Dear Mr. Pugh:
Re: Cash Flow Enhancement Program ("CFEP")
This is in reply to your letter of November 21, 1990 concerning our letter to you dated November 16, 1990 about the above noted subject. You question our statement that reads, ".... where the producer association is a taxable entity, tax could be exigible on the portion of the interest paid by the federal government".
You indicate, among other things, that were the loan to be made directly from a bank to a farmer he would incur interest expense that would be offset by interest reimbursement from the federal government. We agree. The interest reimbursement would be considered income and includable in the farmer's income. Such income would effectively be eliminated by any interest expense incurred on the loan. This is not what is taking place, however. As we understand it the farmer gets an interest free loan from his producer association. Thus the farmer does not incur any interest expense nor does he directly receive any reimbursement. The producer association on the other hand borrows money at interest from a lending institution in an amount equal to the amount loaned to the farmer. It incurs interest expense in so doing but, again as we understand it, this interest is reimbursed to the producer association by the federal government under the CFEP. Thus the reimbursement is income to the producer association, just as it would have been to the farmer had he received it directly under the program. Where, of course, the interest income is offset completely by the interest expense there should be no tax consequences to the producer association, whether or not it is a taxable entity.
We trust this is the information you require.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch