Farmer and Fisherman Income Averaging, 78157-78160 [2010-31497]

Agencies

• Internal Revenue Service
• DEPARTMENT OF THE TREASURY

[Federal Register Volume 75, Number 240 (Wednesday, December 15, 2010)]
[Rules and Regulations]
[Pages 78157-78160]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2010-31497]



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DEPARTMENT OF THE TREASURY

Internal Revenue Service

26 CFR Part 1

[TD 9509]
RIN 1545-BE23


Farmer and Fisherman Income Averaging

AGENCY: Internal Revenue Service (IRS), Treasury.

ACTION: Final regulations and removal of temporary regulations.

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SUMMARY: This document contains final regulations relating to the 
averaging of farm and fishing income in computing income tax liability. 
The regulations reflect changes made by the American Jobs Creation Act 
of 2004 and the Tax Extenders and Alternative Minimum Tax Relief Act of 
2008. 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.

DATES: Effective Date: These regulations are effective on December 15, 
2010.
    Applicability Date: For date of applicability, see Sec.  1.1301-
1(g).

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

SUPPLEMENTARY INFORMATION: 

Background and Explanation of Provisions

    This document contains amendments to 26 CFR part 1. On July 22, 
2008, temporary regulations (TD 9417) were published in the Federal 
Register (73 FR 42522) relating to the averaging of farm and fishing 
income in computing tax liability. A notice of proposed rulemaking 
(REG-161695-04) cross-referencing the temporary regulations also was 
published in the Federal Register (73 FR 42538) on July 22, 2008. No 
comments in response to the notice of proposed rulemaking or requests 
to hold a public hearing were received, and no hearing was held. This 
Treasury decision adopts the proposed regulations with minor changes 
and removes the temporary regulations.
    Section 504 of the Tax Extenders and Alternative Minimum Tax Relief 
Act of 2008, Div. C of Public Law 110-343 (122 Stat. 3765), enacted on 
October 3, 2008, provides that a taxpayer may treat qualified 
settlement income received in connection with the civil action In re 
Exxon Valdez, No. 8-095-CV (HRH) (Consolidated) (D. Alaska), as income 
from a fishing business eligible for income averaging. Therefore, these 
final regulations include this qualified settlement income in the 
definition of income from a fishing business. Qualified settlement 
income is limited to interest and punitive damages. The extent to which 
compensatory damages are treated as income from a fishing business is 
determined under the generally applicable rules of section 1301.

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, and because the 
regulations do not impose a collection of information on small 
entities, the Regulatory Flexibility Act (5 U.S.C. chapter 6) does not 
apply. Pursuant to section 7805(f) of the Code, the notice of proposed 
rulemaking preceding these regulations were 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 Erika Reigle of the 
Office of 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.

Adoption of 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 continues to read in 
part as follows:

    Authority: 26 U.S.C. 7805 * * *


0
Par. 2. Section 1.1301-1 is amended by revising the section heading and 
paragraphs (a), (b)(1), (b)(3), (c)(1), (d)(3)(ii), (d)(4), (e), 
(f)(2), (f)(4), and (g) to read as follows:


Sec.  1.1301-1  Averaging of farm and fishing income.

    (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. An individual who 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 calculating 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) The amount by which the section 1 tax would be increased if 
taxable income for each base 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) Exxon Valdez settlement payments. For purposes of this 
section, a qualified taxpayer who receives qualified settlement income 
in any taxable year is treated as engaged in a fishing business, and 
the income is treated as income attributable to a fishing business, for 
that taxable year. A qualified taxpayer is an individual plaintiff in 
the civil action In re Exxon

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Valdez, No. 89-095-CV (HRH) (Consolidated) (D. Alaska). Qualified 
taxpayer also means any individual who is a beneficiary of the estate 
of such a plaintiff, was the spouse or immediate relative of that 
plaintiff, and acquired the right to receive the settlement income from 
that plaintiff. Qualified settlement income means any interest and 
punitive damage awards that are received in connection with the civil 
action In re Exxon Valdez (whether as lump-sum or periodic payments, 
whether pre- or post-judgment, and whether related to a settlement or 
to a judgment) and that are otherwise includible in income.
    (iii) 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 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 of the Internal Revenue Code.
    (iv) 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.
* * * * *
    (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).
* * * * *
    (d) * * *
    (3) * * *
    (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 2007, 2008, and 2009, T's taxable income 
is $20,000, none of which is electible farm income. In 2010, T has 
taxable income of $30,000 (prior to any farm income averaging 
election), $10,000 of which is electible farm income. T makes a farm 
income averaging election with respect to $9,000 of the electible 
farm income for 2010. Under paragraph (a)(2)(ii) of this section, 
$3,000 of elected farm income is allocated to each of the base years 
2007, 2008, and 2009. Under paragraph (a)(2) of this section, T's 
2010 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 2007, 2008, and 2009, the amount 
by which the 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 2010 
election year), minus the section 1 tax on $20,000.
    (ii) In 2011, T has taxable income of $50,000, $12,000 of which 
is electible farm income. T makes a farm income averaging election 
with respect to all $12,000 of the electible farm income for 2011. 
Under paragraph (a)(2)(ii) of this section, $4,000 of elected farm 
income is allocated to each of the base years 2008, 2009, and 2010. 
Under paragraph (a)(2) of this section, T's 2011 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 the base years 2008 and 2009, 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 2011 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 2010 farm income averaging election and further increased by 
$4,000, which is one-third of elected farm income for the 2011 
election year), minus the section 1 tax on $23,000 (T's taxable 
income of $20,000 increased by $3,000 for T's 2010 farm income 
averaging election).
    (C) For base year 2010, 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 2010 taxable income of 
$30,000 reduced by $9,000 for T's 2010 farm income averaging 
election and increased by $4,000, which is one-third of elected farm 
income for the 2011 election year), minus the section 1 tax on 
$21,000 (T's taxable income of $30,000 reduced by $9,000 for T's 
2010 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 
Internal Revenue 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 2007, 2008, and 2009, T's taxable income 
(before taking any CCF reduction into account) is $20,000. For 
taxable year 2008, 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 2008. In 2010, T has 
total taxable income of $30,000 (before taking any CCF reduction 
into account). T's electible farm income for 2010 (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 2010, T makes a $4,000 deposit into a CCF.
    (ii) The amount of the 2010 CCF deposit reduces taxable income. 
Accordingly, T's taxable income for 2010 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 2010 is $6,000 
($10,000-$4,000). Similarly, the amount of the 2008 CCF deposit 
reduces T's taxable income for 2008. Accordingly, T's taxable income 
for 2008 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 2010. Under paragraph 
(a)(2)(ii) of this section, $2,000 of elected farm income is 
allocated to each of the base years 2007, 2008, and 2009. Under 
paragraph (a)(2) of this section, T's 2010 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

[[Page 78159]]

reduced by the $4,000 CCF deposit), minus elected farm income of 
$6,000.
    (B) For each of the base years 2007, 2008, and 2009, 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 
2007 and 2009 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 2008 is the section 1 tax on $17,000, which is 
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. 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) 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) * * *
    (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.
* * * * *
    (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

[[Page 78160]]

account, however, in determining the regular tax liability under 
section 53(c) for the election year.
* * * * *
    (g) Effective/applicability date. This section applies for taxable 
years beginning after December 15, 2010. See the provisions of 
Sec. Sec.  1.1301-1 and 1.1301-1T as in effect on December 14, 2010 for 
rules that apply for taxable years beginning on or before December 15, 
2010. In addition, a taxpayer may apply paragraph (b)(1)(ii) of this 
section in taxable years beginning after December 31, 2003.


Sec.  1.1301-1T  [Removed]

0
Par. 3. Section 1.1301-1T is removed.

Linda E. Stiff,
Deputy Commissioner for Services and Enforcement.
    Approved: December 7, 2010.
Michael Mundaca,
Assistant Secretary of the Treasury (Tax Policy).
[FR Doc. 2010-31497 Filed 12-14-10; 8:45 am]
BILLING CODE 4830-01-P