The recent enactment of the One, Big, Beautiful Bill Act (OBBBA) introduced significant changes to the Internal Revenue Code, specifically regarding the sale of agricultural assets. One of the most critical additions for our clients in the agricultural sector is the new Internal Revenue Code (IRC) Section 1062. This section allows for the deferral of tax liability arising from specific farmland dispositions. However, the interaction between this deferral mechanism and the estimated tax payment requirements under IRC Sections 6654 and 6655 created an immediate technical conflict.

To resolve this, the Internal Revenue Service released Notice 2026-3. This article examines the statutory framework of the Section 1062 election, the estimated tax conflict it created, and the specific relief provided by the Notice.

The Statutory Framework: IRC Section 1062

IRC Section 1062(a) provides a specialized election for taxpayers recognizing gain from the sale or exchange of "qualified farmland property" to a "qualified farmer." Under this provision, "at the election of the taxpayer, the portion of the net income tax of such taxpayer for the taxable year of the sale or exchange which is equal to the applicable net tax liability shall be paid in 4 equal installments".

The timing of these payments is statutorily defined. IRC Section 1062(b)(1) mandates that "the first installment shall be paid on the due date (determined without regard to any extension of time for filing the return) for the return of tax for the taxable year in which the sale or exchange occurs". Subsequent installments are due on the return due dates for the following three taxable years.

For practitioners advising clients, identifying "qualified farmland property" is paramount. Pursuant to IRC Section 1062(d)(2)(A), this includes real property located in the United States which "has been used by the taxpayer as a farm for farming purposes, or leased by the taxpayer to a qualified farmer for farming purposes, during substantially all of the 10-year period ending on the date of the qualified sale or exchange". Additionally, the property must be subject to a legally enforceable restriction prohibiting non-farm use for 10 years post-sale.

The Conflict with Estimated Tax Provisions

While IRC Section 1062 allows for the payment of tax over four years, the existing estimated tax statutes—IRC Section 6654 for individuals and IRC Section 6655 for corporations—generally require current payment of tax liability as income is earned.

Under IRC Section 6654(d)(1)(B), the "required annual payment" for individuals is generally the lesser of "90 percent of the tax shown on the return for the taxable year" or 100 percent (or 110 percent for higher-income taxpayers) of the preceding year’s tax. Similarly, IRC Section 6655(d)(1)(B) imposes comparable requirements on corporations to avoid additions to tax.

The conflict arises because the "tax shown on the return" generally includes the total liability for the year, regardless of a payment deferral election. As the IRS noted in Notice 2026-3, taxpayers faced a situation where "in order to avoid the addition to tax under section 6654 or 6655 for failure to make a sufficient and timely payment of estimated income tax, they must pay the full amount of applicable net tax liability, or a substantial portion of it, as estimated income tax for the taxable year of the qualified sale or exchange".

Strict adherence to the estimated tax rules would effectively nullify the Congressional intent of the deferral. As stated in the Notice, "Doing so would be contrary to the purpose of the section 1062 election, which is to allow payment of the liability in installments over four years".

Details of Relief Under Notice 2026-3

Notice 2026-3 establishes a "Limited Waiver" of the addition to tax. The IRS determined that "In the interest of sound tax administration, the IRS will waive a portion of the addition to tax under sections 6654 and 6655 attributable to the qualified sale or exchange for which the section 1062 election is made".

The mechanics of this relief are specific. Practitioners must calculate the estimated tax payments by adjusting the "required annual payment." The Notice establishes that "a taxpayer may exclude 75 percent of the applicable net tax liability (with respect to the qualified sale or exchange as to which the taxpayer has properly made the section 1062 election) from the calculation of the required annual payment for purposes of determining estimated income tax installment amounts".

It is crucial to note that this is not a total exclusion of the liability from the estimated tax calculation. The taxpayer is still responsible for the portion of the liability due in the current year. The Notice explicitly states: "In determining the required annual payment for the taxable year of the qualified sale or exchange, the taxpayer must include the portion of the applicable net tax liability that is required to be paid on the due date of the income tax return for the taxable year of the qualified sale or exchange (25 percent of the applicable net tax liability...)".

Procedural Requirements for Taxpayers

To utilize this relief, the primary requirement is the valid execution of the election itself. The Notice emphasizes that "A proper section 1062 election is a prerequisite to receiving the relief provided in this notice". The statute requires that "Any election under subsection (a) shall be made not later than the due date for the return of tax for the taxable year described in subsection (a)". Furthermore, the taxpayer must "include with the return for the taxable year of the sale or exchange described in subsection (a) a copy of the covenant or other legally enforceable restriction".

Regarding the penalty relief specifically, the IRS has adopted an automated approach for compliant returns. "The waiver will apply automatically to any taxpayer who qualifies for the waiver and does not self-report an addition to tax under section 6654 or 6655 on their income tax return for the taxable year of the qualified sale or exchange".

Steps for Abatement

For taxpayers who have already filed or who receive valid penalty notices despite qualifying for relief, affirmative steps are required. Notice 2026-3 outlines the following procedure:

"A taxpayer who otherwise satisfies the criteria for relief under this notice, but who has already filed an income tax return reporting an addition to tax under section 6654 or 6655, may request an abatement of the addition to tax by filing Form 843, Claim for Refund and Request for Abatement".

When filing Form 843, the IRS mandates a specific annotation to ensure processing. Practitioners must ensure the form includes the text "Abatement requested pursuant to Notice 2026-3" at the top of the claim. This same procedure applies to a taxpayer that "satisfies the criteria for relief under this notice but receives a penalty notice from the IRS".

Conclusion

Notice 2026-3 aligns the administrative penalty regime with the legislative intent of IRC Section 1062. By allowing taxpayers to exclude the deferred 75 percent of their applicable net tax liability from the "required annual payment" calculation, the IRS ensures that the installment election remains a viable cash-flow management tool for farmers. As explicitly stated in the Notice, "Without a limited waiver of the addition to tax, a taxpayer making a section 1062 election might be deprived of the full benefit of the provision". Practitioners should immediately review client portfolios for qualified farmland dispositions to ensure the election is properly made and estimated tax calculations are adjusted accordingly.

Prepared with assistance from NotebookLM.