[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: 26CFR1.1251-4]

[Page 476-481]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1_INCOME TAXES--Table of Contents
 
Sec. 1.1251-4  Exceptions and limitations.

    (a) Exception for gifts--(1) General rule. Section 1251(d)(1) 
provides that no gain shall be recognized under section 1251(c)(1) upon 
a disposition by gift. For purposes of this paragraph, the term gift 
shall have the same meaning as in paragraph (a) of Sec. 1.1245-4 and, 
with respect to the application of this paragraph, principles 
illustrated by the examples of paragraph (a)(2) of Sec. 1245-4 shall 
apply. For reduction in amount of charitable contribution in case of a 
gift of farm recapture property, see section 170(e) and Sec. 1.170A-4.
    (2) Disposition in part a sale or exchange and in part a gift. Where 
a disposition of farm recpature property is in part a sale or exchange 
and in part a gift, the amount of gain recognized as ordinary income 
under section 1251(c)(1) shall not exceed:
    (i) In the case of farm recapture property other than land, the 
excess of the amount realized over adjusted basis, and
    (ii) In the case of land, the lower of the amount in subdivision (i) 
of this subparagraph or the potential gain (as defined in paragraph 
(b)(2)(ii) of Sec. 1.1251-1.
    (3) Treatment of land in hand of transferee. See paragraph (g) of 
this section for treatment of transferee in the case of a disposition of 
land to which this paragraph applies.
    (4) Examples. The provisions of this paragraph may be illustrated by 
the following examples:


[[Page 477]]


    Example 1. A, a calendar year taxpayer, makes one disposition of 
farm recapture property during 1976. On March 2, 1976, A makes a gift to 
B (also a calendar year taxpayer) of a parcel of land which he had on 
January 15, 1971. On the date of such disposition, the excess of the 
fair market value ($65,000) over the adjusted basis of the land 
($40,000) is $25,000 and the sum of the deductions allowable in respect 
of such land under sections 175 and 182 is $21,000 for 1971 and $3,000 
(attributable to 1975) for the taxable year of disposition and the four 
immediately preceding taxable years. Thus, the potential gain (as 
defined in paragraph (b)(2)(ii) of Sec. 1.1251-1) is limited to $3,000. 
At the end of 1976 (after making the applicable additions and 
subtractions under section 1251(b) (2) and (3)(A)), there is a balance 
in A's excess deductions account of $25,000. However, upon making the 
gift, A recognizes no gain under section 1251(c)(1) or section 
1252(a)(1). See subparagraph (a)(1) of this paragraph and paragraph 
(a)(1) of Sec. 1.1252-2. For treatment of the land in the hands of B, 
see example (1) of paragraph (g)(3) of this section. For effect of the 
gift on the excess deductions accounts of A and B, see paragraph (e)(2) 
of Sec. 1.1251-2.
    Example 2. Assume the same facts as in example (1), except that A 
transfers the land to B for $50,000. Thus, the gain realized is $10,000 
(amount realized, $50,000, minus adjusted basis $40,000), and A has made 
a gift of $15,000 (fair market value, $65,000, minus amount realized, 
$50,000). Since under subparagraph (2)(ii) of this paragraph, the 
potential gain ($3,000) is lower than the gain realized ($10,000), the 
gain to which section 1251(c)(1) could apply is limited by subparagraph 
(2)(ii) of this paragraph to $3,000. Thus, as A has $25,000 in his 
excess deductions account, $3,000 is recognized as ordinary income under 
section 1251(c)(1). See example (2) of paragraph (a)(4) of Sec. 1.1252-
2 for computation of gain of $7,000 which is recognized as ordinary 
income by A under section 1252(a)(1). For treatment of the land in the 
hands of B, see example (2) of paragraph (g)(3) of this section.

    (b) Exception for transfers at death--(1) General rule. Section 
1251(d)(2) provides that, except as provided in section 691 (relating to 
income in respect of a decedent), no gain shall be recognized under 
section 1251(c)(1) upon a transfer at death. For purposes of this 
paragraph, the term transfer at death shall have the same meaning as in 
paragraph (b) of Sec. 1.1245-4 and, with respect to the application of 
this paragraph, principles illustrated by the examples of paragraph 
(b)(2) of Sec. 1.1245-4 shall apply.
    (2) Treatment of land in hands of transferee. If as of the date a 
person acquires land which is farm recapture property from a decedent 
such person's basis is determined, by reason of the application of 
section 1014(a), solely by reference to the fair market value of the 
property on the date of the decedent's death or on the applicable date 
provided in section 2032 (relating to alternate valuation date), then on 
such date the potential gain in respect to such land is zero.
    (c) Certain corporate transactions--(1) Limitation on amount of 
gain. Under section 1251(d)(3), upon a transfer of property described in 
subparagraph (2) of this paragraph, the amount of gain recognized as 
ordinary income by the transferor under section 1251(c)(1) shall not 
exceed an amount equal to the excess (if any) of (i) the amount of gain 
recognized to the transferor on the transfer (determined without regard 
to section 1251) over (ii) the amount (if any) of gain recognized as 
ordinary income under section 1245(a)(1). For purposes of this 
subparagraph, the principles of paragraph (c)(1) of Sec. 1.1245-4 shall 
apply. Thus, in case of a transfer of both farm recapture property and 
property other than farm recapture property in a single transaction, the 
amount realized from the disposition of the farm recapture property (as 
determined in a manner consistent with the principles of paragraph 
(a)(5) of Sec. 1.1245-1) shall be deemed to consist of that portion of 
the fair market value of each property acquired which bears the same 
ratio to the fair market value of such acquired property as the amount 
realized from the disposition of farm recapture property bears to the 
total amount realized. The preceding sentence shall be applied solely 
for purposes of computing the portion of the total gain (determined 
without regard to section 1251) which is eligible to be recognized as 
ordinary income under section 1251(c)(1). Section 1251(d)(3) does not 
apply to a disposition of property to an organization (other than a 
cooperative described in section 521) which is exempt from the tax 
imposed by chapter 1 of the Code.
    (2) Transfers covered. The transfers referred to in subparagraphs 
(1) of this paragraph are transfers of farm recapture property in which 
the basis of such property in the hands of the

[[Page 478]]

transferee is determined by reference to its basis in the hands of the 
transferor by reason of the application of any of the following 
provisions:
    (i) Section 332 (relating to distributions in complete liquidation 
of an 80-percent-or-more controlled subsidiary corporation). For the 
application of section 1251(d)(3) to such a complete liquidation, the 
principles of paragraph (c)(3) of Sec. 1.1245-4 shall apply. Thus, for 
example, the provisions of subparagraph (1) of this paragraph do not 
apply to a liquidating distribution of farm recapture property by an 80-
percent-or-more controlled subsidiary to its parent if the parent's 
basis for the property is determined, under section 334(b)(2), by 
reference to its basis for the stock of the subsidiary.
    (ii) Section 351 (relating to transfer to corporation controlled by 
transferor).
    (iii) Section 351 (relating to exchanges pursuant to certain 
corporate reorganizations).
    (iv) Section 371(a) (relating to exchanges pursuant to certain 
receivership and bankruptcy proceedings).
    (v) Section 374(a) (relating to exchanges pursuant to certain 
railroad reorganizations).
    (3) Partnerships. For the application of section 1251 to 
partnerships, see paragraph (e) of this section.
    (4) Treatment of land in hands of transferee. See paragraph (g) of 
this section for treatment of transferee in the case of a disposition of 
land to which this paragraph applies.
    (5) Examples. The provisions of this paragraph may be illustrated by 
the following examples:

    Example 1. (i) A, an individual calendar year taxpayer, makes one 
disposition of farm recapture property during 1971. On January 20, 1971. 
A transfers farm recapture property (other than land and section 1245 
property), having an adjusted basis of $22,000, to corporation M in 
exchange for stock in M worth $35,000 plus $15,000 in cash in a 
transaction qualifying under section 351. Thus, the amount realized is 
$50,000, and the gain realized is the excess of the amount realized, 
$50,000, over the adjusted basis, $22,000, or $28,000. Without regard to 
section 1251, A would recognize gain of $15,000 under section 351(b), 
and M's basis for the farm recapture property would be determined under 
section 362(a) by reference to its basis in the hands of A. Assume 
further that the balance in A's excess deductions account (after making 
the applicable additions and subtractions under section 1251(b) (2) and 
(3)(A)) at the close of 1971 is $20,000. Thus, since such balance in the 
excess deductions account ($20,000) is lower than the gain realized 
($28,000), is subparagraph (1) of this paragraph did not apply, gain of 
$20,000 would be recognized as ordinary income under section 1251(c)(1). 
However, subparagraph (1) of this paragraph limits the amount of gain to 
be recognized as ordinary income under section 1251(c)(1) to $15,000.
    (ii) If, however, A transferred the farm recapture property to M 
solely in exchange for stock worth $50,000, then, because of the 
application of subparagraph (1) of this paragraph he would not recognize 
any gain under section 1251(c)(1). If, instead, A transferred the farm 
recapture property to M in exchange for stock worth $25,000 and $25,000 
cash, only $20,000 (the amount of such balance in the excess deductions 
account) of the gain of $25,000 recognized under section 351(b) would be 
recognized as ordinary income under section 1251(c)(1). The remaining 
$5,000 of gain recognized under section 351(b) may be treated as gain 
from the sale or exchange of property described in section 1231. In the 
hands of M, the property received from A is farm recapture property 
under the provisions of paragraph (a)(11)(ii) of Sec. 1.1251-3. For 
treatment of the property received by A in such transaction; see section 
1251(d)(6) and paragraph (f) of this section.
    Example 2. Assume the same facts as in subdivision (i) of example 
(1), except that the farm recapture property is section 1245 property. 
Assume further than $5,000 is recognized as ordinary income under 
section 1245(a)(1), and that as of the close of 1971, A has a balance of 
$15,000 in his excess deductions account (after making the applicable 
additions and subtractions under section 1251(b) (2) and (3)(A) which, 
under paragraph (b) of Sec. 1.1251-3, is computed by treating the 
$5,000 of gain to which section 1245 applies as gross income derived 
from the trade or business of farming). The amount of gain recognized as 
ordinary income under section 1251(c)(1) is $10,000, computed as 
follows:

(1) Amount of gain under section 1251(c)(1) (determined
 without regard to subparagraph (1) of this paragraph):......
    (a) Portion of gain realized ($28,000) in excess of          $23,000
     amount recognized as ordinary income under section
     1245(a)(1) ($5,000).....................................
    (b) Excess deductions account balance....................     15,000
    (c) Lower of (a) or (b)..................................     15,000
                                                              ==========
(2) Limitation in subparagraph (1) of this paragraph:
    (a) Gain recognized (determined without regard to section     15,000
     1251)...................................................
    (b) Minus: Gain recognized as ordinary income under            5,000
     section 1245(a)(1)......................................
                                                              ----------

[[Page 479]]


    (c) Difference...........................................     10,000
                                                              ==========
    (3) Lower of line (1)(c) or line (2)(c)..................     10,000
                                                              ==========


    (d) Limitation for like kind exchanges and involuntary conversions--
(1) General rule. Under section 1251(d)(4), if farm recapture property 
is disposed of and gain (determined without regard to section 1251) is 
not recognized in whole or in part under section 1031 (relating to like 
kind exchanges) or section 1033 (relating to involuntary conversions), 
then the amount of gain recognized as ordinary income by the transferor 
under section 1251(c)(1) shall not exceed an amount equal to the excess 
(if any) of (i) the amount of gain recognized on such disposition 
(determined without regard to section 1251) or (ii) the amount (if any) 
of gain recognized as ordinary income under section 1245(a)(1).
    (2) Examples. The provisions of subparagraph (1) of this paragraph 
may be illustrated by the following examples:

    Example 1. (i) A, an individual calendar year taxpayer, owns a herd 
of breeding cattle having an adjusted basis of $75,000 which he acquired 
on March 30, 1970, A receives insurance proceeds of $90,000. Thus, the 
gain realized is $15,000 (that is, the excess of the amount realized, 
$75,000), A makes no other disposition of farm recapture property during 
1970. Assume that had the herd been sold at its fair market value on 
March 15, 1970, no gain would have been recognized as ordinary income 
under section 1245(a)(1). As of the close of 1970, A has a balance of 
$12,000 in his excess deductions account (after making the applicable 
additions and subtractions under section 1251(b) (2) and (3)(A)). Thus, 
since the balance in the excess deductions account, $12,000, is lower 
than the gain realized, $15,000, the amount of gain which would be 
recognized under section 1251(c)(1) (determined without regard to 
subparagraph (1) of this paragraph) would be $12,000.
    (ii) Assume further that A spends $72,000 of the insurance proceeds 
to purchase another breeding herd, $10,000 to purchase stock in the 
acquisition of control of a corporation which owns property similar or 
related in service or use to the destroyed breeding herd, and retains 
cash of $8,000. Both of the acquisitions by A qualify under section 
1033(a)(3)(A), and A properly elects under section 1033(a)(3)(A) and the 
regulations thereunder to limit recognition of gain to $8,000 (that is, 
the amount by which the amount realized from the conversion, $90,000 
exceeds the cost of the stock and other property acquired to replace the 
converted property, $72,000 plus $10,000). Thus, since $8,000 is the 
amount of gain which would be recognized under section 1033(a)(3) 
(determined without regard to section 1251), and since that amount is 
lower than the gain of $12,000 which would be recognized under section 
1251(c)(1) (determined without regard to subparagraph (1) of this 
paragraph), under subparagraph (1) of this paragraph the amount of gain 
recognized under section 1251(c)(1) is limited to $8,000. The stock 
purchased for $10,000 qualifies under paragraph (a)(1)(ii)(b) of Sec. 
1.1251-3 as farm recapture property.
    Example 2. (i) A, an individual calendar year taxpayer, owns land 
which he had acquired on March 7, 1970, having an adjusted basis of 
$48,000, and a fair market value of $67,500. On January 15, 1975, A, as 
a result of a condemnation action, receives $67,500 (its fair market 
value) for the land. The aggregate of the deductions allowable in 
respect of such land under sections 175 and 182 is $18,000, with $5,000 
of such aggregate attributable to 1970 and $13,000 of such aggregate 
attributable to 1970 and $13,000 of such aggregate attributable to 1975 
and the four preceding taxable years. Thus, the potential gain (as 
defined in paragraph (b)(2)(ii) of Sec. 1.1251-1) is limited to 
$13,000, since that amount is lower than $19,500 (the excess of the fair 
market value of the land, $67,500, over its adjusted basis, $48,000). 
The gain realized by A is also $19,500. At the end of A's taxable year 
(after making the applicable additions and subtractions under section 
1251(b) (2) and (3)(A)) there is a balance of $21,000 in the excess 
deductions account of A. Since the potential gain, $13,000, is lower 
than both the excess deductions account balance, $21,000, and the gain 
realized, $19,500, A would recognize $13,000 as ordinary income under 
section 1251(c)(1) (determined without regard to subparagraph (1) of 
this paragraph).
    (ii) Assume further that A spends the entire amount received, 
$67,500, to purchase stock in the acquisition of control of a 
corporation which owns property similar or related in service or use to 
A's condemned land which qualifies under section 1033(a)(3)(A), and A 
properly elects under section 1033(a)(3)(A) and the regulations 
thereunder to limit recognition of gain to zero (that is, the amount by 
which the amount realized from the conversion, $67,500, exceeds the cost 
of the stock acquired to replace the converted land, $67,500). Thus, 
since no gain would be recognized under section 1033(a)(3) (determined 
without regard to section 1251), under subparagraph (1) of this 
paragraph, no gain is recognized under section 1251(c)(1). The stock 
purchased for $67,500 qualifies under paragraph (a)(1)(ii)(b) of Sec. 
1.1251-3 as farm recapture property. See example (1) of paragraph (d)(2) 
of Sec. 1.1252-2 for a computation of gain recognized as ordinary 
income under section 1252(a)(1).

[[Page 480]]

    Example 3. B, an individual calendar year taxpayer, owns a herd of 
breeding cattle having an adjusted basis of $25,000 which he acquired on 
March 30, 1970. On March 15, 1976, the entire herd is destroyed by a 
blizzard and on March 20, 1976, B receives insurance proceeds of 
$90,000. Thus, the gain realized is $65,000 (that is, the excess of the 
amount realized, $90,000, over the adjusted basis, $25,000). B makes no 
other disposition of farm recapture property during 1976. B spends 
$60,000 of the insurance proceeds to purchase another breeding herd and 
retains cash of $30,000. The acquisition by B qualifies under section 
1033(a)(3)(A), and B properly elects under section 1033(a)(3)(A) and the 
regulations thereunder to limit recognition of gain to $30,000 (that is, 
the amount by which the amount realized from the conversion, $90,000, 
exceeds the cost of the property acquired to replace the converted 
property, $60,000). Assume that the amount of gain recognized under 
section 1245(a)(1) is $20,000, and that as of the close of 1976 B has a 
balance of $100,000 in his excess deductions account (after making the 
applicable additions and subtractions under section 1251(b) (2) and 
(3)(A) which, under paragraph (b) of Sec. 1.1251-3, is computed by 
treating the $20,000 of gain to which section 1245 applies as gross 
income derived from the trade or business of farming). The amount of 
gain recognized as ordinary income under section 1251(c)(1) is $10,000, 
computed as follows:

(1) Amount of gain under section 1251(c)(1) (determined
 without regard to subparagraph (1) of this paragraph):
    (a) Portion of gain realized ($65,000) in excess of          $45,000
     amount recognized as ordinary income under section
     1245(a)(1) ($20,000)....................................
    (b) Excess deductions account balance....................    100,000
    (c) Lower of (a) or (b)..................................     45,000
                                                              ==========
(2) Limitation in subparagraph (1) of this paragraph:
    (a) Gain recognized (determined without regard to section     30,000
     1251)...................................................
    (b) Minus: Gain recognized as ordinary income under          $20,000
     section 1245(a)(1)......................................
                                                              ----------
    (c) Difference...........................................     10,000
                                                              ==========
(3) Lower of line (1)(c) or line (2)(c)......................     10,000
                                                              ==========


    (3) Application to single disposition of farm recapture property of 
one class and property of different class. (i) If upon a sale of farm 
recapture property of one class gain would be recognized under section 
1251(c)(1), and if such farm recapture property together with property 
of a different class or classes is disposed of in a single transaction 
in which gain is not recognized in whole or in part under section 1031 
(without regard to section 1251(c)(1), then rules consistent with the 
principles of paragraph (d)(6) of Sec. 1.1250-3 (relating to gain from 
disposition of certain depreciable realty) shall apply for purposes of 
allocating the amount realized to each of the classes of property 
disposed of and for purposes of determining what property the amount 
realized for each class consists of.
    (ii) For purposes of this subparagraph, the classes of property 
other than farm recapture property are (a) section 1245 property, (b) 
section 1250 property, and (c) other property.
    (iii) For purposes of this subparagraph, the classes of farm 
recapture property are (a) hand, (b) farm recapture property other than 
land which is section 1245 property and (c) farm recapture property 
other than land which is not section 1245 property.
    (4) Treatment of land received in like kind exchange or involuntary 
conversion. The aggregate of the deductions allowed under sections 175 
and 182 in respect of land acquired in a transaction described in 
subparagraph (1) of this paragraph shall include the aggregate of the 
deductions allowable under sections 175 and 182 in respect of the land 
transferred or converted (as the case may be) in such transaction minus 
the amount of gain taken into account under sections 1251(c) and 1252(a) 
with respect to the land transferred or converted. Upon a subsequent 
disposition of such land, such deductions shall be treated as having 
been allowable in the same taxable year as they were allowable with 
respect to the land transferred or converted.
    (e) Partnerships. [Reserved]
    (f) Property transferred to controlled corporation. [Reserved]
    (g) Treatment of land received by a transferee in a disposition by 
gift and certain tax-free transactions--(1) General rule. If farm 
recapture property which is land is disposed of in a transaction which 
is either a gift to which paragraph (a)(1) of this section applies or a 
completely tax-free transfer to which section 1251(b)(5)(A) applies, 
then for purposes of section 1251:
    (i) The aggregate of the deductions allowable under sections 175 and 
182 in respect of the land in the hands of the transferee immediately 
after the disposition shall be an amount equal to

[[Page 481]]

the aggregate of such deductions for the taxable year and the four 
preceding taxable years in the hands of the transferor immediately 
before the disposition,
    (ii) Upon a subsequent disposition by the transferee (including a 
computation of potential gain as defined in paragraph (b)(2)(ii) of 
Sec. 1.1251-1), such deductions in the hands of the transferee shall be 
treated as having been allowable with respect to the transferee in the 
same taxable year they were allowable to the transferor, and
    (iii) If the taxable years of the transferor and transferee 
regularly end on different dates, then the aggregate of such deductions 
allowable for taxable year with respect to the transferor shall be 
treated in the hands of the transferee as allowable in the transferee's 
taxable year in which the taxable year of the transferor regularly ends.
    (2) Certain partially tax-free transfers. If farm recapture property 
which is land is disposed of in a transaction which either is in part a 
sale or exchange and in part a gift to which paragraph (a)(2) of this 
section applies, or is a partially tax-free transfer to which section 
1251(b)(5)(A) applies, then for purposes of section 1251:
    (i) The amount determined under subparagraph (1)(i) of this 
paragraph shall be reduced by the amount of gain taken into account 
under sections 1251(c) and 1252(a) to the extent such gain is 
attributable to the sections 175 and 182 deductions for the taxable year 
and the preceding four taxable years (determined by attributing gain 
under section 1252(a) to the oldest years first) by the transferor upon 
the disposition, and
    (ii) For purposes of subparagraph (1)(ii) of this paragraph, the 
amount of such gain recognized under sections 1251(c) and 1252(a) shall 
reduce the aggregate of deductions allowable under sections 175 and 182 
for the taxable year and each of the preceding four taxable years on a 
pro rata basis.
    (3) Examples. The provisions of subparagraphs (1) and (2) of this 
paragraph may be illustrated by the following examples:

    Example 1. Assume the same facts as in example (1) of paragraph 
(a)(4) of this section. Therefore, on the date B receives the land in 
the gift transaction, under subparagraph (1) (i) and (ii) of this 
paragraph, the aggregate of the deductions allowable under sections 175 
and 182 in respect of the land in the hands of B is the amount in the 
hands of A, $24,000, and for purposes of applying section 1251 upon a 
subsequent disposition by B (including the computation of potential 
gain) such deductions in the hands of B shall be treated as allowable in 
the same year as they were allowable to A. Thus, in respect to the land 
in the hands of B, the allowable section 175 and 182 deductions of 
$3,000 shall be treated as allowable in 1975.
    Example 2. Assume the same facts as in example (2) of Paragraph 
(a)(4) of this section. Under paragraph (2) of this paragraph, the 
aggregate of the allowable sections 175 and 182 deductions with respect 
to the land which pass over to B for purposes of section 1251 is zero 
($3,000 deduction allowable under sections 175 and 182 for the taxable 
year and the four preceding taxable years minus $3,000 gain taken into 
account by A in accordance with example (2) of paragraph (a)(4) of this 
section).

[T.D. 7818, 41 FR 18828, May 7, 1976; 41 FR 23669, June 11, 1976]