SECTION 2. BACKGROUND

.01 Nonrecognition of Gain on Invol- untary Conversion of Livestock . Section 1033(a) generally provides for nonrecognition of gain when property is involuntarily converted and replaced with property that is similar or related in service or use. Section 1033(e)(1) provides that a sale or exchange of livestock (other than poultry) held by a taxpayer for draft, breeding, or dairy purposes in excess of the number that would be sold following the taxpayer’s usual business practices is treated as an involuntary conversion if the livestock is sold or exchanged solely on account of drought, flood, or other weatherrelated conditions.

.02 Replacement Period . Section 1033(a)(2)(A) generally provides that gain from an involuntary conversion is recognized only to the extent the amount realized on the conversion exceeds the cost of replacement property purchased during the replacement period. If a sale or exchange of livestock is treated as an involuntary conversion under § 1033(e)(1) and is solely on account of drought, flood, or other weather-related conditions that result in the area being designated as eligible for assistance by the federal government, § 1033(e)(2)(A) provides that the replacement period ends four years after the close of the first taxable year in which any part of the gain from the conversion is realized. Section 1033(e)(2)(B) provides that the

hours (25 percent of 40 kilowatt hours) per day of the electricity sold to the unrelated party will be treated as electricity produced from open-loop biomass.

Example 2 . A qualified facility at a paper mill produces 100 kilowatt hours of electricity per day. The entire electric output of the facility is sold to a public utility. Each day, simultaneously with the sales, 120 kilowatt hours of electricity are purchased from a public utility to operate the facility and the paper mill. Because the amount of electricity sold is less than the amount of electricity simultaneously purchased, none of the electricity will be treated as sold to an unrelated party.

.04 Wood Bark And Lignin . Open-loop biomass includes wood bark and lignin material recovered from spent pulping liquors.

.05 No Rule Area . The Service will not issue private letter rulings regarding § 45 as it relates to open-loop biomass. In addition, the Service will not rule on any issues under Subchapter K for partnerships claiming the credit under § 45.