Rev. Rul. 87-17

Revoked by 87-103

GROSS INCOME; WHEN RECEIVED; FARMERS

Published: March 2, 1987

Section 61.-Gross Income Defined, 26 CFR 1.61-1: Gross Income

  Gross income; when received; farmers. The tax consequences to farmers are set forth in situations involving (1) the receipt of generic commodity certificates, (2) the pledging of grain to secure a loan from the Commodity Credit Corporation and the termination of that loan, (3) the use of the certificates to purchase the grain that was pledged, and (4) the subsequent sale of the grain.

ISSUE

  What are the federal income tax consequences of (1) the receipt of generic commodity certificates, (2) the pledging of grain to secure a loan from the Commodity Credit Corporation and the termination of that loan, (3) the use of the certificates to repurchase the grain that was pledged, and (4) the subsequent sale of the grain.

FACTS

  A is a farmer using the cash receipts and disbursements method of accounting and filing federal income tax returns on a calendar year basis. In 1986, pursuant to government deficiency and diversion programs, A received generic commodity certificates with a total face value of $10,000. Also in 1986, A borrowed $12,000 from the Commodity Credit Corporation (CCC), pledging grain to the CCC as security for the nonrecourse loan. A currently deducted all expenses incurred in producing grain and had a zero basis in the grain that was pledged.

  Later in 1986, when the value of the grain securing the nonrecourse CCC loan had fallen to $10,000, A notified the CCC that the loan would be terminated and that the commodity certificates would be used to reacquire the grain. Under U.S.D.A. regulations, A was treated as having sold the grain to the CCC for an amount equal to the $12,000 loan and as having used the amount received to repay the loan. A then used the certificates to repurchase the grain from the CCC for its current value of $10,000.

  In 1987, A sold the grain for $13,000.

  SITUATION 1: Pursuant to section 77 of the Internal Revenue Code, A elected to treat the proceeds of the CCC loan as income in 1986, the year received.

  SITUATION 2: A did not make the election under section 77. LAW AND ANALYSIS

  Section 61(a) of the Code provides that gross income means all income from whatever source derived, including gross income derived from business.

  Section 1.61-4 of the Income Tax Regulations provides, in relevant part, that a farmer using the cash receipts and disbursements method of accounting shall include in gross income the amount of cash and the value of merchandise or other property received during the year from the sale of produce raised by the farmer and all subsidy and conservation payments received which must be considered as income.

  Section 77(a) of the Code provides 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. This section is intended to permit a taxpayer to avoid income recognition in a taxable period later than that in which the production expenses were deducted. S. Rep. No. 648, 76th Cong., 1st Sess. 8 (1939), 1939-2 C.B. 524, 529.

  Section 1001 of the Code provides that the gain from the sale or other disposition of property is the excess of the amount realized over the adjusted basis provided in section 1011 of the Code.

  Section 1.1001-2 of the regulations provides, with certain exceptions, that the amount realized from a sale or other disposition of property, including a transfer of property in satisfaction of liabilities to which it is subject, includes the amount of liabilities from which the transferor is discharged. See also section 1.1001-2(c), Example (7); section 7701(g) of the Code. Rev. Rul. 76-111, 1976-1 C.B. 214, holds that a transfer of assets in consideration of a cancellation of indebtedness is equivalent to a sale upon which gain or loss is recognized in the amount of the difference between the basis of the assets transferred and the amount of the indebtedness that is cancelled in consideration for the transfer.

  Section 1012 of the Code provides that the basis of property shall be the cost of such property. Section 1016(a)(8) of the Code requires that the basis of property pledged to the CCC 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 of the Code.

  Rev. Rul. 75-57, 1975-1 C.B. 141, holds, in the case of a cotton producer who did not elect under section 77 of the Code to have loan proceeds from the CCC included in gross income when received, that the producer is taxable in the year in which the producer's liability on the loan is discharged by a transfer to the CCC of the cotton pledged as security for the loan.

  In Rev. Rul. 80-19, 1980-1 C.B. 185, a cash method farmer obtained a loan from the CCC 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 ruling states that 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 is treated as being repurchased when it is redeemed by repayment of the loan.

  Under section 61(a) of the Code and section 1.61-4 of the regulations, A's receipt of the commodity certificates in 1986 gave rise to $10,000 of income in that year. Under section 1012 of the Code, A had a basis of $10,000 in the certificates.

  A also has income of $12,000 in 1986. In Situation 1, A elected to include the proceeds of the CCC loan in income. Although under U.S.D.A. regulations this transaction is a loan, for federal income tax purposes the grain is treated as having been sold when it was pledged as collateral for the loan. Rev. Rul. 80-19, supra. Thus, A had $12,000 of income from the sale of the grain at the time it was pledged and no additional income when the loan was terminated. See section 106(a)(8) of the Code. In Situation 2, A did not make the section 77 election, and therefore, unlike Situation 1, the transaction is not viewed as a sale for federal income tax purposes. A terminated the loan later in 1986 when the grain had fallen in value to $10,000. U.S.D.A. regulations treat this transaction as a sale of the grain to the CCC for $12,000, with the $12,000 being used to repay the loan. For federal income tax purposes, the substance of the loan termination transaction is that A forfeited the grain pledged as collateral in full satisfaction of the nonrecourse loan. So viewed, the transfer of the grain in return for the discharge of the $12,000 indebtedness is treated as a sale of the grain for that amount. Section 1.1001- 2 of the regulations, Rev. Rul. 76-111, supra, and Rev. Rul. 75-57, supra. Thus, A had $12,000 of income from the sale of the grain at the time the loan was terminated.

  A's use of the commodity certificates having a basis of $10,000 to repurchase the grain worth $10,000 from the CCC resulted in no gain on disposition of the certificates. Under section 1012, A had a cost basis of $10,000 in the grain purchased.

  A's sale of the grain in 1987 resulted in a gain of $3,000, the amount realized ($13,000) over A's basis ($10,000).

HOLDING

  In both Situation 1 and Situation 2, A had income of $10,000 on the receipt of generic commodity certificates, $12,000 on the sale of grain to the CCC, and $3,000 on the sale of the repurchased grain. In neither situation does A have income from the use of the commodity certificates to repurchase grain from the CCC.

Rev. Rul. 87-17, 1987-1 C.B. 20, 1987-9 I.R.B. 4