Rev. Rul. 80-19
1980-1 C.B. 185, 1980-3 I.R.B. 9.
Internal Revenue Service
Revenue Ruling
FARMER; COMMODITY CREDIT CORPORATION LOAN; WHEAT PLEDGED AS COLLATERAL
Published: January 21, 1980
Section 1221.--Capital Asset Defined, 26 CFR 1.1221-1: Meaning of terms.
(Also Sections 61, 77, 1016; 1.61-4, 1.77-1, 1.1016-5.)
Farmer; Commodity Credit Corporations loan; wheat pledged as collateral. A cash method wheat farmer obtained a loan from the Commodity Credit Corporation pledging that year's crop as collateral. The farmer elected under section 77 of the code to include the loan proceeds in gross income. The next year the loan was repaid and the crop pledged as collateral was redeemed. Thirteen months later the redeemed crop was sold at a price that exceeded the amount of the loan. The crop was not a capital asset, and the excess sale price for the crop over its basis, as adjusted under section 1016(a)(8), is includible in the farmer's gross income as ordinary income.
ISSUE
If a farmer pledges wheat as collateral for a loan from the Commodity Credit Corporation and elects, under section 77 of the Internal Revenue Code, to include the loan proceeds in gross income, is the wheat a capital asset of the farmer when it is redeemed by repayment of the loan?
FACTS
The taxpayer is a wheat farmer who uses the cash method of accounting.
In 1976, the taxpayer obtained a loan from the Commodity Credit Corporation, pledging the 1976 crop as collateral. The taxpayer elected section 77 of the Code to include the loan proceeds in gross income for 1976. The taxpayer had not previously elected to apply section 77.
The taxpayer repaid the loan in 1977, and redeemed the wheat that was pledged as collateral. Prior to the redemption, the taxpayer had no basis in the wheat. Thirteen months later, in 1978, the redeemed wheat was sold at a price that exceeded the amount of the loan.
Aside from the fact that the 1976 crop was pledged as collateral and subsequently redeemed in connection with the Commodity Credit Corporation loan, the circumstances show that the crop was primarily held by the taxpayer for sale in the ordinary course of business.
LAW AND ANALYSIS
Section 1.61-4(a) of the Income Tax Regulations provides that a farmer using the cash method of accounting shall include in gross income the amount received from the sale of livestock and produce raised by the farmer. Section 1.61-4(a) also provides that profits from the sale of livestock or other items which were purchased by a farmer is ascertained by subtracting the cost from the sale price in the year the sale is made.
Under section 77 of the Code, a taxpayer who has obtained a crop loan from the Commodity Credit Corporation may elect to include the loan proceeds in gross income in the taxable year in which the loan is made.
Section 1016(a)(8) of the Code and section 1.1016-5(e) of the regulations require that the basis of property pledged to the Commodity Credit Corporation as collateral for a loan be increased by the amount of the loan proceeds, if the proceeds were included in gross income in the year received pursuant to an election under section 77.
The Senate Finance Committee report for the predecessor of section 77 of the Code states that loans by the Commodity Credit Corporation on agricultural commodities 'should be treated for income-tax purposes as though such commodities had been sold in the year of the loan for the amount of the loan.' S. Rep. No. 648, 76th Cong., 1st Sess 8 (1939), 1939-2 C.B. 524, 529.
Therefore, if an election is made under section 77 of the Code, the crop is treated as being sold when it is pledged as collateral for the loan and it is treated as being repurchased when it is redeemed by repayment of the loan. United States v. Isaak, 400 F.2d 869 (9th Cir. 1968).
Under section 1221 of the Code, property held by a taxpayer is a capital asset unless it is described in paragraphs (1) through (6) of section 1221. Under paragraph (1), property that is 'held by the taxpayer primarily for sale to customers in the ordinary course of his trade or business' is not a capital asset. The determination of whether property is held primarily for sale in the ordinary course of business is a factual problem that must be resolved on a case-by-case basis. Gamble v. Commissioner, 242 F.2d
586 (5th Cir. 1957).
In the present case, the taxpayer redeemed the 1976 wheat crop by repaying the Commodity Credit Corporation loan. In view of the Senate Finance Committee report and the Isaak case, the crop redemption must be treated as a purchase for income tax purposes because the taxpayer elected under section 77 of the Code to include the loan proceeds in gross income for 1976. The taxpayer's basis in the crop after the redemption was equal to the loan amount, under section 1016(a)(8).
Application of section 77 of the Code does not determine whether the repurchased wheat is a capital asset in the hands of the taxpayer. The taxpayer's 1976 wheat crop thus continued to be held primarily for sale in the ordinary course of business, as described in section 1221(1), even though the taxpayer's election to apply section 77 and to redeem the crop requires the redemption to be treated as a repurchase.
HOLDING
The taxpayer's 1976 wheat crop was not a capital asset in the hands of the taxpayer. The excess of the 1978 sale price for the wheat over its basis, as adjusted pursuant to section 1016(a)(8), is includible in the taxpayer's gross income for 1978 as ordinary income.
Rev. Rul. 80-19, 1980-1 C.B. 185, 1980-3 I.R.B. 9.