[Code of Federal Regulations]
[Title 26, Volume 2]
[Revised as of April 1, 2003]
From the U.S. Government Printing Office via GPO Access
[CITE: 26CFR1.61-4]

[Page 34-36]
 
                       TITLE 26--INTERNAL REVENUE
 
    CHAPTER I--INTERNAL REVENUE SERVICE, DEPARTMENT OF THE TREASURY 
                               (CONTINUED)
 
PART 1--INCOME TAXES--Table of Contents
 
Sec. 1.61-4  Gross income of farmers.

    (a) Farmers using the cash method of accounting. A farmer using the 
cash receipts and disbursements method of accounting shall include in 
his gross income for the taxable year--

[[Page 35]]

    (1) The amount of cash and the value of merchandise or other 
property received during the taxable year from the sale of livestock and 
produce which he raised,
    (2) The profits from the sale of any livestock or other items which 
were purchased,
    (3) All amounts received from breeding fees, fees from rent of 
teams, machinery, or land, and other incidental farm income,
    (4) All subsidy and conservation payments received which must be 
considered as income, and
    (5) Gross income from all other sources.

The profit from the sale of livestock or other items which were 
purchased is to be ascertained by deducting the cost from the sales 
price in the year in which the sale occurs, except that in the case of 
the sale of purchased animals held for draft, breeding, or dairy 
purposes, the profits shall be the amount of any excess of the sales 
price over the amount representing the difference between the cost and 
the depreciation allowed or allowable (determined in accordance with the 
rules applicable under section 1016(a) and the regulations thereunder). 
However, see section 162 and the regulations thereunder with respect to 
the computation of taxable income on other than the crop method where 
the cost of seeds or young plants purchased for further development and 
cultivation prior to sale is involved. Crop shares (whether or not 
considered rent under State law) shall be included in gross income as of 
the year in which the crop shares are reduced to money or the equivalent 
of money. See section 263A for rules regarding costs that are required 
to be capitalized.
    (b) Farmers using an accrual method of accounting. A farmer using an 
accrual method of accounting must use inventories to determine his gross 
income. His gross income on an accrual method is determined by adding 
the total of the items described in subparagraphs (1) through (5) of 
this paragraph and subtracting therefrom the total of the items 
described in subparagraphs (6) and (7) of this paragraph. These items 
are as follows:
    (1) The sales price of all livestock and other products held for 
sale and sold during the year;
    (2) The inventory value of livestock and products on hand and not 
sold at the end of the year;
    (3) All miscellaneous items of income, such as breeding fees, fees 
from the rent of teams, machinery, or land, or other incidental farm 
income;
    (4) Any subsidy or conservation payments which must be considered as 
income;
    (5) Gross income from all other sources;
    (6) The inventory value of the livestock and products on hand and 
not sold at the beginning of the year; and
    (7) The cost of any livestock or products purchased during the year 
(except livestock held for draft, dairy, or breeding purposes, unless 
included in inventory).

All livestock raised or purchased for sale shall be added in the 
inventory at their proper valuation determined in accordance with the 
method authorized and adopted for the purpose. Livestock acquired for 
draft, breeding, or dairy purposes and not for sale may be included in 
the inventory (see subparagraphs (2), (6), and (7) of this paragraph) 
instead of being treated as capital assets subject to depreciation, 
provided such practice is followed consistently from year to year by the 
taxpayer. When any livestock included in an inventory are sold, their 
cost must not be taken as an additional deduction in computing taxable 
income, because such deduction is reflected in the inventory. See the 
regulations under section 471. See section 263A for rules regarding 
costs that are required to be capitalized. Crop shares (whether or not 
considered rent under State law) shall be included in gross income as of 
the year in which the crop shares are reduced to money or the equivalent 
of money.
    (c) Special rules for certain receipts. In the case of the sale of 
machinery, farm equipment, or any other property (except stock in trade 
of the taxpayer, or property of a kind which would properly be included 
in the inventory of the taxpayer if on hand at the close of the taxable 
year, or property held by the

[[Page 36]]

taxpayer primarily for sale to customers in the ordinary course of his 
trade or business), any excess of the proceeds of the sale over the 
adjusted basis of such property shall be included in the taxpayer's 
gross income for the taxable year in which such sale is made. See, 
however, section 453 and the regulations thereunder for special rules 
relating to certain installment sales. If farm produce is exchanged for 
merchandise, groceries, or the like, the market value of the article 
received in exchange is to be included in gross income. Proceeds of 
insurance, such as hail or fire insurance on growing crops, should be 
included in gross income to the extent of the amount received in cash or 
its equivalent for the crop injured or destroyed. See section 451(d) for 
special rule relating to election to include crop insurance proceeds in 
income for taxable year following taxable year of destruction. For 
taxable years beginning after July 12, 1972, where a farmer is engaged 
in producing crops and the process of gathering and disposing of such 
crops is not completed within the taxable year in which such crops are 
planted, the income therefrom may, with the consent of the Commissioner 
(see section 446 and the regulations thereunder), be computed upon the 
crop method. For taxable years beginning on or before July 12, 1972, 
where a farmer is engaged in producing crops which take more than a year 
from the time of planting to the time of gathering and disposing, the 
income therefrom may, with the consent of the Commissioner (see section 
446 and the regulations thereunder), be computed upon the crop method. 
In any case in which the crop method is used, the entire cost of 
producing the crop must be taken as a deduction for the year in which 
the gross income from the crop is realized, and not earlier.
    (d) Definition of ``farm''. As used in this section, the term 
``farm'' embraces the farm in the ordinarily accepted sense, and 
includes stock, dairy, poultry, fruit, and truck farms; also 
plantations, ranches, and all land used for farming operations. All 
individuals, partnerships, or corporations that cultivate, operate, or 
manage farms for gain or profit, either as owners or tenants, are 
designated as farmers. For more detailed rules with respect to the 
determination of whether or not an individual is engaged in farming, see 
Sec. 1.175-3. For rules applicable to persons cultivating or operating a 
farm for recreation or pleasure, see sections 162 and 165, and the 
regulations thereunder.
    (e) Cross references. (1) For election to include Commodity Credit 
Corporation loans as income, see section 77 and regulations thereunder.
    (2) For definition of gross income derived from farming for purposes 
of limiting deductibility of soil and water conservation expenditures, 
see section 175 and regulations thereunder.
    (3) For definition of gross income from farming in connection with 
declarations of estimated income tax, see section 6073 and regulations 
thereunder.

[T.D. 6500, 25 FR 11402, Nov. 26, 1960; 25 FR 14021, Dec. 31, 1960, as 
amended by T.D. 7198, 37 FR 13679, July 13, 1972; T.D. 8729, 62 FR 
44546, Aug. 22, 1997]