Par. 2. Sections 1.1062-0 through 1.1062-3 are added to read as follows:
(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 § 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 § 1.1062-3. Only the agent for the group (within the meaning of § 1.150277) may make a section 1062 election under this section and enter into any transfer agreement under § 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 § 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 § 1.10623(b)(1)(ii); or
(B) The eligible section 1062 transferee exception in § 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 §§ 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 § 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 § 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.
(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 § 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 § 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 [date of publication of final regulations in the Federal Register ].