Rev. Rul. 65-17

Title I of the Agricultural Act of 1964, P.L. 88-297, 78 Stat. 173, provides in pertinent part for payments-in-kind of cotton (or cash in lieu thereof) in an amount which will make upland cotton produced in the United States available for domestic use at a price which is not in excess of the price at which such cotton is made available for export. Under the terms of the Act, payments will be conditioned upon the placing of such cotton into the manufacturing process during the life of the cotton equalization program. Persons eligible for payments under the program are exporters, domestic cotton users, and those who are regularly engaged in the business of buying and selling upland cotton.

Held , payments-in-kind (or cash in lieu thereof) received under the cotton equalization program, must be included as items of other income in the tax return of an accrual-basis taxpayer in the year in which the applications for payment-in-kind certificates are approved by the Commodity Credit Corporation. Compare I.T. 3187, C.B. 1938-1, 159. Further held , no adjustments due to the cotton equalization payments may be made in the cost of goods sold or in the cost of inventories of cotton either in raw materials, or raw material content of goods in process or finished goods.

Taxpayers using the last-in, first-out (LIFO) inventory method of valuing inventories of cotton must use the domestic price at which the cotton was purchased as cost for purposes of determining the value of LIFO inventories of cotton. This cost will be reflected in inventories to the extent there is an increment in the inventories for the taxable year of participation in the cotton equalization program. Where cotton is purchased below the domestic price because applications for payment-in-kind certificates (or cash in lieu thereof) have previously been made with respect to such cotton by a prior holder, the purchase price of such cotton must be used as cost for purposes of determining the value of any increments in the cotton inventories under the LIFO computation.

Where taxpayers use the first-in, first-out (FIFO) inventory method on the basis of cost or market, whichever is lower, the market value of cotton in the inventories which was purchased at the domestic price is the market price as of the close of the taxable year of domestic cotton on which applications for payment-in-kind certificates have not been made. The market value of cotton in the inventory which was purchased at a price below the domestic market price (because applications for payment-in-kind certificates have previously been made by prior holders of such cotton) is the market price of cotton as of the close of the taxable year involved on which applications for payment-in-kind certificates have been made. Cost of cotton under the FIFO inventory method should be computed in the same manner as cost is computed under the LIFO inventory method.

Taxpayers valuing their cotton inventory under the market method in accordance with S.M. 5693, C.B. V-2, 20 (1926), will compute market value in the same manner as market values is computed under the FIFO inventory method.

¹ Also released as Technical Information Release 674, dated Jan. 4, 1965.