According to the U.S. Department of Agriculture, marketing assistance loans, "Provide producers interim financing at harvest time to meet cash flow needs without having to sell their commodities when market prices are typically at harvest-time lows."

Marketing assistance loans fall into two categories - non-recourse and recourse. With non-recourse loans, farmers have the option of repaying the Commodity Credit Corporation (CCC) with pledged collateral, typically crops. A settlement value is determined and applied to the outstanding loan principal and interest.

In some cases, "producers may repay loans at less than principal plus accrued interest and other charges. Alternatively, loan deficiency payment (LDP) provisions specify that, in lieu of securing a loan, producers may be eligible for an LDP. For ELS cotton, LDP provisions do not apply and ELS cotton marketing assistance loans must be repaid at the loan rate plus interest," according to the USDA.

Recourse loans must be repaid at principal plus interest. The recourse loan commodity cannot be delivered or forfeited in satisfaction of the outstanding loan.

The IRS has published Notice 2007-63 which sets out guidelines for reporting the tax treatment of gain associated with repayment of non-recourse CCC loans.

According to Notice 1007-63, "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 election under IRC Section 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.

"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 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)."