Rev. Rul. 81-80

1981-1 C.B. 44, 1981-11 I.R.B. 5.

                       Internal Revenue Service
                                 Revenue Ruling

     FARMERS' COOPERATIVE; COMMODITY CREDIT CORPORATION LOANS; ADVANCES TO

                                    PATRONS

                           Published: March 16, 1981

SECTION 77.--COMMODITY CREDIT LOANS, 26 CFR 1.77-1: Election to consider Commodity Credit Corporation loans as income

(Also Section 1381; 1.1381-1.)

  Farmers' cooperative; Commodity Credit Corporation loans; advances to patrons.  A farmers' cooperative that uses the open pool method of accounting elected to include in income price support loans received from the Commodity Credit Corporation (CCC) to cover advances paid to its patrons and other costs.  The patrons included the advances in income.  The cooperative is deemed to have sold the crop to the CCC and may deduct, the advances as costs of products sold.

ISSUE

  Under the circumstances described below, may the taxpayer deduct the total amount of the advances paid to its patrons in 1979 as costs of products sold?

FACTS

  The taxpayer, a farmers' cooperative within the meaning of section 1381(a) of the Internal Revenue Code, markets tobacco for its patrons.  The tobacco is subject to the price support program of the Commodity Credit Corporation (CCC).  Under this program, the CCC makes price support loans to tobacco growers through loans to cooperative organizations.  In 1979, the taxpayer entered into a price support loan agreement with the CCC prior to its marketing season.

  The loan agreement required the CCC to make price support loans to the taxpayer equal to the sum of the amount the taxpayer is required to pay as price support advances to its patrons and the cost of transporting, processing, handling and storing its patrons' tobacco.  The loans are obtained from a bank that is a fiscal agent for the CCC, are open-ended in amount, mature upon demand, and are without recourse.  The taxpayer is required to give to the CCC the negotiable warehouse receipts for its patrons' tobacco as collateral for the loans.  The taxpayer must remit to the CCC in repayment of the loans, all sale proceeds (less unreimbursed expenses) when the sale proceeds are received by the taxpayer.  Upon maturity and nonpayment of the loans, the CCC may sell the tobacco held as collateral.  If the sales proceeds exceed the loan balance, there is an "over-plus" that is paid to the taxpayer.  If the sales proceeds are less than the balance of the loans, any loan balance remaining after the application of the sales proceeds is forgiven.

  Prior to its 1979 marketing season the taxpayer entered into a contract with an auction warehouse to allow the use of the warehouse's facilities for purposes of delivering and storing its patrons' tobacco.  The warehouse is required to pay on behalf of the taxpayer an advance to the patrons whose tobacco is subject to the price support program.  The advance paid is based on a schedule that is part of the contract.  At the close of each business day, the warehouse bills the taxpayer for the advances paid on behalf of the taxpayer and the warehouse charges incurred for handing the patrons' tobacco. When the taxpayer receives this bill from the warehouse, the taxpayer obtains a loan from the CCC to cover the amount billed.  The negotiable warehouse receipts for the tobacco are given to the CCC as collateral for the loan.

  The taxpayer entered into a marketing agreement with each of its patrons pursuant to which the taxpayer agreed to remit to the patron the excess of the proceeds from the sale of the tobacco over certain enumerated costs and repayment of the loan granted by CCC.  The patrons that elected to participate in the price support program had to bring their tobacco to a designated auction warehouse.  The patrons received from the auction warehouse an advance paid on behalf of the taxpayer for the delivered tobacco.  The patrons were required to include the advance in income in the year it was received.

  In 1979, the taxpayer used the open pool method of accounting for the marketing of the tobacco it received from its patrons whereby sales are ordinarily accounted for as each portion of the tobacco is sold.  All of the tobacco in this pool was subject to the CCC's price support program. Throughout the year, the taxpayer obtained loans from the CCC to cover the advances paid to its patrons and the warehouse charges.  The patrons included the advances in income.

  For its 1979 taxable year, the taxpayer elected under section 77 of the Code to treat the amount of the loans it received from the CCC as income.  The taxpayer deducted the total amount of the advances and the warehouse charges as costs of products sold.

LAW AND ANALYSIS

  Section 77 of the Code states that amounts received as loans from the CCC 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.

  Rev. Rul. 57-358, 1957-2 C.B. 42, provides that when a cooperative makes an election under section 77 of the Code, the cooperative is deemed to have sold the crop to the CCC when the cooperative receives the price support loans from the CCC.

  Rev. Rul. 67-333, 1967-2 C.B. 299, provides that advances made by a cooperative to its patrons for products delivered to the cooperative are deductions of the cooperative as costs of the products sold in the same year they are considered to be income to the patrons.  However, Rev. Rul. 69-67, 1969-1 C.B. 142, modifies Rev. Rul. 67-333 to the extent the latter ruling implies that the total amount of the advances may be deducted in the year of payment even though a portion of the products acquired from the patrons may be on hand at the end of the cooperative's taxable year.  When none of the patrons' products remain on hand at the end of the taxable year, the cooperative may deduct the total amount of the advances paid to its patrons during the taxable year as costs of the products sold.

  In the present situation, the taxpayer received price support loans from the CCC for all of the tobacco that its patrons delivered in 1979 and elected under section 77 of the Code to include the proceeds of the loans in income in 1979. The taxpayer used the proceeds of the loans to reimburse the auction warehouse in 1979 for the advances paid on its behalf and for the warehouse charges incurred for handling its patrons' tobacco.  The patrons included the advances paid in 1979 in their income.

  Rev. Rul. 57-358 states that when a cooperative makes an election under section 77 of the Code to include the proceeds of CCC loans into income, the cooperative is deemed to have sold to the CCC at the time it receives the loan proceeds.  Therefore, in 1979, the taxpayer is deemed to have sold to the CCC all of the tobacco that it received from its patrons.  Thus, this tobacco is not included in the taxpayer's inventory of unmarketed commodities on hand at the end of the taxpayer's taxable year.

HOLDING

  The taxpayer may deduct the total amount of the advances paid to its patrons in 1979 as costs of the products sold.

Rev. Rul. 81-80, 1981-1 C.B. 44, 1981-11 I.R.B. 5.