payments due under section 1062(b) in the same manner as if
the buyer were the taxpayer.
Section 1062(b)(3) sets forth rules, referred to as the ``proration
rules'' in this notice of proposed rulemaking, providing that, if a
taxpayer has made a section 1062 election, and if a deficiency
subsequently is assessed with respect to the taxpayer's ``applicable
net tax liability,'' the amount of the deficiency is prorated among the
installments payable under section 1062(a). The part of the deficiency
prorated to any installment payments that are not yet due will be due
at the same time as, and as part of, that installment payment. The part
of the deficiency prorated to any installment payment that is past due
must be paid upon notice and demand from the Commissioner. However, the
proration rules do not apply if the deficiency is due to negligence,
intentional disregard of rules and regulations, or fraud with intent to
evade tax.
Section 1062(c) provides rules regarding the making of a section
1062 election. Section 1062(c)(1) provides that a section 1062 election
must be made no later than the due date for the return for the taxable
year of the qualified sale or exchange. Section 1062(c)(2) provides
that, in the case of a qualified sale or exchange by a partnership or
an S corporation, the section 1062 election is made at the partner or
shareholder level. In addition, section 1062(c)(2) authorizes the
Secretary to prescribe such regulations or other guidance as necessary
to carry out the purposes of section 1062(c)(2).
Section 1062(d) provides definitions of terms used in section 1062.
Section 1062(d)(1) defines the term ``applicable net tax liability'' as
the excess (if any) of (i) the taxpayer's net income tax for the
taxable year, over (ii) the taxpayer's net income tax for that taxable
year determined without regard to any gain recognized from the
qualified sale or exchange. For this purpose, the term ``net income
tax'' means the taxpayer's regular tax liability reduced by the credits
allowed under subparts A, B, and D of part IV of subchapter A of
chapter 1 of the Code. As is provided in section 1062(a), the amount of
tax on the gain from the qualified sale or exchange that may be paid in
installments by the taxpayer is limited to the applicable net tax
liability.
Section 1062(d)(2)(A) defines the term ``qualified farmland
property'' to mean real property located in the United States that the
taxpayer either has used as a farm for farming purposes or leased 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
(prior 10-year period), and that is subject to a covenant or other
legally enforceable restriction (section 1062 covenant) prohibiting the
use of that real property other than as a farm for farming purposes
during the 10-year period beginning on the date of the qualified sale
or exchange. Section 1062(d)(2)(A) further provides that real property
that is used as a farm for farming purposes or leased to a qualified
farmer for farming purposes by a partnership or an S corporation during
substantially all of the prior 10-year period will be treated as used
or leased in that manner by each person who holds a direct or indirect
interest in the partnership or S corporation.
Section 1062(d)(2)(B) defines the terms ``farm'' and ``farming
purposes'' to have the respective meanings given to those terms under
section 2032A(e) of the Code. Section 1062(d)(3) defines the term
``qualified farmer'' to mean any individual who is actively engaged in
farming within the meaning of 7 U.S.C. 1308-1(b) and (c).
Section 1062(e) provides that a taxpayer making a section 1062
election must include a copy of the section 1062 covenant with the
taxpayer's return for the taxable year of the qualified sale or
exchange.
Explanation of Provisions
I. Overview
This notice of proposed rulemaking proposes rules regarding the
election under section 1062(a) to defer payment of tax on qualified
sales or exchanges. Proposed Sec. 1.1062-1 would provide general rules
and definitions of terms used in the section 1062 regulations (that is,
Sec. Sec. 1.1062-0 through 1.1062-3). Proposed Sec. 1.1062-2 would
provide operating rules regarding the availability of the section 1062
election, the manner in which to make the section 1062 election, the
amount of, timing of, and manner in which to make the installment
payments of the applicable net tax liability, and other special rules.
Proposed Sec. 1.1062-3 would provide rules regarding events that would
result in the acceleration of unpaid installment payments.
II. General Rules and Definitions
Proposed Sec. 1.1062-2(a)(1) would provide that, in the case of
gain from a qualified sale or exchange, the taxpayer may make a section
1062 election to pay in four equal annual installments the portion of
the taxpayer's net income tax for the taxable year of the qualified
sale or exchange that is equal to the taxpayer's applicable net tax
liability. Proposed Sec. 1.1062-1(q) would define the term ``qualified
sale or exchange'' to mean a sale or exchange of qualified farmland
property to a qualified farmer.
A. Qualified Farmland Property
Proposed Sec. 1.1062-1(o)(1) would define the term ``qualified
farmland property'' as real property (as defined in proposed Sec.
1.1062-1(o)(8)) that meets the following three requirements. First, the
real property must be located in the United States. Second, the real
property must, during substantially all of the prior 10-year period (as
would be defined in proposed Sec. 1.1062-1(n)), either have been used
by the taxpayer as a farm for farming purposes or have been leased by
the taxpayer to a qualified farmer for farming purposes. Third, the
real property must be subject to a section 1062 covenant (as would be
defined in proposed Sec. 1.1062-1(t)) that is attached to the
taxpayer's return for the relevant taxable year as required under
section 1062(e). With respect to this third requirement, failure to
attach the section 1062 covenant to the return would result in the real
property not
[[Page 61369]]
being qualified farmland property, which would mean that the sale or
exchange of that property would not qualify for the section 1062
election.
Proposed Sec. 1.1062-1(j) would define the term ``farm'' to mean a
farm as defined in section 2032A(e)(4), and proposed Sec. 1.1062-1(k)
would define the term ``farming purposes'' to mean farming purposes as
defined in section 2032A(e)(5). Finally, proposed Sec. 1.1062-1(r)
would define the term ``relevant taxable year'' of the taxpayer to mean
the taxable year of the qualified sale or exchange.
1. Certain Periods of Non-Use Disregarded
Proposed Sec. 1.1062-1(o)(2) would clarify that certain periods of
non-use during a prior 10-year period are disregarded for purposes of
determining whether real property may be considered qualified farmland
property. Under the proposed rule, real property would not fail to be
considered as used by the taxpayer as a farm for farming purposes or
leased by the taxpayer to a qualified farmer for farming purposes if
all necessary functions, such as land management activities (for
example, protecting the soil from erosion), are performed to maintain
the real property for farming purposes during periods in which one or
more of the following conditions is met: the real property is taken out
of production pursuant to a Federal, State, Tribal, or local government
program; the real property is taken out of production pursuant to
recognized good farming practices (for example, laying fallow or
conditioning the soil); or the real property is taken out of production
due to unforeseen events caused by factors outside the taxpayer's
control.
2. Certain Acquisitions of Qualified Farmland Property During the Prior
10-Year Period
Proposed Sec. 1.1062-1(o)(3) would address limited cases in which
real property acquired by the taxpayer during the prior 10-year period
may be considered to be used or leased by the taxpayer during the prior
10-year period. Under proposed Sec. 1.1062-1(o)(3)(i), if the taxpayer
acquired the real property during the prior 10-year period in a
transaction in which the taxpayer's holding period for the real
property is determined under section 1223(1) of the Code (for example,
in an exchange under section 1031 of the Code), the taxpayer may
include the period during the prior 10-year period for which the
taxpayer used the real property exchanged for the acquired real
property as a farm for farming purposes, or leased the real property
exchanged for the acquired real property to a qualified farmer for
farming purposes. In addition, under proposed Sec. 1.1062-1(o)(3)(ii),
if the taxpayer acquired the real property during the prior 10-year
period in a transaction in which the taxpayer's holding period for the
real property is determined under section 1223(2) (for example, in a
reorganization described in section 368(a) of the Code), the taxpayer
may include the period during the prior 10-year period for which the
other person referenced in section 1223(2) used the real property
acquired as a farm for farming purposes, or leased the real property
acquired to a qualified farmer for farming purposes. Finally, proposed
Sec. 1.1062-1(o)(3)(iii) would provide that if the taxpayer acquired
the real property during the prior 10-year period from a decedent by
reason of that individual's death, the taxpayer may include the period
during the prior 10-year period for which the decedent used the real
property acquired as a farm for farming purposes, or leased the real
property acquired to a qualified farmer for farming purposes.
3. Real Property Partially Used for Farming Purposes; Residential Real
Property; Portion of Real Property Subject to Covenant Attached to
Return
Proposed Sec. 1.1062-1(o)(4) would clarify that residential
buildings and related improvements (as described in section
2032A(e)(3), substituting the requirements of section 1062(d) for the
requirements under section 2032A(b)(1)(C)) are considered to be used or
leased by the taxpayer for farming purposes. Proposed Sec. 1.1062-
1(o)(5) would clarify that if only a portion of the real property is
used or leased for farming purposes, only that portion of the real
property is considered to be qualified farmland property. Similarly,
proposed Sec. 1.1062-1(o)(6) would clarify that, if only a portion of
the real property is subject to a section 1062 covenant that is
attached to the return for the relevant taxable year, only that portion
of the real property is considered to be qualified farmland property.
4. Real Property Used or Leased by a Pass-Through Entity
Proposed Sec. 1.1062-1(o)(7)(i) would clarify that real property
used or leased by a pass-through entity in a manner described in
proposed Sec. 1.1062-1(o)(1)(i) during any period is considered used
or leased in such manner by each person who holds a direct or indirect
beneficial or equity interest in that pass-through entity during such
period. A person who holds a direct or indirect beneficial or equity
interest in the pass-through entity for only a portion of such period
is considered to use or lease the property in a manner described in
proposed Sec. 1.1062-1(o)(1)(i) only during such portion of the
period. See part III.A.2 of this Explanation of Provisions for the
proposed definition of ``pass-through entity.'' Proposed Sec. 1.1062-
1(o)(7)(ii) would further provide that, in the case of a sale or
exchange of real property by a pass-through entity, the determination
of whether the real property is qualified farmland property must be
made separately by each person who holds a direct or indirect
beneficial or equity interest in that pass-through entity.
5. Section 1062 Covenant
Proposed Sec. 1.1062-1(t) would define a ``section 1062 covenant''
to mean a covenant or other legally enforceable restriction with
respect to real property that meets five requirements. First, the
section 1062 covenant must prohibit using the real property as anything
other than a farm for farming purposes for the 10-year period following
the date of the sale or exchange. Second, the section 1062 covenant
must be executed prior to or contemporaneously with the closing of the
sale or exchange. Third, the section 1062 covenant must be recorded in
the land records office 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. Fourth, the section 1062 covenant must
be enforceable against the buyer and any future owners of the real
property prior to or beginning with the date of the sale or exchange.
Finally, the section 1062 covenant must be enforceable against the
buyer and any future owners of the real property, that is, the covenant
must ``run with the land,'' for a period of at least 10 years following
the date of the sale or exchange. The term ``section 1062 covenant''
would include an easement or other interest in real property that,
under applicable law, has attributes similar to a covenant (for
example, an equitable servitude).
B. Qualified Farmer
Proposed Sec. 1.1062-1(p)(1) would define a ``qualified farmer''
to mean an individual who is actively engaged in farming within the
meaning of 7 U.S.C. 1308-1(b) and (c). See, for example, 7 U.S.C. 1308-
1(b)(2)(A) (providing a general rule regarding when a person is
considered to be actively engaged in farming). However, proposed Sec.
1.1062-1(p)(2) would provide that a buyer is not treated as a qualified
farmer if, pursuant to a plan or an arrangement between the
[[Page 61370]]
seller, buyer, and a third party existing at the time of a sale or
exchange, the qualified farmland property subsequently is transferred
to a person who is neither a related person within the meaning of
section 267(b) or section 707(b)(1) of the Code with respect to the
individual, nor a qualified farmer.
III. Section 1062 Election
A. Eligibility To Make Election
1. In General
As described in part II of this Explanation of Provisions, proposed
Sec. 1.1062-2(a)(1) would provide that, in the case of gain from a
qualified sale or exchange, the taxpayer may make a section 1062
election to pay in four equal annual installments the portion of the
taxpayer's net income tax for the taxable year of the qualified sale or
exchange that is equal to the taxpayer's applicable net tax liability.
Proposed Sec. 1.1062-2(a)(2)(i)(A) thus would provide that only a
person with an applicable net tax liability may elect to make a section
1062 election. Proposed Sec. 1.1062-2(a)(2)(i)(B) further would
provide that, absent an exception, a section 1062 election may be made
only by a taxpayer with respect to whom none of the acceleration events
described in proposed Sec. 1.10623(b)(1) have occurred after the
qualified sale or exchange but before the election is made.
2. Pass-Through Entities
a. Partnerships and S Corporations
As noted in the Background section of this preamble, section
1062(c)(2) provides that, in the case of a qualified sale or exchange
by a partnership or an S corporation, the section 1062 election is made
at the partner or shareholder level and authorizes the Secretary to
issue regulations or other guidance as necessary to carry out the
purposes of section 1062(c)(2).
Proposed Sec. 1.1062-1(m) would define the term ``pass-through
entity'' as a partnership, an S corporation, or any other person other
than a C corporation if the person's gain from a qualified sale or
exchange may be included in the income of one or more direct or
indirect owners or beneficiaries of the person. This term would not
include a real estate investment trust (as defined in section 856 of
the Code), a regulated investment company (as defined in section 851 of
the Code), or a bankruptcy estate under section 1398 of the Code.
Proposed Sec. 1.1062-2(a)(2)(ii) would provide, in part, that a
partner or an S corporation shareholder may make a section 1062
election with respect to that partner's or shareholder's applicable net
tax liability arising from a qualified sale or exchange by a pass-
through entity. This rule would apply even if there were several tiers
of pass-through entities between the pass-through entity that engaged
in the qualified sale or exchange and the taxpayer with the applicable
net tax liability.
b. Trusts and Decedent's Estates
In certain cases, a trust or a decedent's estate may pass through
some or all of its income, including gain from a qualified sale or
exchange, to one or more beneficiaries. See, for example, sections 661
through 663 of the Code. In that case, the applicable net tax liability
will be borne, in full or in part, by the beneficiaries rather than the
trust or the decedent's estate. Consistent with the rules for
partnerships and S corporations, the definition of ``pass-through
entity'' in proposed Sec. 1.1062-1(m) would include a trust or a
decedent's estate because a trust or a decedent's estate may pass
through to one or more beneficiaries gain from a qualified sale or
exchange. In that event, under proposed Sec. 1.1062-2(a)(2)(ii), the
beneficiary of the trust or decedent's estate would be permitted to
make a section 1062 election with respect to the beneficiary's
applicable net tax liability arising from a qualified sale or exchange
by a pass-through entity.
c. Disregarded Entities and Grantor Trusts
Under existing rules (see, for example, Sec. 301.7701-3(b)), an
entity may be disregarded as separate from its owner for Federal income
tax purposes. Accordingly, for Federal income tax purposes (including
for purposes of section 1062), activities of a disregarded entity are
treated as the activities of the owner. Additionally, a grantor or
other person treated as owning any portion of a trust under sections
671 through 679 of the Code (grantor trust) is treated as the owner of
that portion of the trust property for Federal income tax purposes.
See, for example, Revenue Ruling 85-13 (1985-1 C.B. 184). In the case
of a qualified sale or exchange by a disregarded entity or a grantor
trust, the qualified sale or exchange would be considered to have been
made under existing rules by the owner of the disregarded entity or the
grantor, respectively. Therefore, a disregarded entity or a grantor
trust would not be a ``pass-through entity'' under proposed Sec.
1.10621(m).
d. Pass-Through Entities Subject To Tax at the Entity Level
In certain cases, a trust, a decedent's estate, or an S corporation
may be subject to Federal income tax at the entity level, including on
gain from a qualified sale or exchange. See, for example, sections 641
and 1374 of the Code. To address these situations, the definition of a
``pass-through entity'' in proposed Sec. 1.1062-1(m) would provide
that an entity other than a C corporation may be a pass-through entity
even if it is subject to an entity-level tax with respect to a
qualified sale or exchange, if any gain from the qualified sale or
exchange may be included in the income of one or more direct or
indirect owners or beneficiaries. For example, if a trust is subject to
Federal income tax on a portion of its gain from a qualified sale or
exchange and its beneficiaries are subject to tax on the remaining
portion, the trust is treated as a pass-through entity.
Proposed Sec. 1.1062-2(a)(2)(ii) would further provide that a
pass-through entity may make a section 1062 election with respect to an
entity-level applicable net tax liability. Thus, a trust with an
entity-level tax liability from a qualified sale or exchange, or an S
corporation subject to tax under section 1374 with respect to a
qualified sale or exchange, may make a section 1062 election.
Additionally, proposed Sec. 1.1062-2(a)(2)(ii) would provide that
a section 1062 election by a pass-through entity is made solely with
respect to its own applicable net tax liability and is independent
from, and has no effect on, a section 1062 election by an owner or
beneficiary of the pass-through entity with respect to the owner's or
beneficiary's applicable net tax liability, and vice versa. Thus, a
pass-through entity cannot make a section 1062 election on behalf of an
owner or beneficiary, and vice versa. Rather, both the passthrough
entity and each owner or beneficiary may make the election under
section 1062 with regard to their respective shares of that gain.
3. Consolidated Group
Proposed Sec. 1.1062-2(a)(2)(iii) would provide that, if a
``member'' of a ``consolidated group'' (within the meaning of Sec.
1.1502-1(b) and (h), respectively) recognizes gain from a qualified
sale or exchange, the consolidated group is treated as the taxpayer.
4. Election Unavailable Due to Acceleration Event
Proposed Sec. 1.1062-2(a)(2)(i)(B) generally would not allow a
taxpayer to
[[Page 61371]]
make a section 1062 election if, with respect to the taxpayer, any
acceleration event, as described in proposed Sec. 1.1062-3(b)(1), has
occurred after the qualified sale or exchange but before the election
is due. See part IV.A of this Explanation of Provisions for a
discussion of acceleration events. However, proposed Sec. 1.1062-
2(a)(2)(iv) would permit such a taxpayer to make the section 1062
election after the occurrence of an acceleration event if the election
is made in accordance with proposed Sec. 1.1062-2 and either the
acceleration event is the death of the taxpayer, or the eligible
section 1062 transferee exception applies. See part IV.B of this
Explanation of Provisions.
B. Time and Manner of Making Election
1. In General
Proposed Sec. 1.1062-2(b)(1) would require that, in order to make
a section 1062 election, a taxpayer must complete and file with its
return a Form 1062, Deferral of Tax on Gain from the Sale or Exchange
of Qualified Farmland Property to Qualified Farmers, and a Schedule A
(Form 1062), Section 1062 Gain From the Sale or Exchange of Qualified
Farmland Property to a Qualified Farmer, or in any other manner
prescribed in guidance published in the Internal Revenue Bulletin or in
forms and instructions.
2. Pass-Through Entities
To ensure that a partner, a shareholder, a beneficiary, or any
other owner of a pass-through entity has the information necessary to
make a section 1062 election with respect to its applicable net tax
liability arising from a qualified sale or exchange by the pass-through
entity, proposed Sec. 1.1062-2(b)(2)(i)(A) and (B) would require the
pass-through entity to complete and file a Schedule A (Form 1062) in
accordance with its instructions (that is, the entity files only the
Schedule A (Form 1062), but not the Form 1062 itself), and to provide a
copy of its completed Schedule A (Form 1062) and the section 1062
covenant to its owners or beneficiaries. If a pass-through entity
provides a copy of its Schedule A (Form 1062) and section 1062 covenant
to an owner that is itself a pass-through entity (upper-tier pass-
through entity), proposed Sec. 1.1062-2(b)(2)(ii) would require the
upper-tier pass-through entity to forward a copy of the Schedule A
(Form 1062) and the section 1062 covenant to its owners, and so on
through any additional tiers.
Proposed Sec. 1.1062-2(b)(2)(iii) would require a pass-through
entity to identify and report on the Schedule K-1 issued to its owners
or beneficiaries each owner's or beneficiary's allocable share of the
gain attributable to the qualified sale or exchange and such other
information as may be required by the prescribed forms and the
accompanying instructions. Proposed Sec. 1.1062-2(b)(2)(iv) would
provide that, if a pass-through entity fails to comply with the
requirements of proposed Sec. 1.10622(b)(2)(i) through (iii), its
owners would be ineligible to make the section 1062 election with
respect to any gain allocated by the pass-through entity. Proposed
Sec. 1.1062-2(b)(2)(v) would provide that a pass-through entity does
not complete or file Form 1062 itself unless the pass-through entity
has an entity-level applicable net tax liability and wishes to make a
section 1062 election with respect to that tax liability. Lastly,
proposed Sec. 1.1062-2(b)(2)(vi) would provide that, in the case of a
taxpayer who is a partner, a shareholder, a beneficiary, or any other
owner of a pass-through entity that satisfies the requirements in Sec.
1.10622(b)(2)(i) through (iii), the taxpayer makes the section 1062
election by completing and filing Form 1062 and Schedule A (Form 1062)
with its return for the relevant taxable year.
3. Consolidated Groups
With respect to a consolidated group, proposed Sec. 1.1062-
2(a)(2)(iii) would provide that the agent for the group (within the
meaning of Sec. 1.1502-77) must make the section 1062 election.
4. Revocation
Proposed Sec. 1.1062-2(b)(3) would provide that, once made, a
section 1062 election may be revoked only by paying the full amount of
the remaining unpaid applicable net tax liability.
C. Installment Payments
1. General Rules
Proposed Sec. 1.1062-2(c)(1) would provide that, if a taxpayer
makes a section 1062 election, the amount of each installment payment
is 25 percent of the taxpayer's applicable net tax liability. Proposed
Sec. 1.1062-2(c)(2) would provide that the first installment payment
is due on the due date (without regard to extensions) for filing the
return for the relevant taxable year. For example, a calendar-year
individual taxpayer making a section 1062 election for the relevant
taxable year must pay the individual's first installment payment on or
before April 15, even if that individual has an extension of time to
file the individual's return until October 15. That is, the first
installment payment may be due before the taxpayer makes the section
1062 election on the taxpayer's return for the relevant taxable year.
Similarly, each succeeding installment payment is due on the due date
(without regard to extensions) for filing the return for the taxable
year following the taxable year with respect to which the previous
installment payment was made.
However, proposed Sec. 1.1062-2(c)(3) would provide that, if a
taxpayer is a specified individual with respect to a taxable year
within which an installment payment is due, then for purposes of
determining the due date of an installment payment, the due date
(without regard to extensions) for filing the return for the taxable
year will be treated as the fifteenth day of the sixth month following
the close of the prior taxable year. Proposed Sec. 1.10621(v) would
define a ``specified individual'' as a person described in Sec.
1.6081-5(a)(5) or (6) (which means a United States citizen or resident
whose tax home and abode, in a real and substantial sense, is outside
the United States and Puerto Rico or a United States citizen or
resident in military or naval service on duty, including non-permanent
or short term duty, outside the United States and Puerto Rico) who
receives an extension of time under Sec. 1.6081-5(a) for filing a
return and paying any tax shown on the return for the taxable year.
2. Increased Installment Payments Due to Deficiency
Proposed Sec. 1.1062-2(c)(4)(i) would provide that, if a taxpayer
makes a section 1062 election, any deficiency assessed with respect to
the taxpayer's applicable net tax liability is prorated to the required
installment payments. Proposed Sec. 1.10622(c)(4)(ii)(A) would provide
that, if the due date for an installment payment to which the
deficiency is prorated has passed, then the amount of any deficiency
prorated to that installment payment must be paid on notice and demand
by the Commissioner. Proposed Sec. 1.1062-2(c)(4)(ii)(B) would provide
that, if the due date of an installment payment to which the deficiency
is prorated has not passed, then the prorated amount is due at the same
time as, and as part of, the relevant installment payment.
However, proposed Sec. 1.1062-2(c)(4)(iii) would provide that this
proration rule does not apply if a deficiency is due to negligence,
intentional disregard of rules and regulations, or fraud with intent to
evade tax. In that event, the full amount of the deficiency (including
any applicable interest and penalties) must be paid on notice and
demand by the Commissioner.
[[Page 61372]]
D. Applicable Net Tax Liability
Proposed Sec. 1.1062-2(d) would provide that a taxpayer's
applicable net tax liability equals the excess (if any) of the
taxpayer's net income tax for the relevant taxable year, over the
taxpayer's net income tax for the relevant taxable year determined
without regard to the taxpayer's gain that is recognized from the
qualified sale or exchange. Proposed Sec. 1.1062-1(l) would define the
term ``net income tax'' to mean the taxpayer's regular tax liability
(as defined in section 26(b) of the Code) reduced by the credits
allowed under subparts A, B, and D of part IV of subchapter A of
chapter 1 of the Code.
Proposed Sec. 1.1062-2(e) would provide that, for purposes of
determining the amount of gain the taxpayer recognizes from a sale or
exchange of property, only a portion of which is qualified farmland
property, the taxpayer must equitably allocate its cost or other basis
and the amount realized between the portion of the property that is
qualified farmland property and the portion that is not qualified
farmland property. See Sec. 1.61-6 of the Income Tax Regulations.
Taxpayers must maintain all documentation demonstrating how they made
their equitable allocations.
Proposed Sec. 1.1062-2(f) would provide that, in determining the
amount of the taxpayer's gain from a qualified sale or exchange, only
the gain from the qualified sale or exchange that is included in gross
income and recognized in the relevant taxable year is used. See the
example in proposed Sec. 1.1062-2(g)(5).
IV. Acceleration of Installment Payments
A. Acceleration Events
Proposed Sec. 1.1062-3(a) would provide that, if a taxpayer makes
a section 1062 election, and if an acceleration event subsequently
occurs with respect to that taxpayer, then the due date for the unpaid
portion of all remaining installment payments is accelerated unless the
eligible section 1062 transferee exception (as set forth in proposed
Sec. 1.1062-3(c)) applies.
1. Acceleration Events Applicable to All Taxpayers
Proposed Sec. 1.1062-3(b)(1)(i) would provide that the assessment
of an addition to tax for the failure to timely pay an installment
payment is an acceleration event. Proposed Sec. 1.1062-3(b)(2)(i)
would provide that, in the case of such an acceleration event, the due
date for the unpaid portion of all remaining installment payments is
the date the addition to tax is assessed on the untimely installment
payment.
2. Acceleration Events Applicable to Individual Taxpayers
Proposed Sec. 1.1062-3(b)(1)(ii) would provide in part that, in
the case of a taxpayer who is an individual, the death of that
individual is an acceleration event. Proposed Sec. 1.1062-3(b)(2)(ii)
would provide that, in the case of such an acceleration event, the due
date for the unpaid portion of all remaining installment payments is
the due date (determined without regard to any extension of time for
filing) for filing the individual's return for the taxable year in
which the individual dies.
3. Acceleration Events Applicable to Trusts and Estates
Proposed Sec. 1.1062-3(b)(1)(iii) would provide in part that, in
the case of a taxpayer that is a non-grantor trust or a decedent's
estate, a liquidation or sale, exchange, or other disposition of
substantially all the assets of the taxpayer (including in a title 11
or similar case) is an acceleration event. Proposed Sec. 1.1062-
3(b)(2)(iii) would provide that, in the case of such an acceleration
event, the due date for the unpaid portion of all remaining installment
payments is the date of the acceleration event (or, in a title 11 or
similar case, the day before the petition is filed).
As described in part III.A.2 of this Explanation of Provisions,
under proposed Sec. 1.1062-2(a)(2)(ii), a non-grantor trust or a
decedent's estate that passes through some but not all the gain with
respect to a qualified sale or exchange may make a section 1062
election with respect to its entity-level applicable net tax liability,
and a beneficiary may make a section 1062 election with respect to the
beneficiary's applicable net tax liability. In that case, the non-
grantor trust or decedent's estate is treated as a separate taxpayer
from the beneficiary for purposes of section 1062. Thus, the death of
the individual beneficiary would be an acceleration event for that
individual's remaining unpaid applicable net tax liability, but it
would not be an acceleration event for the trust's or decedent's
estate's remaining unpaid applicable net tax liability. Similarly, the
termination of the trust or decedent's estate would be an acceleration
event for the trust or decedent's estate, but it would not be an
acceleration event for any individual beneficiary with an applicable
net tax liability prior to the trust's or estate's termination.
As described in part IV.B of this Explanation of Provisions, the
eligible section 1062 transferee exception would apply in the case of
acceleration due to a trust or estate selling substantially all its
assets provided all requirements for the exception are satisfied.
4. Acceleration Events Applicable to C Corporations
Proposed Sec. 1.1062-3(b)(1)(iii) through (vi) would describe
acceleration events for a taxpayer that is a C corporation. An
acceleration event includes: a liquidation or sale, exchange, or other
disposition of substantially all the assets of the taxpayer (including
in a title 11 or similar case); a cessation of business by the
taxpayer; in the case of a C corporation that is not a member of a
consolidated group, the C corporation becoming a member of a
consolidated group; and in the case of a C corporation that is a member
of a consolidated group, the consolidated group ceasing to exist or
otherwise discontinuing to file a consolidated return.
Proposed Sec. 1.1062-1(d) would define the term ``C corporation''
to mean a C corporation as defined in section 1361(a)(2) of the Code.
This definition would include any corporation operating on a
cooperative basis. Proposed Sec. 1.1062-1(s) would define the term ``S
corporation'' to mean an S corporation as defined in section
1361(a)(1). Additionally, proposed Sec. 1.1062-3(a) would provide that
if an S corporation has an applicable net tax liability or a remaining
unpaid applicable net tax liability at the entity-level, then the S
corporation is treated as a C corporation for purposes of determining
whether there is an acceleration event. Accordingly, if an S
corporation previously was a C corporation, and the S corporation makes
an entity-level section 1062 election with respect to an applicable net
tax liability from gain on a qualified sale or exchange that is subject
to tax under section 1374, then the S corporation is treated as a C
corporation for purposes of determining whether there is an
acceleration event with respect to that applicable net tax liability.
Additionally, if a C corporation makes a section 1062 election, and if
the C corporation subsequently elects to be taxed as an S corporation
under section 1362(a) of the Code while there is a remaining unpaid
applicable net tax liability, the S corporation is treated as a C
corporation for purposes of determining whether there is an
acceleration event with respect to that remaining unpaid applicable net
tax liability.
[[Page 61373]]
Proposed Sec. 1.1062-3(b)(2)(iii) would provide that, in the case
of an acceleration event described in proposed Sec. 1.1062-
3(b)(1)(iii) through (vi), the due date for the unpaid portion of all
remaining installment payments is the date of the acceleration event
(or, in a title 11 or similar case, the day before the petition is
filed). As described in part IV.B of this Explanation of Provisions,
the eligible section 1062 transferee exception would apply in the case
of acceleration due to a C corporation selling substantially all its
assets provided all requirements for the exception are satisfied.
B. Eligible Section 1062 Transferee Exception
1. In General
Proposed Sec. 1.1062-3(c)(1) would provide that the acceleration
rules described in part IV.A of this Explanation of Provisions do 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 agreement (transfer agreement) that satisfies the requirements
set forth in proposed Sec. 1.10623(c)(2). Proposed Sec. 1.1062-1(i)
would define the term ``eligible section 1062 transferor'' to mean a C
corporation, trust, or estate that makes a section 1062 election, and
with respect to which an acceleration event has occurred. Proposed
Sec. 1.1062-1(g) would define the term ``eligible section 1062
transferee'' to mean a single (that is, one) United States person that
is not a partnership or an S corporation, a debtor in a title 11 or
similar case, or insolvent (within the meaning of section 108(d)(3) of
the Code). Section 1062 generally does not view partnerships and S
corporations as taxpayers. See section 1062(c)(2). In this regard,
since the statute treats an assumption of a section 1062 liability as
though the obligor itself (in this case, a partnership or S
corporation) incurred the liability, excluding partnerships and S
corporations from the definition of an eligible section 1062 transferee
is consistent with statute's intent--that is, partnerships and S
corporations are generally not entities eligible to incur a section
1062 liability.
2. Transfer Agreement
Proposed Sec. 1.1062-3(c)(2)(i) would require a transfer agreement
to be entered into by an eligible section 1062 transferor and an
eligible 1062 transferee by timely filing a Form 1062-T, Transfer
Agreement Under Section 1062(b)(2)(C), or in any other manner
prescribed in guidance published in the Internal Revenue Bulletin or in
forms and instructions. Proposed Sec. 1.1062-3(c)(2)(iv) would set
forth the items required to be included in the transfer agreement.
Proposed Sec. 1.1062-3(c)(2)(ii)(A) generally would require the
transfer agreement to be filed by both the eligible section 1062
transferor and the eligible section 1062 transferee on or before the
date that is 30 days after the date of the acceleration event with
respect to which the transfer agreement is entered into, with two
exceptions. First, proposed Sec. 1.1062-3(c)(2)(ii)(B) would provide
that, if an acceleration event occurs prior to the date the taxpayer
makes a section 1062 election, the transfer agreement with respect to
that acceleration event will be timely filed if the eligible section
1062 transferor files the transfer agreement simultaneously with its
section 1062 election. Second, proposed Sec. 1.1062-3(c)(2)(ii)(C)
would provide that, if an acceleration event occurs prior to the date
of publication of final regulations under section 1062 in the Federal
Register, the transfer agreement with respect to that acceleration
event will be treated as timely filed if it is filed within 30 days
after the date of publication of final regulations under section 1062
in the Federal Register.
Proposed Sec. 1.1062-3(c)(2)(iii) would require the transfer
agreement to be signed under penalties of perjury by both a person who
is authorized to sign a return on behalf of the eligible section 1062
transferor, and a person who is authorized to sign a return on behalf
of the eligible section 1062 transferee. With respect to consolidated
groups, proposed Sec. 1.1062-2(a)(2)(iii) would require the agent for
the group to enter into any transfer agreement.
3. Consent of Commissioner
Proposed Sec. 1.1062-3(c)(3)(i) would provide that, if an eligible
section 1062 transferor and an eligible section 1062 transferee file a
transfer agreement satisfying the requirements of proposed Sec.
1.1062-3(c)(2), the eligible section 1062 transferee will be considered
to have entered into an agreement with the Commissioner for purposes of
proposed Sec. 1.1062-3(c). If the Commissioner determines that
additional information (for example, additional information regarding
the ability of the eligible section 1062 transferee to fully pay the
remaining applicable net tax liability) is necessary, the eligible
section 1062 transferee would be required to provide that information
upon request.
However, proposed Sec. 1.1062-3(c)(3)(ii) would provide what could
occur if the Commissioner determines that a transfer agreement contains
a material misrepresentation or material omission, or if the eligible
section 1062 transferee does not provide any additional information
requested by the Commissioner within a time frame communicated by the
Commissioner to the eligible section 1062 transferee. The Commissioner
either may reject the transfer agreement (effective as of the date of
the related acceleration event), or determine that an acceleration
event has occurred with respect to the eligible section 1062 transferee
as of the date of the Commissioner's determination that a transfer
agreement contains a material misrepresentation or material omission
(such that any unpaid installment payments become due on that date).
4. Effect of Assumption
Proposed Sec. 1.1062-3(c)(4)(i) would provide that, if the
eligible section 1062 transferee exception applies with respect to an
acceleration event, the eligible section 1062 transferee assumes all
outstanding obligations and responsibilities of the eligible section
1062 transferor with respect to the applicable net tax liability as
though the eligible section 1062 transferee had included the gain from
the qualified sale or exchange in that transferee's income.
Accordingly, the eligible section 1062 transferee is responsible for
making payments and reporting with respect to any unpaid installment
payments of the eligible section 1062 transferor.
Proposed Sec. 1.1062-3(c)(4)(ii) would provide that, if an
acceleration event described in proposed Sec. 1.1062-3(b)(1)(iii)
through (vi) subsequently occurs with respect to an eligible section
1062 transferee, any unpaid installment payments of the eligible
section 1062 transferor that were assumed by the eligible section 1062
transferee will become due on the date provided in proposed Sec.
1.1062-3(b)(2)(iii).
Proposed Applicability Date
These regulations are proposed to apply to qualified sales and
exchanges occurring in taxable years ending after the date these final
regulations are published in the Federal Register. Taxpayers may rely
on these proposed regulations under section 1062 with respect to
qualified sales or exchanges that occur in a taxable year beginning
after July 4, 2025, and ending on or before the date these regulations
are published as final regulations in the Federal Register, provided
that the taxpayers comply with these proposed regulations in their
entirety and in a consistent manner.
[[Page 61374]]
Special Analyses
I. Regulatory Planning and Review--Economic Analysis
These proposed regulations are not subject to review under section
6(b) of Executive Order 12866 pursuant to the Memorandum of Agreement
(July 4, 2025) between the Treasury Department and the Office of
Management and Budget (OMB) regarding review of tax regulations.
II. Paperwork Reduction Act
The Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (PRA)
generally requires that a Federal agency obtain the approval of the OMB
before collecting information from the public, whether that collection
of information is mandatory, voluntary, or required to obtain or retain
a benefit. 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 OMB.
The recordkeeping requirements mentioned within these proposed
regulations are considered general tax records under section 6001 of
the Code. A taxpayer would use these records to establish its
eligibility for the section 1062 election or the eligible section 1062
transferee exception. These records are required for the IRS to
validate that taxpayers have met the regulatory requirements and are
required as proof of their qualification for the section 1062 election.
For PRA purposes, general tax records are already approved by OMB under
1545-0047 for tax-exempt organization filers, 1545-0074 for individual
filers, 1545-0092 for estate and trust filers, and 1545-0123 for
business filers. These proposed regulations are not changing this
already approved OMB collection.
The collections of information in these proposed regulations
include reporting, third-party disclosure, and recordkeeping
requirements that are necessary to ensure that taxpayers qualify for
the section 1062 election. The reporting requirements in these proposed
regulations would include providing a copy of the section 1062 covenant
found in Sec. 1.1062-1(o)(1)(ii), and listing the information required
to make a section 1062 election in Sec. 1.1062-2(b)(1). Section
1.1062-2(b)(2) also would require a pass-through entity to provide
information regarding the qualified sale or exchange to the IRS and its
owners or beneficiaries and a copy of the section 1062 covenant to its
owners or beneficiaries. The collections will be used by the IRS for
tax compliance purposes and by taxpayers to ensure they qualify for the
section 1062 election. The burden for these requirements will be
approved by OMB, in accordance with 5 CFR 1320.10, under OMB control
numbers 1545-0047 for tax-exempt organization filers, 1545-0074 for
individual filers, 1545-0092 for estate and trust filers, and 1545-0123
for business entities.
In addition, proposed Sec. 1.1062-3(c)(2) contains collection of
information and reporting requirements for an eligible section 1062
transferor and an eligible section 1062 transferee. The collections of
information in proposed Sec. 1.1062-3(c)(2)(iii) and (iv) include
reporting, third-party disclosure, and recordkeeping requirements that
are necessary to ensure that taxpayers qualify for the eligible section
1062 transferee exception set forth in proposed Sec. 1.1062-3(c).
These collections will be used by the IRS for tax compliance purposes
and by taxpayers to ensure they qualify for the eligible section 1062
transferee exception.
The IRS is soliciting feedback on the collection requirements for
the eligible section 1062 transferee exception. The IRS anticipates
that the likely respondents for the eligible section 1062 transferee
exception are C corporations, trusts, and estates.
Estimated number of respondents: 1,030.
Estimated average annual burden per respondent: 3 hours, 12
minutes.
Estimated total annual reporting burden: 3,296 hours.
The collections contained in this notice of proposed rulemaking
with respect to the eligible section 1062 transferee exception have
been submitted to the OMB for review in accordance with the PRA under
OMB Control Number 1545-NEW. Commenters are strongly encouraged to
submit public comments electronically. Written comments and
recommendations for the proposed information collection should be sent
to <a href="https://www.reginfo.gov/public/do/PRAMain">https://www.reginfo.gov/public/do/PRAMain</a>, with copies to the IRS.
Find this particular information collection by selecting ``Currently
under Review--Open for Public Comments'' then by using the search
function. Submit electronic submissions for the proposed information
collection to the IRS via email at <a href="/cdn-cgi/l/email-protection#116163703f727e7c7c747f6562517863623f767e67"><span class="__cf_email__" data-cfemail="91e1e3f0bff2fefcfcf4ffe5e2d1f8e3e2bff6fee7">[email protected]</span></a> (indicate REG-
117095-25 on the Subject line). Comments on the collection of
information should be received by November 30, 2026.
Comments are specifically requested concerning: (i) 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; (ii) the accuracy of the
estimated burden associated with the proposed collection of
information; (iii) how the quality, utility, and clarity of the
information to be collected may be enhanced; (iv) 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 (v) estimates of capital or
start-up costs and costs of operation, maintenance, and purchase of
services to provide information.
III. Regulatory Flexibility Act
It is hereby certified that these proposed regulations would not
have a significant economic impact on a substantial number of small
entities pursuant to the Regulatory Flexibility Act (5 U.S.C. chapter
6). The proposed rule would affect any entity electing to pay in
installments the tax on the gain from the sale or exchange of qualified
farmland property to an individual qualified farmer. Qualified farmland
property is defined as real property located in the United States, that
for substantially all of the prior 10-year period, has been used by the
taxpayer as a farm for farming purposes or has been leased by the
taxpayer to a qualified farmer for farming purposes and is subject to a
section 1062 covenant. This election is voluntary.
Based on 2022 U.S. Census Bureau data, the Small Business
Administration Office of Advocacy published a 2025 Small Business
Profile showing there are more than 36.2 million U.S. small businesses.
Based on filing data for the 2023 taxable year, the Treasury Department
and the IRS estimate that approximately 1.9 million small entities may
qualify to make the election under section 1062, but likely less will
be impacted because this provision applies solely to entities that sell
or exchange qualified farmland property to an individual qualified
farmer during the taxable year. Based on the current data, the proposed
regulations will not affect a substantial number of small entities.
Further, the economic impact of the proposed regulations is not likely
to be significant. Although a small business entity must complete and
file additional forms to make a section 1062 election, the estimated
time and cost burden per affected entity for completing and filing this
election is $237.40 or 8.45 hours. Furthermore, the election is
voluntary, and the small entity will economically benefit by making the
election because it may defer the payment of tax on the
[[Page 61375]]
gain from the sale or exchange of qualified farmland property over a
four-year period. Thus, the economic impact of these proposed
regulations is not likely to be significant.
Notwithstanding this certification, the Treasury Department and the
IRS welcome comments on the impact of these proposed regulations on
small entities.
IV. Submission to the Small Business Administration
Pursuant to section 7805(f) of the Code, the proposed regulations
will be submitted to the Chief Counsel for the Office of Advocacy of
the Small Business Administration for comment on their impact on small
business.
V. Unfunded Mandates Reform Act
Section 202 of the Unfunded Mandates Reform Act of 1995 requires
that agencies assess anticipated costs and benefits and take certain
other actions before issuing a final rule that includes any Federal
mandate that may result in expenditures in any one year by a State,
local, or Tribal government, in the aggregate, or by the private
sector, of $100 million in 1995 dollars, updated annually for
inflation. These proposed regulations do not include any Federal
mandate that may result in expenditures by State, local, or Tribal
governments, or by the private sector, in excess of that threshold.
VI. Executive Order 13132: Federalism
Executive Order 13132 (Federalism) prohibits an agency from
publishing any rule that has federalism implications if the rule either
imposes substantial, direct compliance costs on State and local
governments, and is not required by statute, or preempts State law,
unless the agency meets the consultation and funding requirements of
section 6 of the Executive order. These proposed regulations do not
have federalism implications, do not impose substantial direct
compliance costs on State and local governments, and do not preempt
State law within the meaning of the Executive order.
Comments and Requests for a Public Hearing
Before these proposed regulations are adopted as final regulations,
consideration will be given to any comments that are submitted timely
to the IRS as prescribed in the preamble under the ADDRESSES heading.
The Treasury Department and the IRS request comments on all aspects of
the proposed regulations. Any comments submitted will be made available
at <a href="https://www.regulations.gov">https://www.regulations.gov</a> or upon request.
A public hearing will be scheduled if requested in writing by any
person that timely submits electronic or written comments. Requests for
a public hearing also are encouraged to be made electronically. If a
public hearing is scheduled, notice of the date and time for the public
hearing will be published in the Federal Register.
Statement of Availability of IRS Documents
IRS announcements and revenue rulings cited in this preamble are
published in the Internal Revenue Bulletin and are available from the
Superintendent of Documents, U.S. Government Publishing Office,
Washington, DC 20402, or by visiting the IRS website at <a href="https://www.irs.gov">https://www.irs.gov</a>.
Drafting Information
The principal author of these proposed regulations is Chiyun Lee,
Office of Associate Chief Counsel (Income Tax and Accounting). However,
other personnel from the Treasury Department and the IRS participated
in their development.
List of Subjects in 26 CFR Part 1
Income taxes, Reporting and recordkeeping requirements.
Proposed Amendments to the Regulations
Accordingly, the Treasury Department and the IRS propose to amend
26 CFR part 1 as follows:
PART 1--INCOME TAXES
0
Paragraph 1. The authority citation for part 1 is amended by adding
entries for Sec. Sec. 1.1062-0 through 1.1062-3 in numerical order to
read in part as follows:
Authority: 26 U.S.C. 7805 * * *
* * * * *
Section 1.1062-1 also issued under 26 U.S.C. 1062.
Section 1.1062-2 also issued under 26 U.S.C. 1062(c)(2).
Section 1.1062-3 also issued under 26 U.S.C. 1502.
* * * * *
0
Par. 2. Sections 1.1062-0 through 1.1062-3 are added to read as
follows:
Sec.
* * * * *
1.1062-0 Table of contents.
1.1062-1 Section 1062 general rules and definitions.
1.1062-2 Election to pay in installments tax on the gain from
qualified sales or exchanges and other special rules.
1.1062-3 Acceleration of payments.
* * * * *
Sec. 1.1062-0 Table of contents.
This section lists the major captions contained in Sec. Sec.
1.1062-1 through 1.1062-3.
Sec. 1.1062-1 Section 1062 general rules and definitions.
(a) Scope.
(b) Acceleration event.
(c) Applicable net tax liability.
(d) C corporation.
(e) Commissioner.
(f) Consolidated group; member.
(g) Eligible section 1062 transferee.
(h) Eligible section 1062 transferee exception.
(i) Eligible section 1062 transferor.
(j) Farm.
(k) Farming purposes.
(l) Net income tax.
(m) Pass-through entity.
(n) Prior 10-year period.
(o) Qualified farmland property.
(1) In general.
(2) Certain periods of non-use disregarded.
(3) Certain acquisitions of qualified farmland property during
the prior 10-year period.
(4) Certain residential real property.
(5) Real property partially used or leased for farming purposes.
(6) Portion of real property covered by covenant.
(7) Real property used or leased by a pass-through entity.
(i) Use of qualified farmland property by a pass-through entity.
(ii) Sale or exchange by a pass-through entity.
(8) Real property.
(p) Qualified farmer.
(1) In general.
(2) Plan or arrangement.
(q) Qualified sale or exchange.
(r) Relevant taxable year.
(s) S corporation.
(t) Section 1062 covenant.
(1) In general.
(2) Other legally enforceable restrictions.
(u) Section 1062 election.
(v) Specified individual.
(w) Transfer agreement.
(x) Examples.
(1) Example 1: Certain periods of non-use disregarded.
(2) Example 2: Certain acquisitions of qualified farmland
property during the prior 10-year period.
(3) Example 3: Qualified farmer's acquisition through a
disregarded entity.
(4) Example 4: Qualified farmer's subsequent contribution to an
S corporation.
(5) Example 5: Failure to attach the section 1062 covenant to
the return for the relevant taxable year.
(y) Applicability date.
Sec. 1.1062-2 Election to pay in installments tax on the gain from
qualified sales or exchanges and other special rules.
(a) Section 1062 election.
(1) In general.
(2) Eligible taxpayers.
(i) In general.
(ii) Section 1062 election by a pass-through entity.
[[Page 61376]]
(iii) Section 1062 election by a consolidated group.
(iv) Exception in the case of certain acceleration events.
(b) Time and manner of making a section 1062 election.
(1) In general.
(2) Pass-through entities.
(3) Revocation of election.
(c) Installment payments.
(1) In general.
(2) Due date of installment payments.
(3) Extension for specified individuals.
(4) Increased installment payments due to a deficiency.
(i) In general.
(ii) Timing.
(iii) Exception for negligence, intentional disregard, or fraud.
(d) Applicable net tax liability.
(e) Allocation of basis and amount realized from a sale or
exchange of property only a portion of which is qualified farmland
property
(f) Coordination with other provisions.
(g) Examples.
(1) Example 1: Pass-through entity.
(2) Example 2: Tiered pass-through entities.
(3) Example 3: Pass-through entity subject to entity-level tax.
(4) Example 4: Death of the individual after the qualified sale
or exchange but before the section 1062 election is made
(5) Example 5: Coordination with section 453.
(6) Example 6: Coordination with section 121.
(h) Applicability date.
Sec. 1.1062-3 Acceleration of payments.
(a) Acceleration of remaining installment payments.
(b) Acceleration events.
(1) In general.
(2) Due date of remaining installment payments.
(3) Consolidated groups.
(c) Eligible section 1062 transferee exception.
(1) In general.
(2) Transfer agreement.
(i) Manner of making transfer agreement.
(ii) Timing.
(iii) Signature requirement.
(iv) Terms of transfer agreement.
(3) Consent of Commissioner.
(i) In general.
(ii) Material misrepresentations and omissions.
(4) Effect of assumption.
(i) In general.
(ii) Eligible section 1062 transferee.
(d) Examples.
(1) Example 1: Acceleration event--C corporation.
(2) Example 2: Acceleration event--S corporation.
(3) Example 3: Acceleration event--consolidated group.
(4) Example 4: Acceleration event--grantor trust.
(5) Example 5: Acceleration event--non-grantor trust.
(e) Applicability date.
Sec. 1.1062-1 Section 1062 general rules and definitions.
(a) Scope. Section 1062(a) of the Internal Revenue Code (Code)
allows a taxpayer that recognizes gain from the sale or exchange of
qualified farmland property to a qualified farmer to make a section
1062 election to pay in four equal annual installments the portion of
the taxpayer's net income tax for the taxable year of the qualified
sale or exchange that is equal to the taxpayer's applicable net tax
liability. Paragraphs (b) through (w) of this section set forth general
rules and define terms for purposes of this section and Sec. Sec.
1.1062-2 and 1.1062-3, and paragraph (x) of this section contains
examples. Section 1.1062-2 provides rules regarding eligibility for and
making a section 1062 election, paying the installments, and other
special rules. Section 1.1062-3 provides rules regarding events that
may result in the acceleration of the unpaid portion of all remaining
installment payments.
(b) Acceleration event. The term acceleration event means an event
described in Sec. 1.1062-3(b)(1).
(c) Applicable net tax liability. The term applicable net tax
liability means an amount described in Sec. 1.1062-2(d).
(d) C corporation. The term C corporation means a C corporation as
defined in section 1361(a)(2) of the Code.
(e) Commissioner. The term Commissioner means the Commissioner of
Internal Revenue or the Commissioner's delegate.
(f) Consolidated group; member. The term consolidated group means a
consolidated group as defined in Sec. 1.1502-1(h). The term member
means a member (within the meaning of Sec. 1.1502-1(b)) of a
consolidated group.
(g) Eligible section 1062 transferee. The term eligible section
1062 transferee means a single United States person, as defined in
section 7701(a)(30) of the Code, that is not--
(1) A partnership or an S corporation;
(2) A debtor in a case under title 11 of the United States Code or
a similar case (title 11 or similar case); or
(3) Insolvent (within the meaning of section 108(d)(3) of the
Code).
(h) Eligible section 1062 transferee exception. The term eligible
section 1062 transferee exception means the exception described in
Sec. 1.1062-3(c)(1).
(i) Eligible section 1062 transferor. The term eligible section
1062 transferor means a C corporation, trust, or estate--
(1) That makes a section 1062 election; and
(2) With respect to which an acceleration event has occurred.
(j) Farm. The term farm means a farm as defined in section
2032A(e)(4) of the Code.
(k) Farming purposes. The term farming purposes means farming
purposes as defined in section 2032A(e)(5).
(l) Net income tax. The term net income tax means the taxpayer's
regular tax liability (as defined in section 26(b) of the Code) reduced
by the credits allowed under subparts A, B, and D of part IV of
subchapter A of chapter 1 of the Code.
(m) Pass-through entity. The term pass-through entity means a
partnership, an S corporation, or any other person other than a C
corporation if any of the person's gain from a qualified sale or
exchange may be included in the income of one or more direct or
indirect owners or beneficiaries of the person. If an entity other than
a C corporation is subject to Federal income tax on a portion of the
gain from a qualified sale or exchange and its owners or beneficiaries
are subject to tax on the remaining portion, the entity is treated as a
pass-through entity, and both the person and each owner or beneficiary
of the person may make the election under section 1062 with regard to
their respective shares of that gain.
(n) Prior 10-year period. The term prior 10-year period means the
10-year period ending on the date of the qualified sale or exchange.
(o) Qualified farmland property--(1) In general. The term qualified
farmland property means real property located in the United States, as
defined in section 7701(a)(9), that--
(i) During substantially all of the prior 10-year period--
(A) Has been used by the taxpayer as a farm for farming purposes;
or
(B) Has been leased by the taxpayer to a qualified farmer for
farming purposes; and
(ii) Is subject to a section 1062 covenant that is attached to the
taxpayer's Federal income tax return (return) for the relevant taxable
year.
(2) Certain periods of non-use disregarded. If all necessary
functions, such as land management activities (for example, protecting
the soil from erosion), continue to be performed to maintain real
property for farming purposes, real property will not fail to be
considered as real property described in paragraph (o)(1)(i)(A) or (B)
of this section, as applicable, during periods in which--
(i) The real property is taken out of production pursuant to a
Federal, State, Tribal, or local government program;
[[Page 61377]]
(ii) The real property is taken out of production pursuant to
recognized good farming practices (for example, laying fallow or
conditioning the soil); or
(iii) The real property is taken out of production due to
unforeseen events caused by factors outside the taxpayer's control,
such as natural disasters.
(3) Certain acquisitions of qualified farmland property during the
prior 10-year period. If the taxpayer acquired the real property during
the prior 10-year period under circumstances described in any of
paragraphs (o)(3)(i) through (iii) of this section, the taxpayer may
count any period described in paragraphs (o)(3)(i) through (iii) of
this section, as applicable, toward the taxpayer's satisfaction of the
requirement described in paragraph (o)(1)(i) of this section.
(i) If the taxpayer acquired the real property in a transaction in
which the taxpayer's holding period for the real property is determined
under section 1223(1) of the Code, the taxpayer may include the period
during the prior 10-year period for which the taxpayer--
(A) Used the real property exchanged as a farm for farming
purposes; or
(B) Leased the real property exchanged to a qualified farmer for
farming purposes.
(ii) If the taxpayer acquired the real property in a transaction in
which the taxpayer's holding period for the real property is determined
under section 1223(2), the taxpayer may include the period during the
prior 10-year period in which the other person--
(A) Used the real property as a farm for farming purposes; or
(B) Leased the real property to a qualified farmer for farming
purposes.
(iii) If the taxpayer acquired the real property by reason of a
decedent's death, the taxpayer may include the period during the prior
10-year period in which the decedent--
(A) Used the real property as a farm for farming purposes; or
(B) Leased the real property to a qualified farmer for farming
purposes.
(4) Certain residential real property. For purposes of this
paragraph (o), residential buildings and related improvements (as
described in section 2032A(e)(3), substituting the requirements of
section 1062(d) for the requirements under section 2032A(b)(1)(C)) are
considered to be used or leased by the taxpayer for farming purposes.
(5) Real property partially used or leased for farming purposes.
For purposes of this paragraph (o), if only a portion of the real
property is used or leased for farming purposes, only that portion of
the real property is considered to be qualified farmland property.
(6) Portion of real property covered by covenant. For purposes of
this paragraph (o), if only a portion of the real property is subject
to a section 1062 covenant, only the portion of the real property that
is subject to the section 1062 covenant that is attached to the
taxpayer's return for the relevant taxable year is considered to be
qualified farmland property.
(7) Real property used or leased by a pass-through entity--(i) Use
of qualified farmland property by a pass-through entity. For purposes
of this paragraph (o), real property used or leased by a pass-through
entity in a manner described in proposed paragraph (o)(1)(i) of this
section during any period is considered used or leased in such manner
by each person who holds a direct or indirect beneficial or equity
interest in that pass-through entity during such period. A person who
holds a direct or indirect beneficial or equity interest in the pass-
through entity for only a portion of such period is considered to use
or lease the property in a manner described in proposed paragraph
(o)(1)(i) only during such portion of the period.
(ii) Sale or exchange by a pass-through entity. In the case of a
sale or exchange of real property by a pass-through entity, the
determination of whether the real property is qualified farmland
property must be made separately by each person who holds a direct or
indirect beneficial or equity interest in that pass-through entity.
(8) Real property. For purposes of this section, the term real
property has the meaning provided in Sec. 1.1031(a)-3(a).
(p) Qualified farmer--(1) In general. A qualified farmer is an
individual who is actively engaged in farming within the meaning of 7
U.S.C. 1308-1(b) and (c).
(2) Plan or arrangement. The term qualified farmer does not include
an individual if, pursuant to a plan or an arrangement between the
seller, buyer, and a third party existing at the time of a sale or
exchange of qualified farmland property to that individual, the
qualified farmland property subsequently is transferred to a person who
is neither--
(i) A related person within the meaning of section 267(b) or
section 707(b)(1) of the Code with respect to that individual; nor
(ii) A qualified farmer.
(q) Qualified sale or exchange. The term qualified sale or exchange
means a sale or exchange of qualified farmland property to a qualified
farmer.
(r) Relevant taxable year. The term relevant taxable year means the
taxable year of the qualified sale or exchange.
(s) S corporation. The term S corporation means an S corporation as
defined in section 1361(a)(1) of the Code.
(t) Section 1062 covenant--(1) In general. With respect to real
property, the term section 1062 covenant means a covenant or other
legally enforceable restriction that--
(i) Prohibits the use of the real property other than as a farm for
farming purposes for any period before the date that is 10 years after
the date of the sale or exchange of the real property;
(ii) Is executed prior to or contemporaneously with the closing of
the sale or exchange;
(iii) Is recorded in the land records office 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;
(iv) Is enforceable against the buyer and all future owners of the
real property prior to or beginning with the date of the sale or
exchange of the real property; and
(v) Does not cease to be enforceable against the buyer and all
future owners of the real property on a date earlier than the date that
is 10 years after the date of the sale or exchange.
(2) Other legally enforceable restrictions. The term section 1062
covenant includes an easement or other interest in real property that,
under applicable law, has attributes similar to a covenant (for
example, an equitable servitude).
(u) Section 1062 election. The term section 1062 election means the
election described in Sec. 1.1062-2(a).
(v) Specified individual. The term specified individual means a
person described in Sec. 1.6081-5(a)(5) or (6) who receives an
extension of time under Sec. 1.60815(a) for filing a return and for
paying any tax shown on the return for the taxable year.
(w) Transfer agreement. The term transfer agreement has the meaning
provided in Sec. 1.1062-3(c)(2).
(x) Examples. The following examples illustrate the application of
the rules of this section.
(1) Example 1: Certain periods of non-use disregarded--(i) Facts.
Individual J has gain from the sale of real property that is subject to
a section 1062 covenant, which J attached to J's return for the
relevant taxable year. During the prior 10-year period, J used the real
property to grow crops during the spring and summer growing seasons.
During the nonproducing seasons, J performs all necessary functions to
maintain the real property for farming purposes. In addition, during
that prior 10-year
[[Page 61378]]
period, J left the real property fallow every third year as part of J's
crop rotation strategy to restore soil fertility, conserve moisture,
and prevent pests and diseases. During those periods in which the real
property has been left fallow, J performs all necessary functions to
maintain the real property for farming purposes.
(ii) Analysis. To determine whether the real property has been used
as a farm for farming purposes during substantially all of the prior
10-year period for purposes of paragraph (o)(1)(i) of this section, J
may include both the nonproducing seasons and the fallow periods
because J has performed all necessary functions to maintain the real
property for farming purposes. Because the real property is subject to
a section 1062 covenant (which J attaches to J's return for the
relevant taxable year) and has been used as a farm for farming purposes
during substantially all of the prior 10-year period, pursuant to
paragraph (o)(2)(ii) of this section, the real property qualifies as
qualified farmland property.
(2) Example 2: Certain acquisitions of qualified farmland property
during the prior 10-year period--(i) Facts. Individual K uses Property
A as a farm for farming purposes for six years. K exchanges Property A
for Property B in an exchange qualifying under section 1031 of the
Code. K uses Property B as a farm for farming purposes for an
additional four years before selling Property B to a qualified farmer
at a gain. Property B is subject to a section 1062 covenant (which K
attaches to K's return for the relevant taxable year).
(ii) Analysis. To determine whether Property B has been used as a
farm for farming purposes during substantially all of the prior 10-year
period for purposes of paragraph (o)(1)(i) of this section, K may
include the period during which K used Property A as a farm for farming
purposes. Because Property B is subject to a section 1062 covenant
(which K attaches to K's return for the relevant taxable year) and has
been used as a farm for farming purposes during substantially all of
the prior 10-year period, pursuant to paragraph (o)(3)(i) of this
section, Property B qualifies as qualified farmland property.
(3) Example 3: Qualified farmer's acquisition through a disregarded
entity--(i) Facts. Individual N is a qualified farmer who operates his
farming business through Y, a limited liability company that is
disregarded as an entity separate from N for Federal income tax
purposes. Y enters into an agreement to purchase a qualified farmland
property (Property C), from Individual O. Y will continue to use
Property C for farming purposes after the sale.
(ii) Analysis. Because Y is disregarded as an entity separate from
N for Federal income tax purposes, Y's purchase of Property C is
treated as a purchase by N, who is a qualified farmer. Accordingly, if
O otherwise satisfies the requirements to make a section 1062 election,
O may make a section 1062 election.
(4) Example 4: Qualified farmer's subsequent contribution to an S
corporation--(i) Facts. The facts are the same as in paragraph
(x)(3)(i) of this section (Example 3), except that N enters into an
agreement to purchase Property C directly from O, and N plans on
contributing Property C to P (an S corporation wholly owned by N).
(ii) Analysis. N had a plan to contribute Property C to N's wholly
owned S corporation P at the time N purchased Property C from O.
However, because N will transfer Property C to a related person, the
acquisition by N is respected as an acquisition by a qualified farmer
pursuant to paragraph (p) of this section.
(5) Example 5: Failure to attach the section 1062 covenant to the
return for the relevant taxable year--(i) Facts. Individual P has owned
Property Q, which is real property as defined in paragraph (o)(8) of
this section that is located in the United States, and used as a farm
for farming purposes for the last eleven years. In year twelve, P sells
Property Q, which is subject to a section 1062 covenant, to a qualified
farmer. P makes a section 1062 election pursuant to Sec. 1.1062-2(b).
However, P fails to attach a copy of the section 1062 covenant to P's
return for the relevant taxable year.
(ii) Analysis. Paragraph (o)(1)(ii) of this section requires a
taxpayer to attach a copy of the section 1062 covenant to the
taxpayer's return for the relevant taxable year in order for their real
property to constitute qualified farmland property. Because P did not
attach a section 1062 covenant to P's return for the relevant taxable
year, Property Q is not qualified farmland property.
(y) Applicability date. This section applies to qualified sales or
exchanges occurring in taxable years ending after [date of publication
of final regulations in the Federal Register].
Sec. 1.1062-2 Election to pay in installments tax on the gain from
qualified sales or exchanges and other special rules.
(a) Section 1062 election--(1) In general. In the case of gain from
a qualified sale or exchange, a taxpayer may make an election in
accordance with the rules of this section to pay in four equal annual
installments the portion of the net income tax for the taxable year of
the qualified sale or exchange that is equal to the taxpayer's
applicable net tax liability.
(2) Eligible taxpayers--(i) In general. Except as provided in
paragraph (a)(2)(iv) of this section, a section 1062 election may be
made only by a taxpayer--
(A) With an applicable net tax liability; and
(B) With respect to whom none of the acceleration events described
in Sec. 1.10623(b)(1) have occurred after the qualified sale or
exchange but before the election is made.
(ii) Section 1062 election by a pass-through entity. In the case of
a qualified sale or exchange made by a pass-through entity, a partner,
shareholder, beneficiary, or other owner of the pass-through entity may
make a section 1062 election with respect to the owner's or the
beneficiary's applicable net tax liability arising from the qualified
sale or exchange. If a pass-through entity has an entity-level
applicable net tax liability, the pass-through entity may make a
section 1062 election with respect to that tax liability. A section
1062 election by a pass-through entity is made solely with respect to
its own applicable net tax liability and is independent from, and has
no effect on, a section 1062 election by an owner or a beneficiary of
the pass-through entity with respect to that owner's or beneficiary's
applicable net tax liability, and vice versa.
(iii) Section 1062 election by a consolidated group. If a member of
a consolidated group recognizes gain from a qualified sale or exchange,
the consolidated group is treated as the taxpayer for purposes of this
section and Sec. 1.1062-3. Only the agent for the group (within the
meaning of Sec. 1.150277) may make a section 1062 election under this
section and enter into any transfer agreement under Sec.
1.10623(c)(2).
(iv) Exception in the case of certain acceleration events. A
taxpayer that would be eligible to make a section 1062 election but for
the occurrence of an acceleration event described in Sec. 1.1062-
3(b)(1) that occurs after the sale but before the election is to be
made may make the section 1062 election in accordance with this section
despite the intervening acceleration event if either--
(A) The acceleration event is the death of the individual as
described in Sec. 1.10623(b)(1)(ii); or
[[Page 61379]]
(B) The eligible section 1062 transferee exception in Sec. 1.1062-
3(c)(1) applies.
(b) Time and manner of making a section 1062 election--(1) In
general. A section 1062 election must be made no later than the due
date (including extensions, if any) for filing the taxpayer's return
for the relevant taxable year. An eligible taxpayer makes the section
1062 election for the relevant taxable year--
(i) By completing and filing with the taxpayer's return a Form
1062, Deferral of Tax on Gain from the Sale or Exchange of Qualified
Farmland Property to Qualified Farmers (or successor) and a Schedule A
(Form 1062), Section 1062 Gain From the Sale or Exchange of Qualified
Farmland Property to a Qualified Farmer (or successor); or
(ii) In any other manner prescribed in guidance published in the
Internal Revenue Bulletin or in forms and instructions (see Sec. Sec.
601.601(d)(2) and 601.602 of this chapter).
(2) Pass-through entities. In the case of a qualified sale or
exchange made by a pass-through entity, the rules of this paragraph
(b)(2) apply:
(i) In order for a partner, shareholder, beneficiary, or other
owner of a pass-through entity to make a section 1062 election with
respect to its applicable net tax liability arising from a qualified
sale or exchange by a pass-through entity, the pass-through entity--
(A) Must complete and file Schedule A (Form 1062) (or successor) in
accordance with its instructions (that is, the entity files only the
Schedule A (Form 1062), but not the Form 1062 itself); and
(B) Must provide a copy of its completed Schedule A (Form 1062) (or
successor) and the section 1062 covenant to its owners or
beneficiaries.
(ii) If a pass-through entity provides a copy of its Schedule A
(Form 1062) (or successor) and the section 1062 covenant to an owner
that is itself a pass-through entity (upper-tier pass-through entity),
the upper-tier pass-through entity must provide a copy of the Schedule
A (Form 1062) (or successor) and the section 1062 covenant to its
owners, and so on through any additional tiers.
(iii) A pass-through entity must identify and report on the
Schedule K-1 issued to its owners or beneficiaries each owner's or
beneficiary's allocable share of the gain attributable to the qualified
sale or exchange and such other information as may be required by the
prescribed forms and the accompanying instructions.
(iv) If a pass-through entity fails to comply with the requirements
of paragraphs (b)(2)(i) through (iii) of this section, its owners or
beneficiaries will be deemed ineligible to make the section 1062
election with respect to any gain allocated to them by the pass-through
entity.
(v) A pass-through entity does not complete or file Form 1062
itself unless the pass-through entity has an entity-level applicable
net tax liability and wishes to make a section 1062 election with
respect to that tax liability.
(vi) If the requirements of paragraphs (b)(2)(i) through (iii) of
this section have been satisfied, a partner, shareholder, beneficiary,
or other owner of a pass-through entity makes the section 1062 election
by completing and filing Form 1062 (or successor) and Schedule A (Form
1062) (or successor) with its return for the relevant taxable year.
(3) Revocation of election. Once made, a section 1062 election may
be revoked only by paying the full amount of the remaining unpaid
applicable net tax liability.
(c) Installment payments--(1) In general. Except as provided in
paragraph (c)(4) of this section, if a taxpayer makes a section 1062
election, the amount of each installment payment is 25 percent of the
applicable net tax liability.
(2) Due date of installment payments. Except as provided in
paragraph (c)(3) or (4) of this section or Sec. 1.1062-3, if a
taxpayer makes a section 1062 election--
(i) The first installment payment is due on the due date (without
regard to extensions) for filing the return for the relevant taxable
year; and
(ii) Each succeeding installment payment is due on the due date
(without regard to extensions) for filing the return for the taxable
year following the taxable year with respect to which the previous
installment payment was made.
(3) Extension for specified individuals. If a taxpayer is a
specified individual (as defined under Sec. 1.1062-1(v)) with respect
to a taxable year within which an installment payment is due pursuant
to paragraph (c)(2) of this section, then, for purposes of determining
the due date of an installment payment under paragraph (c)(2) of this
section, the due date (without regard to extensions) for filing the
return for the taxable year will be treated as the fifteenth day of the
sixth month following the close of the prior taxable year.
(4) Increased installment payments due to a deficiency--(i) In
general. Except as provided in paragraph (c)(4)(iii) of this section,
if a taxpayer makes a section 1062 election, any deficiency assessed
with respect to the taxpayer's applicable net tax liability is prorated
to the installment payments described in paragraph (c)(1) of this
section.
(ii) Timing--(A) Due date has passed. If the due date for an
installment payment to which a deficiency described in paragraph
(c)(4)(i) of this section is prorated has passed, the amount of any
deficiency prorated to that installment payment must be paid on notice
and demand by the Commissioner.
(B) Due date has not passed. If the due date for an installment
payment to which the deficiency is prorated has not passed, then that
prorated amount is due at the same time as, and as part of, the
relevant installment payment.
(iii) Exception for negligence, intentional disregard, or fraud. If
a deficiency is due to negligence, intentional disregard of rules and
regulations, or fraud with intent to evade tax, the proration rule in
this paragraph (c)(4) does not apply, and the full amount of the
deficiency (as well as any applicable interest and penalties) must be
paid on notice and demand by the Commissioner.
(d) Applicable net tax liability. With respect to a taxpayer, the
amount of applicable net tax liability equals the excess (if any) of--
(1) The taxpayer's net income tax for the relevant taxable year;
over
(2) The taxpayer's net income tax for the relevant taxable year
determined without regard to the taxpayer's gain that is recognized
from the qualified sale or exchange.
(e) Allocation of basis and amount realized from a sale or exchange
of property only a portion of which is qualified farmland property. For
purposes of determining the amount of gain the taxpayer recognizes from
a sale or exchange of property, only a portion of which is qualified
farmland property, the taxpayer must equitably allocate the taxpayer's
cost or other basis and the amount realized between the portion of the
property that is qualified farmland property and the portion that is
not qualified farmland property.
(f) Coordination with other provisions. Only the gain from the
qualified sale or exchange that is included in gross income and
recognized in the relevant taxable year is used to determine the
taxpayer's gain from the qualified sale or exchange. See paragraphs
(g)(5) and (6) of this section.
(g) Examples. The following examples illustrate the application of
the rules of this section.
[[Page 61380]]
(1) Example 1: Pass-through entity--(i) Facts. Individuals A and B
are the sole members in W, a limited liability company that is
classified as a partnership for Federal income tax purposes. Under the
organizing agreement for W, A and B share equally in the capital and
profits of W. W recognizes gain from a qualified sale or exchange that
is allocable equally to A and B. W has no applicable net tax liability
with respect to that gain, but A and B each has an applicable net tax
liability with respect to their distributive shares of that gain. W
complies with the requirements of paragraphs (b)(2)(i) through (iii) of
this section.
(ii) Analysis. Pursuant to paragraph (a)(2)(ii) of this section,
because W has no applicable net tax liability with respect to the
qualified sale or exchange, W may not make a section 1062 election.
However, because A and B each has an applicable net tax liability with
respect to the qualified sale or exchange, A and B each separately may
choose to make a section 1062 election with respect to their
distributive shares of W's recognized gain.
(2) Example 2: Tiered pass-through entities--(i) Facts. C is a C
corporation and D is an S corporation. C and D are the sole members in
V, a limited liability company that is classified as a partnership for
Federal income tax purposes. Individuals E and F are the sole
shareholders of D. Under the organizing agreement for V, C and D share
equally in the capital and profits of V. V recognizes gain from a
qualified sale or exchange that is allocable equally to C and D. E and
F each take into account a pro rata share of the gain from the
qualified sale or exchange that is allocated to D. Neither V nor D has
any applicable net tax liability with respect to the gain recognized
from the qualified sale or exchange. However, C, E, and F each has an
applicable net tax liability with respect to their respective shares of
the gain recognized by V from the qualified sale or exchange. V and D
each comply with the requirements of paragraphs (b)(2)(i) through (iii)
of this section.
(ii) Analysis. Pursuant to paragraph (a)(2)(ii) of this section,
because V and D have no applicable net tax liability with respect to
the qualified sale or exchange, neither V nor D may make a section 1062
election. However, because C, E, and F each has an applicable net tax
liability with respect to the qualified sale or exchange, they each
separately may choose to make a section 1062 election with respect to
their respective shares of V's recognized gain.
(3) Example 3: Pass-through entity subject to entity-level tax--(i)
Facts. Individuals G and H are the sole shareholders of R, an S
corporation that previously was a C corporation. At the time of its
conversion to an S corporation, R owned assets with a net unrealized
built-in gain (as defined in section 1374(d)(2) of the Code), including
a parcel of qualified farmland property. Within the recognition period
(as defined in section 1374(d)(7)), R sells the qualified farmland
property in a qualified sale or exchange and recognizes gain. Under
section 1374, R is subject to an entity-level tax with respect to a
portion of the gain recognized from its qualified sale or exchange. As
a result, R has an applicable net tax liability with respect to the
gain that is subject to tax under section 1374. G and H each takes into
account a pro rata share of the remaining portion of net gain from the
qualified sale or exchange and has an applicable net tax liability with
regard to their pro rata shares of R's items attributable to the
qualified sale or exchange. R complies with the requirements of
paragraphs (b)(2)(i) through (iii) of this section.
(ii) Analysis. Pursuant to paragraph (a)(2)(ii) of this section,
because R has an applicable net tax liability with respect to part of
the gain from the qualified sale or exchange, R may make a section 1062
election with respect to that applicable net tax liability. Whether R
makes a section 1062 election has no effect on the application of
section 1062 to G and H. Thus, G and H separately may choose to make a
section 1062 election with respect to their applicable net tax
liabilities.
(4) Example 4: Death of the individual after the qualified sale or
exchange but before the section 1062 election is made--(i) Facts.
Individual Q, a calendar year taxpayer, has an applicable net tax
liability from a qualified sale or exchange in Year X. Q passes away
shortly thereafter in January of the following taxable year, Year Y,
prior to the due date for making an election and before Q makes a
section 1062 election.
(ii) Analysis. Year X is the relevant taxable year. The death of Q
is an acceleration event as described in Sec. 1.1062-3(b)(1)(ii).
However, pursuant to paragraph (a)(2)(iv) of this section, Q's personal
representative may make the section 1062 election on Q's return for
Year X by the due date of Q's return if the requirements to make a
section 1062 election are otherwise satisfied. Further, because Q's
death is an acceleration event described in Sec. 1.1062-3(b)(1)(ii),
the remaining amount of the unpaid applicable net tax liability will be
due on the due date (without regard to extensions) of the Year Y
return.
(5) Example 5: Coordination with section 453--(i) Facts.
Corporation L owns qualified farmland property with a basis of $100x. L
sells the qualified farmland property to a qualified farmer for $500x
in a qualified sale or exchange. L will receive equal payments of $100x
from the qualified farmer over five years, together with adequate
stated interest, and will recognize gain pursuant to the installment
method under section 453 of the Code. L receives the first payment of
$100x in the relevant taxable year, of which $80x is recognized as gain
from the qualified sale or exchange in the relevant taxable year.
(ii) Analysis. Pursuant to paragraph (f) of this section, only the
gain from the qualified sale or exchange that is included in gross
income and recognized in the relevant taxable year is used to determine
L's gain from the qualified sale or exchange. Under section 453, L's
gain from the qualified sale or exchange in the relevant taxable year
is $80x. Accordingly, only $80x of gain is used to determine L's gain
from the qualified sale or exchange. No section 1062 election is
available with respect to any net tax liability attributable to the
remaining $320x ($400x - $80x) of L's gain that is deferred to a
taxable year other than the relevant taxable year.
(6) Example 6: Coordination with section 121--(i) Facts. Individual
M and M's spouse realize $1,000x of gain from a qualified sale or
exchange. The qualified farmland property includes a farmhouse that is
described in section 2032A(e)(3) (without regard to the requirements
under section 2032A(b)(1)(C)). M and M's spouse file a joint return for
the relevant taxable year and determine that $300x of the gain is
attributable to the farmhouse and is excluded from gross income under
section 121 of the Code.
(ii) Analysis. Pursuant to paragraph (f) of this section, only the
gain from the qualified sale or exchange that is included in gross
income and recognized in the relevant taxable year is used to determine
the couple's gain from the qualified sale or exchange. Because $300x of
the couple's gain from the qualified sale or exchange is excluded from
their gross income under section 121, only $700x of gain is used to
determine their gain from the qualified sale or exchange.
(h) Applicability date. This section applies to qualified sales or
exchanges occurring in taxable years ending after
[[Page 61381]]
[date of publication of final regulations in the Federal Register].
Sec. 1.1062-3 Acceleration of payments.
(a) Acceleration of remaining installment payments. If a taxpayer
makes a section 1062 election, and if an acceleration event
subsequently occurs with respect to that taxpayer, the due date for the
unpaid portion of all remaining installment payments is accelerated as
provided in paragraph (b)(2) of this section unless the eligible
section 1062 transferee exception provided in paragraph (c) of this
section applies. For purposes of paragraph (b) of this section, an S
corporation is treated as a C corporation if it has an applicable net
tax liability or a remaining unpaid applicable net tax liability at the
entity-level.
(b) Acceleration events--(1) In general. The following events are
acceleration events for purposes of paragraph (a) of this section with
respect to a taxpayer that has made a section 1062 election--
(i) The assessment of an addition to tax for the failure to timely
pay an installment described in Sec. 1.1062-2(c)(1);
(ii) In the case of a taxpayer that is an individual, the death of
that individual;
(iii) In the case of a taxpayer that is a C corporation, a trust,
or an estate, a liquidation, dissolution, termination, or sale,
exchange, distribution, or other disposition of substantially all the
assets of the taxpayer (including in a title 11 or similar case);
(iv) In the case of a taxpayer that is a C corporation, a cessation
of business by the taxpayer;
(v) In the case of a taxpayer that is a C corporation and is not a
member of a consolidated group, the C corporation becoming a member of
a consolidated group;
(vi) In the case of a taxpayer that is a C corporation and a member
of a consolidated group, the consolidated group ceasing to exist or
otherwise discontinuing to file a consolidated return; and
(vii) In the case of a taxpayer that is a C corporation, a trust,
or an estate, a determination by the Commissioner described in
paragraph (c)(3)(ii)(A) of this section.
(2) Due date of remaining installment payments. The due date for
the unpaid portion of all remaining installment payments is--
(i) In the case of an acceleration event described in paragraph
(b)(1)(i) of this section, the date on which the addition to tax for
failure to timely pay the installment payment is assessed;
(ii) In the case of an acceleration event described in paragraph
(b)(1)(ii) of this section, the due date (without regard to extensions)
for filing the return for the taxable year in which the individual
dies; and
(iii) In the case of an acceleration event described in paragraphs
(b)(1)(iii) through (vii) of this section, the date of the acceleration
event (or, in a title 11 or similar case, the day before the petition
is filed).
(3) Consolidated groups. Paragraphs (b)(1)(iii) and (iv) of this
section apply to a consolidated group by treating the group as a single
taxpayer. See Sec. 1.1062-2(a)(2)(iii).
(c) Eligible section 1062 transferee exception--(1) In general.
Paragraph (a) of this section will not apply to accelerate the unpaid
portion of all remaining installment payments of a taxpayer with
respect to which an acceleration event occurs if--
(i) The acceleration event is a sale of substantially all the
assets of the eligible section 1062 transferor; and
(ii) The eligible section 1062 transferor and the eligible section
1062 transferee enter into a transfer agreement that satisfies the
requirements of paragraph (c)(2) of this section.
(2) Transfer agreement--(i) Manner of making transfer agreement. A
transfer agreement must be entered into by an eligible section 1062
transferor and an eligible section 1062 transferee--
(A) By both the eligible section 1062 transferor and the eligible
section 1062 transferee timely filing a Form 1062-T, Transfer Agreement
Under Section 1062(b)(2)(C) (or successor); or
(B) In any other manner prescribed in guidance published in the
Internal Revenue Bulletin or in forms and instructions (see Sec. Sec.
601.601(d)(2) and 601.602 of this chapter).
(ii) Timing--(A) In general. Except as provided in paragraph
(c)(2)(ii)(B) or (C) of this section, a transfer agreement must be
filed on or before the date that is 30 days after the date of the
acceleration event with respect to which the transfer agreement is
entered into.
(B) Acceleration event occurring before section 1062 election. If
an acceleration event occurs prior to the date an eligible section 1062
transferor makes a section 1062 election, the transfer agreement with
respect to the acceleration event will be treated as timely filed for
purposes of paragraph (c)(2)(i)(A) of this section if it is filed
simultaneously with the eligible section 1062 transferor's section 1062
election. See Sec. 1.1062-2(a)(2)(iv).
(C) Transition rule. If an acceleration event with respect to which
a transfer agreement is entered into occurs on or before [date of
publication of final regulations in the Federal Register], the transfer
agreement with respect to the acceleration event will be treated as
timely filed for purposes of paragraph (c)(2)(i)(A) of this section if
it is filed by 30 days after [date of publication of final regulations
in the Federal Register].
(iii) Signature requirement. The transfer agreement must be signed
under penalties of perjury by both--
(A) A person who is authorized to sign a return on behalf of the
eligible section 1062 transferor; and
(B) A person who is authorized to sign a return on behalf of the
eligible section 1062 transferee.
(iv) Terms of transfer agreement. A transfer agreement must contain
the following items:
(A) The name, address, and taxpayer identification number of the
eligible section 1062 transferor and the eligible section 1062
transferee.
(B) The amount of the eligible section 1062 transferor's remaining
unpaid applicable net tax liability.
(C) The date and a detailed description of the acceleration event
that led to the transfer agreement.
(D) 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.
(E) A statement that the eligible section 1062 transferee agrees to
comply with all conditions and requirements of section 1062, this
section and Sec. 1.1062-2.
(F) A representation that the eligible section 1062 transferee has
the financial ability to make the remaining installment payments
required under section 1062, this section and Sec. 1.1062-2 with
respect to the applicable net tax liability being assumed by the
eligible section 1062 transferee.
(G) 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 applicable net
tax liability.
[[Page 61382]]
(H) 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 (including under Sec. 1.1502-6, if applicable) for any unpaid
applicable net tax liability of the eligible section 1062 transferor.
(I) Any additional information, representation, or certification
required by guidance published in the Internal Revenue Bulletin or in
forms and instructions (see Sec. Sec. 601.601(d)(2) and 601.602 of
this chapter).
(3) Consent of Commissioner--(i) In general. If an eligible section
1062 transferor and an eligible section 1062 transferee file a transfer
agreement satisfying all the requirements of paragraph (c)(2) of this
section, the eligible section 1062 transferee will be considered to
have entered into an agreement with the Commissioner for purposes of
this paragraph (c). If the Commissioner determines that additional
information (for example, additional information regarding the ability
of the eligible section 1062 transferee to fully pay the remaining
applicable net tax liability) is necessary, the eligible section 1062
transferee must provide that information upon request.
(ii) Material misrepresentations and omissions. If the Commissioner
determines that a transfer agreement contains a material
misrepresentation or material omission, or if the eligible section 1062
transferee does not provide the additional information requested under
paragraph (c)(3)(i) of this section within the timeframe communicated
by the Commissioner to the eligible section 1062 transferee, then the
Commissioner--
(A) May reject the transfer agreement (effective as of the date of
the related acceleration event); or
(B) May determine that an acceleration event has occurred with
respect to the eligible section 1062 transferee as of the date of the
Commissioner's determination that a transfer agreement contains a
material misrepresentation or material omission (such that any unpaid
installment payments become due on that date).
(4) Effect of assumption--(i) In general. If the eligible section
1062 transferee exception in this paragraph (c) applies with respect to
an acceleration event, the eligible section 1062 transferee assumes all
outstanding obligations and responsibilities of the eligible section
1062 transferor with respect to the applicable net tax liability as
though the eligible section 1062 transferee had included in income the
gain from the qualified sale or exchange. Accordingly, the eligible
section 1062 transferee is responsible for making payments and
reporting with respect to any unpaid installment payments.
(ii) Eligible section 1062 transferee. If an acceleration event
described in paragraphs (b)(1)(iii) through (vi) of this section
subsequently occurs with respect to an eligible section 1062
transferee, any unpaid installment payments of the eligible section
1062 transferor that were assumed by the eligible section 1062
transferee will become due on the date provided in paragraph
(b)(2)(iii) of this section.
(d) Examples. The following examples illustrate the application of
the rules of this section. For purposes of the examples under this
paragraph (d), assume that the taxpayer has made a valid section 1062
election with respect to an applicable net tax liability from a
qualified sale or exchange.
(1) Example 1: Acceleration event--C corporation--(i) Facts. At a
time when A has remaining unpaid installment payments, A sells all its
assets to B, a United States person, in a fully taxable transaction.
Each of A and B is a C corporation.
(ii) Analysis. Pursuant to paragraph (b)(1)(iii) of this section,
the sale by A of all its assets to B is an acceleration event.
Accordingly, pursuant to paragraph (b)(2)(iii) of this section, the due
date for the unpaid portion of A's remaining installment payments is
the date of the sale. However, B is an eligible section 1062
transferee. See Sec. 1.1062-1(g). Consequently, if A and B enter into
and file a transfer agreement that satisfies the requirements of
paragraph (c)(2) of this section, the unpaid portion of A's remaining
installment payments will not become due; instead, B will be treated as
having assumed all outstanding obligations and responsibilities with
respect to those unpaid installment payments. See paragraphs (c)(1) and
(4) of this section.
(2) Example 2: Acceleration event--S corporation--(i) Facts. The
facts are the same as in paragraph (d)(1)(i) of this section (Example
1), except that A is an S corporation that was subject to tax on the
gain from the qualified sale or exchange under section 1374 and made a
valid section 1062 election with respect to its applicable net tax
liability from that gain.
(ii) Analysis. Pursuant to paragraph (a) of this section, A is
treated as a C corporation because it has an applicable net tax
liability. Accordingly, the results are the same as in paragraph
(d)(1)(ii) of this section (Example 1).
(3) Example 3: Acceleration event--consolidated group--(i) Facts.
The facts are the same as in paragraph (d)(1)(i) of this section
(Example 1), except that A is a member of a consolidated group of which
C is the common parent (C Group). B is not a member of the C Group.
(ii) Analysis. Pursuant to paragraph (b)(3) of this section, the C
Group is treated as the taxpayer. Accordingly, in determining whether
the sale of assets is an acceleration event under paragraph (b)(1)(iii)
of this section, the C Group must determine whether the assets held by
A constitute substantially all the assets of the C Group. If the sale
is an acceleration event, any transfer agreement under paragraph (c)(2)
of this section must be entered into by the agent for the C group on
behalf of A. See Sec. 1.1062-2(a)(2)(iii).
(4) Example 4: Acceleration event--grantor trust--(i) Facts.
Individual D is treated as owning all of E, a grantor trust, under
sections 671 through 679 of the Code. Under local law, E is the owner
of qualified farmland property, which E sells in a qualified sale or
exchange. D, rather than E, has an applicable net tax liability with
respect to the qualified sale or exchange. D makes a section 1062
election with respect to the qualified sale or exchange. Subsequently,
D dies.
(ii) Analysis. D is treated as the taxpayer. Accordingly, D's death
is an acceleration event. Whether E has an event described in paragraph
(b)(1) of this section is not relevant in determining whether an
acceleration event occurs.
(5) Example 5: Acceleration event--non-grantor trust--(i) Facts.
Individual F is a beneficiary of G, a non-grantor complex trust. No one
is treated as owning any portion of G under sections 671 through 679. G
has a qualified sale or exchange. In accordance with the provisions of
sections 661, 662, and 643 of the Code, a portion of the gain on the
qualified sale or exchange is deducted by G and reportable by F. F and
G each has an applicable net tax liability with respect to the
qualified sale or exchange, and F and G each makes a section 1062
election with respect to the qualified sale or exchange. F dies on Date
1. On Date 2, G terminates.
(ii) Analysis. F and G are treated as separate taxpayers.
Accordingly, F's death is an acceleration event with respect to F's
remaining unpaid applicable net tax liability. However, F's death is
not an acceleration event for G and has no effect on G's remaining
unpaid applicable net tax liability. Similarly, G's termination is not
an acceleration event for F and has no
[[Page 61383]]
effect on F's remaining unpaid applicable net tax liability. However,
G's termination is an acceleration event with respect to G's remaining
unpaid applicable net tax liability.
(e) Applicability date. This section applies to qualified sales or
exchanges occurring in taxable years ending after [date of publication
of final regulations in the Federal Register].
Frank J. Bisignano,
Chief Executive Officer.
[FR Doc. 2026-19888 Filed 9-28-26; 8:45 am]
BILLING CODE 4831-GV-P
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