In a recent private letter ruling, the Service addressed a cooperative’s reorganization into a for-profit corporation. The transaction qualified under Section 354(a) and Section 368(a)(1)(F).
In the reorganization, the cooperative transferred its assets to an LLC taxed as a corporation in exchange for interest in the LLC. It also formed a new for-profit corporation. The cooperative then merged into the new corporation, with the new corporation surviving.
As for members, the cooperative fully redeemed all former members’ capital credits. Current members exchanged their capital credits for stock in the new corporation.
Subject to the cooperative’s representations, the reorganization would be tax free under Section 354(a) and Section 368(a)(1)(F). The tax-free treatment applies to the exchange of stock for current members’ capital credits.
The Service appeared to state, though not directly, that the redemption of former members’ capital credits could result in taxable income. To the extent the member treated the underlying patronage transaction as deductible, and to the extent the redemption of former members’ capital credits exceeds their face value, the excess would be taxable income.