Internal Revenue Service
Revenue Ruling

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 Rev. Rul. 68-22

1968-1 C.B. 142

Sec. 354

Sec. 368

IRS Headnote

Five percent cumulative preferred capital certificates of interest of a farmers' cooperative association received by shareholders of a corporation merged under state law into the association represent, under described facts, equity interests in the association. As provided in section 354(a)(1) of the Internal Revenue Code of 1954, no gain or loss will be recognized to the shareholders on the exchange or their common stock of the corporation for these certificates of interest.

Full Text

Rev. Rul. 68-22

Advice has been requested whether, under the circumstances described below, the shareholders of a corporation will receive an equity interest in a farmers' cooperative association on the exchange of their common stock of the acquired corporation for five percent cumulative preferred capital certificates of interest of the association pursuant to a statutory merger and whether gain or loss will be recognized to the shareholders of the acquired corporation on the exchange under section 354(a) of the Internal Revenue Code of 1954.

Y is a farmers' cooperative association which markets and processes agricultural products for its members. Its member-patrons possess membership certificates evidencing their proprietary interests in the association. Only such members are entitled to vote.

Y proposes to acquire all the assets of X corporation in a statutory merger. X is engaged in the business of buying, warehousing and selling agricultural products similar to those handled by Y .

In exchange for their common stock in X , the shareholders of X will receive five percent cumulative preferred capital certificates of interest in Y . The certificates are entitled to five percent cumulative dividends and are transferable on the books of Y when properly endorsed by the registered owners thereof. In the event of the liquidation of Y , the certificates are subordinate to the claims of noteholders and open account creditors but are preferred over any distribution to members in respect of membership certificates. The certificates received by the shareholders of X are redeemable solely in the discretion of Y's board of directors to the extent of ten percent of their face value annually beginning one year after issuance. Y has no present intention to redeem any of the certificates.

Under the facts the five percent cumulative preferred capital certificates of interest to be issued by Y represents an equity interest in the association.

Accordingly, the exchange of X's common stock for Y's certificates will qualify as an exchange of stock in a reorganization described in section 368(a)(1)(A) of the Code and no gain or loss will be recognized to the shareholders of X on the exchange as provided in section 354(a)(1) of the Code.