Rev. Rul. 68-44

Advice has been requested by A , a taxpayer (producer) using the cash receipts and disbursements method of accounting, and by B , a taxpayer (producer) using the accrual method of accounting, regarding the proper income tax treatment of a lump-sum payment received in advance of performance under the `Cropland Adjustment Program' authorized by Title VI of the Food and Agriculture Act of 1965, Public Law 89-321, 7 U.S.C.Supp. II, 1838.

The `Cropland Adjustment Program' provides for deducing the costs of farm programs, assisting farmers in turning their land to nonagricultural uses, promoting the development and conservation of the Nation's soil, water, forest, wildlife, and recreational resources, and establishing, protecting, and conserving open spaces and natural beauty. Under the program the Secretary of Agriculture is authorized to enter into agreements with farmers for periods of five to ten years to divert cropland normally used for the production of allotment crops, feed grains and other specified crops, to approved practices and uses.

Producers are eligible for annual adjustment payments with respect to the acreage diverted. If it is determined that it will best serve the interests of the program, payments may be paid according to any schedule acceptable to the producers, including payment in advance. The program provides that for each year any annual adjustment payment is made in advance of performance, such payment shall be reduced by five percent. The Secretary may provide for the adjustment of any payment on account of failure to comply with the terms and conditions of the program.

Payments made to producers under the `Cropland Adjustment Program' are in the nature of receipts from farm operations in that they replace income which producers could have expected to realize from the normal use of the land devoted to the program. As such they are includible in gross income. See Rev. Rul. 60-32, C.B. 1960-1, 23.

Section 451 of the Internal Revenue Code of 1954 provides that the amount of any item of gross income shall be included in the gross income for the taxable year in which received by the taxpayer unless, under the method of accounting used in computing taxable income, such amount is to be properly accounted for as of a different period.

Under the provisions of section 1.451-1(a) of the Income Tax Regulations a taxpayer using the cash receipts and disbursements method of accounting must include income in gross income for the taxable year in which it is actually or constructively received. Under an accrual method of accounting, income is includible in gross income when all the events have occurred which fix the right to receive such income and the amount thereof can be determined with reasonable accuracy. Advance payments of income, received without restriction as to their use, are includible in gross income in the year of receipt unless a different treatment is specifically provided in the Code or in the regulations thereunder. Rev. Rul. 60-85, C.B. 1960-1, 181, and Rev. Rul. 65-141, C.B. 1965-1, 210.

Accordingly, the lump-sum payment received in advance of performance under the provisions of the `Cropland Adjustment Program' by A , the taxpayer (producer) who reports his income under the cash receipts and disbursements method of accounting, is includible in his gross income for the earlier of the taxable year in which the payment is received or in which it is made available to him.

The lump-sum payment received in advance of performance by B , the taxpayer (producer) who reports his income under the accrual method of accounting, is includible in his gross income for the earlier of the taxable year in which it is received or in which he has a right to receive it.