SECTION 4. EXAMPLE

The following example illustrates the application of the rules in this notice. Drought conditions and designations of eligibility for federal assistance are described in this example solely for illustrative purposes and are not intended to reflect actual conditions and designations.

Example . (i) Taxpayer A, a calendar year taxpayer, raises cattle in Keith County, Nebraska. In 2002, all of A’s cattle held for breeding purposes are sold solely on account of drought conditions in Keith County. Under A’s normal business practices, only 25 percent of A’s cattle held for breeding purposes would have been sold in 2002. In 2003, the Secretary of Agriculture designates Keith County as eligible for federal assistance on account of the drought conditions.

(ii) Under § 1033(e)(1), the sale of 75 percent of the cattle held for breeding purposes is treated as an involuntary conversion. Section 1033(a) provides that the gain from this portion of A’s sale is not recognized except to the extent it exceeds the cost of replacement property (property that is related in service or use) purchased during the replacement period. Because the Secretary of Agriculture has designated Keith County as being eligible for federal assistance on account of the drought conditions, A’s replacement period is determined under § 1033(e)(2)(A) and ends on December 31, 2006.

(iii) Under § 1033(e)(2) and this notice, A’s replacement period is extended until the end of A’s first taxable year ending after the first drought-free year for the applicable region. For this purpose, the applicable region is the county that experienced the drought conditions on account of which the livestock

2006–39 I.R.B. 529 September 25, 2006

was sold (Keith County) and all counties contiguous to Keith County (Deuel, Garden, Arthur, McPherson, Lincoln, and Perkins Counties, Nebraska, and Sedgwick County, Colorado). Sedgwick County is contiguous even though it is in a different state and touches Keith County only at Keith County’s southwest corner.

(iv) For the 12-month period ending on August 31, 2006, severe drought conditions are reported on U.S. Drought Monitor maps for all counties in the applicable region, and all of those counties are included on the list published by the IRS. For the 12-month period ending on August 31, 2007, the only drought conditions reported for the applicable region on U.S. Drought Monitor maps are severe drought conditions for Sedgwick County for the first week in September 2006. A is unable to determine from the maps whether drought conditions have been reported for the applicable region, but the list published by the IRS for the 12-month period ending on August 31, 2007, includes Sedgwick County. For the 12-month period ending August 31, 2008, U.S. Drought Monitor maps do not report drought conditions for any county in the applicable region and none of the counties are included on the list published by the IRS.

(v) Neither the 12-month period ending on August 31, 2006, nor the 12-month period ending on August 31, 2007, is a drought-free year for the applicable region because, in each of the 12-month periods, severe drought conditions have been reported for at least one county in the applicable region for a part of the 12-month period. Accordingly, the 12-month period ending on August 31, 2008, is the first drought-free year for the applicable region. Under § 1033(e)(2) and this notice, A’s replacement

period is extended through December 31, 2008 (the last day of A’s first taxable year ending after the first drought-free year for the applicable region).