Farmer and Fisherman Income Averaging, 42522-42526 [E8-16665]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 73, Number 141 (Tuesday, July 22, 2008)]
[Rules and Regulations]
[Pages 42522-42526]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E8-16665]


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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9417]
RIN 1545-BE39


Farmer and Fisherman Income Averaging

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final and temporary regulations.

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SUMMARY: This document contains final and temporary regulations under 
section 1301 of the Internal Revenue Code (Code) relating to the 
averaging of farm and fishing income in computing income tax liability. 
The regulations reflect changes to the law made by the American Jobs 
Creation Act of 2004. The regulations provide guidance to individuals 
engaged in a farming or fishing business who elect to reduce their tax 
liability by treating all or a portion of the current taxable year's 
farm or fishing income as if one-third of it had been earned in each of 
the prior three taxable years. The text of the temporary regulations in 
this document also serves as the text of proposed regulations set forth 
in a notice of proposed rulemaking on this subject in the Proposed 
Rules section in this issue of the Federal Register.

DATES: Effective Date: These regulations are effective on July 22, 
2008.
    Applicability Dates: For dates of applicability, see Sec. Sec.  
1.1301-1(g) and 1.1301-1T(g).

FOR FURTHER INFORMATION CONTACT: Amy Pfalzgraf, (202) 622-4950 (not a 
toll-free number).

SUPPLEMENTARY INFORMATION:

Background

    This document contains final and temporary amendments to the Income 
Tax Regulations (26 CFR part 1) under section 1301. For taxable years 
beginning after December 31, 1997, section 1301 provides that 
individual taxpayers engaged in a farming business may elect to compute 
their income tax liability under section 1 by treating all or a portion 
of their taxable income from the trade or business of farming as if 
one-third of it had been earned in each of the prior three taxable 
years.
    Section 314(b) of the American Jobs Creation Act of 2004 (AJCA), 
Public Law 108-357 (118 Stat. 1468), amended section 1301 to permit 
fishermen to make a farm income averaging election. Section 
1301(b)(1)(A) now provides that the income eligible for averaging 
includes income attributable to a fishing business. Fishing business is 
defined in section 1301(b)(4) as the conduct of commercial fishing as 
defined in section 3 of the Magnuson-Stevens Fishery Conservation and 
Management Act (Magnuson-Stevens Act), 16 U.S.C. 1802.
    The Magnuson-Stevens Act defines commercial fishing as fishing in 
which the fish harvested are intended to or do enter commerce through 
sale, barter, or trade. 16 U.S.C. 1802(4). Fishing is defined as the 
catching, taking, or harvesting of fish; the attempted catching, 
taking, or harvesting of fish; activities that reasonably can be 
expected to result in the catching, taking, or harvesting of fish; or 
any operations at sea in support of, or in preparation for, the 
catching, taking, or harvesting of fish. Fishing does not include any 
scientific research activity conducted by a scientific research vessel. 
16 U.S.C. 1802(15). Fish is defined as finfish, mollusks, crustaceans, 
and all other forms of marine animal and plant life, other than marine 
mammals and birds. 16 U.S.C. 1802(12). Under 50 CFR 600.10, the terms 
catch, take, or harvest include activities that result in the killing 
of fish or the bringing of live fish on board a vessel.
    Section 314(a) of the AJCA amended section 55(c) to provide that 
the farm income averaging election is disregarded in computing the 
regular tax liability for purposes of calculating the alternative 
minimum tax (AMT). As a result, the reduction in regular tax liability 
resulting from a farm income averaging election will not be offset by a 
corresponding increase in the AMT.
    Section 1.1301-1 of the Income Tax Regulations provides guidance on 
income averaging for farmers under the rules in effect before the AJCA 
amendments.

Explanation of Provisions

    These temporary regulations provide guidance on the AJCA changes to 
the income averaging rules. In addition, conforming changes are made to 
the final regulations in Sec.  1.1301-1.

Definition of Fishing Business

    Section 1301(b)(4) defines fishing business by reference to section 
3 of the Magnuson-Stevens Act. The definition of fishing business in 
these temporary regulations follows the definitions in the Magnuson-
Stevens Act and the regulations under that Act. Thus, fishing includes 
catching, taking, or harvesting activities that result in the killing 
of fish or the bringing of live fish on board a vessel, but does not 
include the processing of fish.

Amount of Income Eligible for Averaging

    Section 1301(b)(1)(A) provides that income attributable to any 
farming business or fishing business is eligible for income averaging. 
These temporary regulations clarify that the maximum amount of income 
that an individual may elect to average is the total of the 
individual's farm and fishing income and gains, reduced by any farm and 
fishing deductions or losses allowed as a deduction in computing 
taxable income. Therefore, a taxpayer engaged in both a farming 
business and a fishing business must combine income, gains, deductions, 
and losses from both the farming business and the fishing business to 
determine the maximum amount of income that is eligible for averaging.

Lessors of Vessels Used for Fishing

    The rental income of a landlord that is based on a share of a 
tenant's production is subject to fluctuations in the farm economy to 
the same extent as that of a farmer. Therefore, Sec.  1.1301-1(b)(2) 
provides that a landlord is engaged in a farming business if this 
arrangement is established in a written agreement before the tenant 
begins significant activities on the land.
    These temporary regulations similarly provide that a lessor of a 
vessel is engaged in a fishing business within the meaning of section 
1301(b)(4) if the payment due to the lessor under the lease is based on 
a share of the lessee's catch (or a share of the proceeds from

[[Page 42523]]

the sale of the catch) and the lease is a written agreement entered 
into before the lessee begins significant fishing activities resulting 
in the shared catch. A fixed lease payment is not eligible for income 
averaging.

Crewmembers

    The income of crewmembers on vessels engaged in fishing also is 
subject to fluctuations in the fishing economy if the crewmembers' 
compensation is based on a share of the vessel's catch of fish or a 
share of the proceeds from the sale of the catch. Accordingly, these 
temporary regulations provide that these crewmembers are engaged in a 
fishing business, whether or not they are treated as employees for 
employment tax purposes.

Deposits Into Merchant Marine Capital Construction Fund

    Section 7518(c)(1)(A) provides that certain deposits into a 
Merchant Marine Capital Construction Fund (CCF) reduce taxable income 
for purposes of the Code (the CCF reduction). These temporary 
regulations provide that, for purposes of income averaging 
computations, the CCF reduction also reduces taxable income. In 
addition, except to the extent that the amount of the CCF deposit is 
determined by reference to income from maritime operations other than 
fishing, the CCF reduction also reduces the amount of income that is 
eligible for income averaging.

Effective/Applicability Date

    These temporary regulations apply for taxable years beginning after 
July 22, 2008. However, taxpayers may apply the temporary regulations 
in taxable years beginning after December 31, 2003, but before July 23, 
2008, if all provisions are consistently applied in each taxable year.

Special Analyses

    It has been determined that this Treasury decision is not a 
significant regulatory action as defined in Executive Order 12866. 
Therefore, a regulatory assessment is not required. It also has been 
determined that section 553(b) of the Administrative Procedure Act (5 
U.S.C. chapter 5) does not apply to these regulations. For the 
applicability of the Regulatory Flexibility Act (5 U.S.C. chapter 6) 
please refer to the cross-reference notice of proposed rulemaking 
published elsewhere in this issue of the Federal Register. Pursuant to 
section 7805(f), these regulations have been submitted to the Chief 
Counsel for Advocacy of the Small Business Administration for comment 
on their impact on small business.

Drafting Information

    The principal author of these regulations is Amy Pfalzgraf of the 
Office of the Associate Chief Counsel (Income Tax & Accounting). 
However, other personnel from the IRS and Treasury Department 
participated in their development.

List of Subjects in 26 CFR Part 1

    Income taxes, Reporting and recordkeeping requirements.

Amendments to the Regulations

0
Accordingly, 26 CFR part 1 is amended as follows:

PART 1--INCOME TAXES

0
Paragraph 1. The authority citation for part 1 is amended by adding an 
entry in numerical order to read in part as follows:

    Authority: 26 U.S.C. 7805 * * *
    Section 1.1301-1T also issued under 26 U.S.C. 1301(c). * * *


0
Par. 2. Section 1.1301-1 is amended by:
0
1. Adding new paragraphs (b)(3) and (d)(4).
0
2. Revising paragraph (g).
    The additions and revision read as follows:


Sec.  1.1301-1  Averaging of farm income.

* * * * *
    (b) * * *
    (3) [Reserved]. For further guidance, see Sec.  1.1301-1T(b)(3).
* * * * *
    (d) * * *
    (4) [Reserved]. For further guidance, see Sec.  1.1301-1T(d)(4).
* * * * *
    (g) Effective/applicability date. (1) Except as provided in 
paragraphs (b)(2), (g)(2), and (g)(3) of this section and Sec.  1.1301-
1T(g)(2), this section applies to taxable years beginning after 
December 31, 2001.
    (2) Paragraphs (a), (b)(1), (c)(1), (d)(3)(ii), (e), (f)(2), and 
(f)(4) of this section apply only for taxable years beginning before 
July 23, 2008. For taxable years beginning after July 22, 2008, see 
Sec.  1.1301-1T.
    (3) Paragraphs (b)(3) and (d)(4) of this section apply for taxable 
years beginning after July 22, 2008.

0
Par. 3. Section 1.1301-1T is added to read as follows:


Sec.  1.1301-1T  Averaging of farm and fishing income (temporary).

    (a) Overview. An individual engaged in a farming or fishing 
business may make a farm income averaging election to compute current 
year (election year) income tax liability under section 1 by averaging, 
over the prior three-year period (base years), all or a portion of the 
individual's current year electible farm income as defined in paragraph 
(e) of this section. Electible farm income includes income from both 
farming and fishing businesses, and the farm income averaging election 
permits the averaging of both farm and fishing income. An individual 
that makes a farm income averaging election--
    (1) Designates all or a portion of the individual's electible farm 
income for the election year as elected farm income; and
    (2) Determines the election year section 1 tax by determining the 
sum of--
    (i) The section 1 tax that would be imposed for the election year 
if taxable income for the year were reduced by elected farm income; 
plus
    (ii) For each base year, the amount by which the section 1 tax 
would be increased if taxable income for the year were increased by 
one-third of elected farm income.
    (b) Individual engaged in a farming or fishing business--(1) In 
general--(i) Farming or fishing business. Farming business has the same 
meaning as provided in section 263A(e)(4) and the regulations under 
that section. Fishing business means the conduct of commercial fishing 
as defined in section 3 of the Magnuson-Stevens Fishery Conservation 
and Management Act (16 U.S.C. 1802(4)). Accordingly, a fishing business 
is fishing in which the fish harvested are intended to or do enter 
commerce through sale, barter, or trade. Fishing means the catching, 
taking, or harvesting of fish; the attempted catching, taking, or 
harvesting of fish; any activities that reasonably can be expected to 
result in the catching, taking, or harvesting of fish; or any 
operations at sea in support of or in preparation for the catching, 
taking, or harvesting of fish. Fishing does not include any scientific 
research activity conducted by a scientific research vessel. Fish means 
finfish, mollusks, crustaceans, and all other forms of marine animal 
and plant life, other than marine mammals and birds. Catching, taking, 
or harvesting includes activities that result in the killing of fish or 
the bringing of live fish on board a vessel.
    (ii) Form of business. An individual engaged in a farming or 
fishing business includes a sole proprietor of a farming or fishing 
business, a partner in a partnership engaged in a farming or fishing 
business, and a shareholder of an S corporation engaged in a farming

[[Page 42524]]

or fishing business. Except as provided in paragraph (e)(1)(i) of this 
section, services performed as an employee are disregarded in 
determining whether an individual is engaged in a farming or fishing 
business for purposes of section 1301.
    (iii) Base years. An individual is not required to have been 
engaged in a farming or fishing business in any of the base years in 
order to make a farm income averaging election.
    (2) [Reserved]. For further guidance, see Sec.  1.1301-1(b)(2).
    (3) Lessors of vessels used in fishing. A lessor of a vessel is 
engaged in a fishing business for purposes of section 1301 with respect 
to payments that are received under the lease and are based on a share 
of the catch from the lessee's use of the vessel in a fishing business 
(or a share of the proceeds from the sale of the catch) if this manner 
of payment is determined under a written lease agreement entered into 
before the lessee begins any significant fishing activities resulting 
in the catch. A lessor of a vessel is not engaged in a fishing business 
for purposes of section 1301 with respect to fixed lease payments or 
with respect to lease payments based on a share of the lessee's catch 
(or a share of the proceeds from the sale of the catch) if the share is 
determined under either an unwritten agreement or a written agreement 
entered into after the lessee begins significant fishing activities 
resulting in the catch.
    (c) Making, changing, or revoking an election--(1) In general. A 
farm income averaging election is made by filing Schedule J, ``Income 
Averaging for Farmers and Fishermen,'' with an individual's Federal 
income tax return for the election year (including a late or amended 
return if the period of limitation on filing a claim for credit or 
refund has not expired).
    (2) [Reserved]. For further guidance, see Sec.  1.1301-1(c)(2).
    (d)(1) through (3)(i) [Reserved]. For further guidance, see Sec.  
1.1301-1(d)(1) through (3)(i).
    (ii) Example. The rules of this paragraph (d)(3) are illustrated by 
the following example:

    Example. (i) T is a fisherman who uses the calendar taxable 
year. In each of the years 2001, 2002, and 2003, T's taxable income 
is $20,000. In 2004, T has taxable income of $30,000 (prior to any 
farm income averaging election) and electible farm income of 
$10,000. T makes a farm income averaging election with respect to 
$9,000 of the electible farm income for 2004. Under paragraph 
(a)(2)(ii) of this section, $3,000 of elected farm income is 
allocated to each of the base years 2001, 2002, and 2003. Under 
paragraph (a)(2) of this section, T's 2004 tax liability is the sum 
of the following amounts:
    (A) The section 1 tax on $21,000, which is T's taxable income of 
$30,000, minus elected farm income of $9,000.
    (B) For each of the base years 2001, 2002, and 2003, the amount 
by which section 1 tax would be increased if one-third of elected 
farm income were allocated to each year. The amount for each year is 
the section 1 tax on $23,000 (T's taxable income of $20,000, plus 
$3,000, which is one-third of elected farm income for the 2004 
election year), minus the section 1 tax on $20,000.
    (ii) In 2005, T has taxable income of $50,000 and electible farm 
income of $12,000. T makes a farm income averaging election with 
respect to all $12,000 of the electible farm income for 2005. Under 
paragraph (a)(2)(ii) of this section, $4,000 of elected farm income 
is allocated to each of the base years 2002, 2003, and 2004. Under 
paragraph (a)(2) of this section, T's 2005 tax liability is the sum 
of the following amounts:
    (A) The section 1 tax on $38,000, which is T's taxable income of 
$50,000, minus elected farm income of $12,000.
    (B) For each of base years 2002 and 2003, the amount by which 
section 1 tax would be increased if, after adjustments for previous 
farm income averaging elections pursuant to paragraph (d)(3)(i) of 
this section, one-third of elected farm income were allocated to 
each year. The amount for each year is the section 1 tax on $27,000 
(T's taxable income of $20,000 increased by $3,000 for T's 2004 farm 
income averaging election and further increased by $4,000, which is 
one-third of elected farm income for the 2005 election year), minus 
the section 1 tax on $23,000 (T's taxable income of $20,000 
increased by $3,000 for T's 2004 farm income averaging election).
    (C) For base year 2004, the amount by which section 1 tax would 
be increased if, after adjustments for previous farm income 
averaging elections pursuant to paragraph (d)(3)(i) of this section, 
one-third of elected farm income were allocated to that year. This 
amount is the section 1 tax on $25,000 (T's taxable income of 
$30,000 reduced by $9,000 for T's 2004 farm income averaging 
election and increased by $4,000, which is one-third of elected farm 
income for the 2005 election year), minus the section 1 tax on 
$21,000 (T's taxable income of $30,000 reduced by $9,000 for T's 
2004 farm income averaging election).

    (4) Deposits into Merchant Marine Capital Construction Fund--(i) 
Reductions to taxable income and electible farm income. Under section 
7518(c)(1)(A), certain deposits to a Merchant Marine Capital 
Construction Fund (CCF) reduce taxable income for purposes of the Code 
(the CCF reduction). The amount of the CCF reduction is limited under 
section 7518(a)(1)(A) to the taxpayer's taxable income (determined 
without regard to the reduction) attributable to specified maritime 
operations including operations in fisheries of the United States. The 
CCF reduction is taken into account in determining the taxable income 
used in computations under this section. In addition, except to the 
extent the amount described in section 7518(a)(1)(A) is not 
attributable to the individual's fishing business, the CCF reduction is 
treated in computing electible farm income as an item of deduction 
attributable to the individual's fishing business.
    (ii) Example. The rules of this paragraph (d)(4) are illustrated by 
the following example:

    Example. (i) T is a fisherman who uses the calendar taxable 
year. In each of the years 2001, 2002, and 2003, T's taxable income 
(before taking any CCF reduction into account) is $20,000. For 
taxable year 2002, all of T's income is described in section 
7518(a)(1)(A) and is attributable to T's fishing business. T makes a 
$5,000 deposit into a CCF for taxable year 2002. In 2004, T has 
taxable income of $30,000 (before taking any CCF reduction into 
account). In addition, T's electible farm income for 2004 (before 
taking the CCF reduction into account) is $10,000, all of which is 
described in section 7518(a)(1)(A) and is attributable to T's 
fishing business. For taxable year 2004, T makes a $4,000 deposit 
into a CCF.
    (ii) The amount of the 2004 CCF deposit reduces taxable income. 
Accordingly, T's taxable income for 2004 is $26,000 ($30,000-
$4,000). In addition, the entire amount of the CCF reduction is 
treated as an item of deduction attributable to T's fishing 
business. Accordingly, T's electible farm income for 2004 is $6,000 
($10,000-$4,000). Similarly, the amount of the 2002 CCF deposit 
reduces T's taxable income for 2002. Accordingly, T's taxable income 
for 2002 is $15,000 ($20,000-$5,000).
    (iii) T makes an income averaging election with respect to all 
$6,000 of the electible farm income for 2004. Under paragraph 
(a)(2)(ii) of this section, $2,000 of elected farm income is 
allocated to each of the base years 2001, 2002, and 2003. Under 
paragraph (a)(2) of this section, T's 2004 tax liability is the sum 
of the following amounts:
    (A) The section 1 tax on $20,000, which is T's taxable income of 
$26,000 ($30,000 reduced by the $4,000 CCF deposit), minus elected 
farm income of $6,000.
    (B) For each of the base years 2001, 2002, and 2003, the amount 
by which section 1 tax would be increased if one-third of elected 
farm income were allocated to each year. The amount for base years 
2001 and 2003 is the section 1 tax on $22,000 (T's taxable income of 
$20,000, plus $2,000, which is one-third of elected farm income for 
the election year), minus the section 1 tax on $20,000. The amount 
for base year 2002 is the section 1 tax on $17,000 (T's taxable 
income of $15,000 ($20,000 reduced by the $5,000 CCF deposit), plus 
$2,000 (one-third of elected farm income for the election year)), 
minus the section 1 tax on $15,000.

    (e) Electible farm income--(1) Identification of items attributable 
to a farming or fishing business--(i) In general. Farm and fishing 
income includes items of income, deduction, gain, and loss attributable 
to an individual's farming or fishing business.

[[Page 42525]]

Farm and fishing losses include, to the extent attributable to a 
farming or fishing business, any net operating loss carryover or 
carryback or net capital loss carryover to an election year. Income, 
gain, or loss from the sale of development rights, grazing rights, and 
other similar rights is not treated as attributable to a farming 
business. In general, farm and fishing income does not include 
compensation received as an employee. However, a shareholder of an S 
corporation engaged in a farming or fishing business may treat 
compensation received from the corporation as farm or fishing income if 
the compensation is paid by the corporation in the conduct of the 
farming or fishing business. If a crewmember on a vessel engaged in 
commercial fishing (within the meaning of section 3 of the Magnuson-
Stevens Fishery Conservation and Management Act, 16 U.S.C. 1802(4)) is 
compensated by a share of the boat's catch of fish or a share of the 
proceeds from the sale of the catch, the crewmember is treated for 
purposes of section 1301 as engaged in a fishing business and the 
compensation is treated for such purposes as income from a fishing 
business.
    (ii) Gain or loss on sale or other disposition of property--(A) In 
general. Gain or loss from the sale or other disposition of property 
that was regularly used in the individual's farming or fishing business 
for a substantial period of time is treated as attributable to a 
farming or fishing business. For this purpose, the term property does 
not include land, but does include structures affixed to land. Property 
that has always been used solely in the farming or fishing business by 
the individual is deemed to meet both the regularly used and 
substantial period tests. Whether property not used solely in the 
farming or fishing business was regularly used in the farming or 
fishing business for a substantial period of time depends on all of the 
facts and circumstances.
    (B) Cessation of a farming or fishing business. If gain or loss 
described in paragraph (e)(1)(ii)(A) of this section is realized after 
cessation of a farming or fishing business, the gain or loss is treated 
as attributable to a farming or fishing business only if the property 
is sold within a reasonable time after cessation of the farming or 
fishing business. A sale or other disposition within one year of 
cessation of the farming or fishing business is presumed to be within a 
reasonable time. Whether a sale or other disposition that occurs more 
than one year after cessation of the farming or fishing business is 
within a reasonable time depends on all of the facts and circumstances.
    (2) Determination of amount that may be elected farm income--(i) 
Electible farm income. (A) The maximum amount of income that an 
individual may elect to average (electible farm income) is the sum of 
any farm and fishing income and gains, minus any farm and fishing 
deductions or losses (including loss carryovers and carrybacks) that 
are allowed as a deduction in computing the individual's taxable 
income.
    (B) Individuals conducting both a farming business and a fishing 
business must calculate electible farm income by combining income, 
gains, deductions, and losses derived from the farming business and the 
fishing business.
    (C) Except as otherwise provided in paragraph (d)(4) of this 
section, the amount of any CCF reduction is treated as a deduction from 
income attributable to a fishing business in calculating electible farm 
income.
    (D) Electible farm income may not exceed taxable income, and 
electible farm income from net capital gain attributable to a farming 
or fishing business may not exceed total net capital gain. Subject to 
these limitations, an individual who has both ordinary income and net 
capital gain from a farming or fishing business may elect to average 
any combination of the ordinary income and net capital gain.
    (ii) Examples. The rules of this paragraph (e)(2) of this section 
are illustrated by the following examples:

    Example 1. A has ordinary income from a farming business of 
$200,000 and deductible expenses from a farming business of $50,000. 
A's taxable income is $150,000 ($200,000-$50,000). Under paragraph 
(e)(2)(i) of this section, A's electible farm income is $150,000, 
all of which is ordinary income.
    Example 2. B has capital gain of $20,000 that is not from a 
farming or fishing business, capital loss from a farming business of 
$30,000, and ordinary income from a farming business of $100,000. 
Under section 1211(b), B's allowable capital loss is limited to 
$23,000. B's taxable income is $97,000 (($20,000-$23,000) + 
$100,000). B has a capital loss carryover from a farming business of 
$7,000 ($30,000 total loss-$23,000 allowable loss). Under paragraph 
(e)(2)(i) of this section, B's electible farm income is $77,000 
($100,000 ordinary income from a farming business, minus $23,000 
capital loss from a farming business), all of which is ordinary 
income.
    Example 3. C has ordinary income from a fishing business of 
$200,000 and ordinary loss from a farming business of $60,000. C's 
taxable income is $140,000 ($200,000-$60,000). Under paragraph 
(e)(2)(i)(B) of this section, C must deduct the farm loss from the 
fishing income in determining C's electible farm income. Therefore, 
C's electible farm income is $140,000 ($200,000-$60,000), all of 
which is ordinary income.
    Example 4. D has ordinary income from a farming business of 
$200,000 and ordinary loss of $50,000 that is not from a farming or 
fishing business. D's taxable income is $150,000 ($200,000-$50,000). 
Under paragraph (e)(2)(i)(D) of this section, electible farm income 
may not exceed taxable income. Therefore, D's electible farm income 
is $150,000, all of which is ordinary income.
    Example 5. E has capital gain from a farming business of 
$50,000, capital loss of $40,000 that is not from a farming or 
fishing business, and ordinary income from a farming business of 
$60,000. E's taxable income is $70,000 (($50,000-$40,000) + 
$60,000). Under paragraph (e)(2)(i)(D) of this section, electible 
farm income may not exceed taxable income, and electible farm income 
from net capital gain attributable to a farming or fishing business 
may not exceed total net capital gain. Therefore, E's electible farm 
income is $70,000 of which $10,000 is capital gain and $60,000 is 
ordinary income.

    (f)(1) [Reserved]. For further guidance, see Sec.  1.1301-1(f)(1).
    (2) Changes in filing status. An individual is not prohibited from 
making a farm income averaging election solely because the individual's 
filing status is not the same in an election year and the base years. 
For example, an individual who is married and files a joint return in 
the election year, who filed as single in one or more of the base 
years, may elect to average farm or fishing income, by using the single 
filing status to compute the increase in section 1 taxes for the base 
years in which the individual filed as single.
    (f)(3) [Reserved]. For further guidance, see Sec.  1.1301-1(f)(3).
    (4) Alternative minimum tax. A farm income averaging election is 
disregarded in computing the tentative minimum tax and the regular tax 
under section 55 for the election year or any base year. The election 
is taken into account, however, in determining the regular tax 
liability under section 53(c) for the election year.
    (f)(5) [Reserved]. For further guidance, see Sec.  1.1301-1(f)(5).
    (g) Effective/applicability date. (1) This section applies for 
taxable years beginning after July 22, 2008.
    (2) Taxpayers may apply the provisions of this section rather than 
the corresponding provisions of Sec.  1.1301-1 in taxable years 
beginning after December 31, 2003, but before July 23, 2008, if all 
provisions are consistently applied in each taxable year.

[[Page 42526]]

    (3) This section expires on July 21, 2011.

Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
    Approved: July 7, 2008.
Eric Solomon,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. E8-16665 Filed 7-21-08; 8:45 am]
BILLING CODE 4830-01-P