[Code of Federal Regulations]
[Title 26, Volume 11]
[Revised as of April 1, 2004]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.1251-3]

[Page 474-476]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1251-3  Definitions relating to section 1251.

    (a) Farm recapture property--(1) In general. (i) The term farm 
recapture property means any property (other than section 1250 property 
as defined in section 1250(c)) which, in the hands of the taxpayer is or 
was property:
    (a) Which is described in section 1231(b)(1) (relating to business 
property held for more than 1 year (6 months for taxable years beginning 
before 1977; 9 months for taxable years beginning in 1977), section 
1231(b)(3) (relating to livestock), or section 1231(b)(4) (relating to 
an unharvested crop), and
    (b) Which, at the time the property qualifies under (a) of this 
subdivision, is used in the trade or business of farming (as defined in 
paragraph (e) of this section).
    (ii) The term farm recapture property also includes:
    (a) Property acquired by gift and property acquired in a transaction 
to which section 1251(b)(5)(A) applies, if such property was farm 
recapture property within the meaning of subdivision (i) of this 
subparagraph in the hands of the transferor, and
    (b) Property the basis of which in the hands of the taxpayer holding 
such property is determined by reference to the basis of other property 
which in the hands of such taxpayer was farm recapture property within 
the meaning of subdivision (i) of this paragraph. For purposes of (b) of 
this subdivison (ii) property whose basis is determined in accordance 
with the last sentence of section 1033(c) shall be considered as having 
as basis determined by reference to the property whose conversion gave 
rise to the application of such section.
    (iii) Leasehold of farm recapture property. If property is farm 
recapture property under this subparagraph, a leasehold of such property 
is also farm recapture property is also farm recapture property to the 
same extent as described in, and in accordance with the principles of 
paragraph (a)(2) of Sec. 1.1245-3.
    (iv) If property described in subdivision (ii) of this subparagraph 
is stock or securities received in certain corporate transactions 
described in section 1251(d)(6), see paragraph (f) of Sec. 1.1251-4 for 
determination as to extent such stock or securities is farm recapture 
property.
    (2) Examples. The provisions of subparagraph (1) of this paragraph 
may be illustrated by the following example:

    Example: On December 15, 1971, A, an individual calendar year 
taxpayer engaged in the trade or business of farming (as defined in 
paragraph (e) of this section) exchanges in a transaction which 
qualifies under section 1031(a) (relating to an exchange of property 
held for productive use or investment) tractor No. 1 which A acquired on 
March 1, 1971, for tractor No. 2. Under subparagraph (1)(i) of this 
paragraph, tractor No. 1 is farm recapture property as the tractor was 
used in the trade or business of farming and was held for a period in 
excess of 6 months. Under subparagraph (1)(ii) of this paragraph, 
tractor No. 2 is farm recapture property as the basis of tractor No. 2 
in the hands of A is determined with reference to the adjusted basis of 
tractor No. 1.

    (b) Farm net loss--(1) In general. The term farm net loss means the 
amount by which:
    (i) The deductions allowed or allowable for the taxable year by 
chapter 1 of subtitle A of the Code which are directly connected with 
the carrying on

[[Page 475]]

of the trade or business of farming, exceed
    (ii) The gross income derived from such trade or business.
    (2) Disposition of farm recapture property. For purposes of 
subparagraph (1) of this paragraph, no gain or loss (regardless of how 
treated) resulting from the disposition of farm recapture property shall 
be taken into account, except that under subparagraph (1)(ii) of this 
paragraph gain upon disposition of such property which is recognized as 
ordinary income by reason of section 1245(a)(1) shall be taken into 
account. Thus, for example, if land used in the trade or business of 
farming were disposed of and gain of $3,000 was realized, then none of 
such gain would be taken into account in computing farm net loss and 
farm net income even if all or a portion of such gain is recognized as 
ordinary income by reason of section 1251(c)(1), section 1252(a)(1), or 
both. If such land were disposed of at a loss, the result would be the 
same. See paragraph (d)(1)(ii) of this section with respect to the 
exclusion of gain or loss from the disposition of farm recapture 
property from the computation of nonfarm adjusted gross income.
    (3) Amount of deduction under section 172(a) attributable to farm 
net loss. (i) If all or a portion of a net operating loss (within the 
meaning of section 172(c)) for a taxable year is absorbed in another 
taxable year as a carryover or carry back, then for purposes of 
determining the amount of deductions referred to in subparagraph (1)(i) 
of this paragraph for such other taxable year the portion of the amount 
absorbed in such other taxable year which is attributable to amounts 
directly connected with the carrying on of the trade or business of 
farming shall be an amount equal to the amount absorbed, multiplied by a 
fraction the numerator of which is the amount of the farm net loss for 
the taxable year the net operating loss arose (but not in excess of the 
net operating loss for such year) and the denominator of which is the 
amount of the net operating loss for such year.
    (ii) No portion of a farm net loss added to the excess deductions 
account in the year a net operating loss arose (or which would have been 
added to such account but for the application of the $25,000 or $12,500 
farm net loss exclusion under paragraph (b) (2)(ii) or (4)(i)(b) of 
Sec. 1.1251-2) shall be taken into account under subparagraph (1)(i) of 
this paragraph in any other taxable year. Accordingly the same farm net 
loss shall not be added to the excess deductions account more than once 
and a farm net loss for any taxable year shall not be subject to the 
$25,000 or $12,500 exclusion more than once.
    (iii) If a net operating loss for a current taxable year 
attributable in whole or part to a farm net loss is carried back and 
absorbed in a preceding taxable year no redetermination shall be made 
with respect to (a) the amount of gain recognized as ordinary income 
under section 1251(c)(1) and paragraph (b) of Sec. 1.1251-1 in any 
taxable year preceding the current taxable year, and (b) the amount of 
the taxpayer's excess deductions account allocated under paragraph 
(e)(2) of Sec. 1.1251-2 to a donee as of the close of any taxable year 
preceding the current taxable year.
    (4) Special rules as to estates and trusts. In the case of an estate 
or trust, computations of amounts under this paragraph shall be made 
without regard to any deductions under section 651 or 661. If on the 
termination of an estate or trust the beneficiaries succeeding to its 
property are allowed a deduction under section 642(h) (relating to 
unused loss carryovers and excess deductions on termination available to 
beneficiaries), to the extent the carryover or excess deduction is 
attributable to a farm loss it shall have the same character in the 
hands of the beneficiary as in the hands of the estate or trust. The 
amount of a carryover or of excess deductions from a particular taxable 
year of an estate or trust succeeded to under section 642(h) shall be 
allocated between amounts attributable to a farm net loss and other 
amounts in the same proportion as the farm net loss for such year bears 
to the amount of such carryover or of excess deductions. If there is 
more than one beneficiary, the total farm net loss succeeded to by all 
the beneficiaries shall be allocated to each beneficiary in proportion 
to the deduction of each under section 642(h).
    (c) Farm net income. The term farm net income means the amount by 
which

[[Page 476]]

the amount referred to in paragraph (b)(1)(ii) of this section exceeds 
the amount referred to in paragraph (b)(1)(i) of this section.
    (d) Nonfarm adjusted gross income--(1) In general. The term nonfarm 
adjusted gross income means adjusted gross income (taxable income in the 
case of a taxpayer other than an individual) computed without regard to:
    (i) Income or deductions taken into account in computing farm net 
loss and farm net income,
    (ii) Gains and losses (regardless of how treated) resulting from the 
disposition of farm recapture property, and
    (iii) In the case of an estate or trust, the principles of paragraph 
(b)(4) of this section, to the extent applicable, shall apply.
    (2) Special rules. The following rules in addition to the rules of 
subparagraph (1) of this paragraph, shall apply in computing the 
adjusted gross income of a shareholder of an electing small business 
corporation:
    (i) The amount of any distribution described in section 1373 (c)(2) 
made by the corporation shall be disregarded,
    (ii) For purposes of computing the amount includible in the gross 
income of a shareholder under section 1373(b), the corporation's 
undistributable taxable income shall equal the corporation's nonfarm 
adjusted gross income (as defined in subparagraph (1) of this paragraph) 
minus the amount described in section 1373(c)(1), and
    (iii) For purposes of computing a shareholder's deduction under 
section 1374, the corporation's net operating loss shall be computed 
without regard to the items referred to in subparagraph (1) (i) and (ii) 
of this paragraph.
    (e) Trade or business of farming--(1) In general. For purposes of 
section 1251, the term trade or business of farming includes any trade 
or business with respect to which the taxpayer may compute gross income 
under Sec. 1.61-4, expenses under Sec. 1.162-12, make an election 
under section 175, 180, or 182, or use an inventory method referred to 
in Sec. 1.471-6. Such term does not include any activity not engaged in 
for profit within the meaning of section 183 and section 183-2.
    (2) Horse racing. If a taxpayer is engaged in the raising of horses, 
including horses which are bred or purchased, then for purposes of 
section 1251 the term trade or business of farming also includes the 
racing of such horses by the taxpayer. Thus, for example, if a taxpayer 
purchases a yearling and develops it to the racing stage, the term trade 
or business of farming includes the racing of such horse.
    (3) Several businesses of farming. If a taxpayer is engaged in more 
than one trade or business of farming, all such trades and businesses 
shall be treated as one trade or business.

[T.D. 7418, 41 FR 18826, May 7, 1976, as amended by T.D. 7728, 45 FR 
72650, Nov. 3, 1980]