Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 75-57

1975-1 C.B. 141

Sec. 451

IRS Headnote

Commodity Credit Corporation loan unpaid. The amount of an unpaid loan from the Commodity Credit Corporation to a cotton producer, who has not elected under section 77 of the Code to treat the loan as income in the taxable year received, is includible in his gross income in the year in which his liability on the loan is discharged by transferring to the Corporation his ownership of the cotton pledged as security. Any additional amount realized by the producer from the Corporation's sale of the cotton for more than the amount owed is includible in his income in the taxable year received if he uses the cash method or the year his right to the amount becomes fixed if he uses the accrual method. I.T. 4016 superseded.

Full Text

Rev. Rul. 75-57 [fn1]

The purpose of this Revenue Ruling is to update and restate, under the current statute and regulations, the position set forth in I.T. 4016, 1950-2 C.B. 29.

The question presented concerns the taxable year for which an amount received by a cotton producer as a loan under the cotton loan program of the Commodity Credit Corporation, which was not repaid, is includible in his gross income, for Federal income tax purposes, where the producer is not bound by an election under section 77 of the Internal Revenue Code of 1954 to have amounts received as loans from the Corporation considered as income for the taxable year in which received. Also, a question is raised as to the time of taxability of any additional amount received by the producer upon sale of the pledged cotton by the Corporation after maturity and nonpayment of the loan note.

An individual cotton producer (taxpayer) obtained a loan from the Commodity Credit Corporation in 1973 upon execution of a prescribed note and security agreement. His note was payable on or before the first day of the tenth month following the month in which the loan was made or upon demand, with interest from the date of the note until paid at the rate of 51/2 percent a year. The note was subject to all the terms and conditions of the security agreement and was secured by warehouse receipts covering cotton pledged by the taxpayer. The loan in question was not repaid upon maturity and the title to the cotton was immediately vested in the Corporation pursuant to the terms of the security agreement as hereinafter discussed. The taxpayer did not make an election under section 77 of the Code at the time the loan proceeds were received by him.

Section 77(a) of the Code provides that amounts received as loans from the Commodity Credit Corporation shall, at the election of the taxpayer, be considered as income and shall be included in gross income for the taxable year in which received.

The security agreement provided, in part, that the Commodity Credit Corporation shall look solely to the cotton for satisfaction of the loan unless the producer has made a fraudulent representation in obtaining the loan, and that, upon maturity and nonpayment of the note, title to the cotton shall, at the Corporation's election, without a sale thereof, vest in the Corporation. It further provided that the Corporation is authorized, without notice to the producer, to sell, transfer, and deliver the cotton, or documents evidencing title thereto, at such time, in such manner, and upon such terms and conditions as the Corporation may determine, at any cotton exchange or elsewhere, or through any agency, at public or private sale, for immediate or future delivery, and without demand, advertisement, or notice of the time and place of sale or adjournment thereof or otherwise, and upon such sale, the Corporation may become the purchaser of the whole or any part of such cotton at its market value, as determined by the Corporation. Any "overplus" remaining from the proceeds received from the sale, after deducting from such proceeds the amount of the loan, interest and charges, shall be paid to the producer.

The transaction described above represents a bona fide loan from Commodity Credit Corporation to the cotton producer irrespective of the lack of personal liability on the part of the producer. See Old Colony Trust Associates v. Hassett, 150 F.(2d) 179 (1st Cir. 1944), wherein the court said: "advances may be loans even where there is an absence of personal liability and the lender can look to the pledged securities for repayment."

Accordingly, since the taxpayer in the instant case did not elect under section 77 of the Code to have the amount received by him as a loan from the Commodity Credit Corporation considered as income for the taxable year in which received, any amount of the loan not repaid is includible in his gross income for the taxable year in which his liability on the loan is discharged by transfer of ownership in the cotton pledged as security for the loan.

Furthermore if the taxpayer realizes an amount in addition to the discharge of the loan upon sale of the cotton by the Commodity Credit Corporation, such additional amount is income for the taxable year in which received if he uses the cash receipts and disbursements method of accounting, or for the taxable year in which his right to receive it becomes fixed, if he uses an accrual method of accounting.

I.T. 4016 superseded.

[fn1] Prepared pursuant to Rev. Proc. 67-6, 1967-1 C.B. 576.