n-07-63.pdf

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# Part III - Administrative, Procedural, and Miscellaneous

## Repayment of Commodity Credit Corporation Loans

Notice 2007-63

### PURPOSE

This notice provides answers to frequently asked questions regarding the tax
treatment of "market gain" associated with the repayment of Commodity Credit
Corporation (CCC) loans under the nonrecourse marketing assistance loan program
authorized under the Farm Security and Rural Investment Act of 2002, Pub. L. No. 107-
171, 116 Stat. 134 (2002). Under §§ 1201-1204 of that Act, 7 U.S.C. §§ 7931-7934, as
amended by § 763(b)-(c) of Division A of the Consolidated Appropriations Resolution,
2003, Pub. L. No. 108-7 (2003), the CCC provides nonrecourse marketing assistance
loans for the 2002-2007 crops of certain commodities (the 2002 Act nonrecourse
marketing assistance loan program). This notice provides answers for taxpayers that
elect, and those that do not elect, to include the proceeds of CCC loans in income under
§ 77 of the Internal Revenue Code.

### BACKGROUND

Under § 77 a taxpayer receiving amounts as loans from the CCC may elect to
include those amounts in gross income for the taxable year in which received. Most
individual taxpayers report the loan proceeds as a Commodity Credit Corporation loan
on line 7a of Schedule F, Profit or Loss from Farming. A taxpayer that makes the

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election under § 77 for any taxable year must compute income using that method for all
subsequent years until the taxpayer receives the permission of the Internal Revenue
Service to change to a different method of accounting. Rev. Proc. 2002-9, 2002-1 C.B.
327, provides procedures under which a taxpayer may obtain automatic consent of the
Service to change the taxpayer's method of accounting for CCC loans from including
the loan amount in gross income to treating the loan amount as a loan.

Under the 2002 Act nonrecourse marketing assistance loan program, CCC loans
for each eligible commodity are made at a specified rate per unit of commodity (the
original loan rate). The repayment amount for a loan secured by the pledge of an
eligible commodity generally is based on the lower of the original loan rate or the
alternative repayment rate, as determined by the CCC, for the commodity as of the date
of repayment. The alternative repayment rate may be adjusted to reflect quality and
location for each type of commodity. A taxpayer can use cash to repay a CCC loan,
purchase CCC certificates for use in repayment of the loan, or deliver the pledged
collateral as full payment for the loan at maturity. CCC certificates are available for
purchase by producers that have outstanding commodity loans for which a crop is
pledged as collateral.

If a taxpayer uses cash or CCC certificates to repay a CCC loan, and the loan is
repaid when the alternative repayment rate is less than the original loan rate, the
difference between the original loan amount and the lesser repayment amount is market
gain. Regardless of whether a taxpayer repays a CCC loan in cash or uses CCC
certificates in repayment of the loan, the market gain is taken into account either as

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income (if the taxpayer has not made an election under § 77) or as an adjustment to the
basis of the commodity (if the taxpayer has made an election under § 77).

QUESTIONS AND ANSWERS

The answers to the following questions apply whether a taxpayer repays a CCC
loan with cash or uses CCC certificates in repayment of the loan.

Q-1. How does a taxpayer that has elected under § 77 to include the amount of
CCC loans in gross income report market gain associated with the repayment of a CCC
loan?

A-1. A taxpayer that has made an election under § 77 accounts for market gain for
the year in which a CCC loan is repaid by making an adjustment to the basis of the
commodity that secures the loan. The taxpayer's basis in the commodity before the
repayment of the loan is equal to the amount of the loan previously reported as income.
That basis is reduced by the amount of any market gain associated with the repayment
of the loan. An individual taxpayer that has made a § 77 election should report the
market gain as an Agricultural Program Payment on line 6a of Schedule F, but not as a
taxable amount on line 6b, for the year in which the loan is repaid.

Q-2. How does a taxpayer that has not elected under § 77 to include the amount of
CCC loans in gross income report market gain associated with the repayment of a CCC
loan?

A-2. A taxpayer that has not made an election under § 77 reports market gain as
income for the year in which a CCC loan is repaid. An individual taxpayer that has not
made an election under § 77 should report the market gain as an Agricultural Program

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Payment on line 6a and as a taxable amount on line 6b of Schedule F for the year in
which the loan is repaid.

Q-3. Will the market gain associated with the repayment of a CCC loan be reported
to a taxpayer whether the taxpayer repays a CCC loan with cash or uses CCC
certificates in repayment of the loan?

A-3. Yes. For loans repaid on or after January 1, 2007, the CCC reports market
gain associated with the repayment of a CCC loan whether the taxpayer repays the loan
with cash or uses CCC certificates in repayment of the loan. The CCC reports the
market gain on Form 1099-G, Certain Government Payments.

### DRAFTING INFORMATION

The principal author of this notice is Marnette M. Myers of the Office of Associate
Chief Counsel (Income Tax and Accounting). For further information regarding this
notice (except Q&A-3), contact Ms. Myers at (202) 662-4920. For further information
regarding Q&A-3 of this notice, contact Stephen J. Coleman of the Office of Associate
Chief Counsel (Procedure and Administration) at (202) 622-4910 (not toll-free calls).