Sub-Section 221, Advance Payments
Internal Revenue Manual
Specialized Industry Guidelines - Timber
Sub-Section 221, Advance Payments
Last amended: 6-26-1978
Advance Payments
Some contracts require that advance payments be made before cutting begins. The advance payment is treated as realized from the sale of timber if it is to be applied as payment for the timber to be cut later. If the contract expires or is abandoned so that the timber paid for is not cut, the advance payment becomes ordinary income. Examiners should determine the status of contracts where advance payments are made but no timber has been cut. A recomputation may be necessary in order to treat these payments as ordinary income rather than IRC 1231 gain.