-12- 



between the amount of Che settlement and the depreciation in book value 

 of the asset. However, it is not necessary for the cooperatives to allo- 

 cate these funds to members if the funds are used for a conversion. The 

 basic rule is chat where money is received in an involuntary conversion, 

 the money has to be used for the purpose of acquiring property similar 

 or related in use in a period ending "within 1 year after the close of 

 the first taxable year in which any part of the gain upon the conversion 

 Is realized." This rule would appear to apply whether the funds were 

 used separately by each cooperative for separate facilities, or jointly for 

 one merged facility after merger or consolidation. 1_/ Thus it is clear 

 that it is to the advantage of the growers, if the funds are not used for 

 a conversion, for these capital gains funds to be allocated to the members, 

 and the amounts so allocated disclosed to each member. 



Turning now to the tax position of the individual grower -members, their 

 liability will vary with the method of handling the funds after they have 

 been allocated to members, that is, whether (1) the funds remain with the 

 cooperative, or (2) the funds are all, or in part, paid out in cash to the 

 members . 



Before considering these situations, it must first be pointed out that 

 at the present time the tasc treatment of amounts paid to patrons, or allo- 

 cated and disclosed to them, has not been clearly determined. It is unfor- 

 tunate, but nevertheless true, that the following discussion must be 

 qualified by this present uncertainty in tax treatment. 



It appears that, at the present time, if the capital gains portion of the 

 PUD settlement is allocated and disclosed to the patrons of the coopera- 

 tives, but not paid in cash, such allocations would not be taxable in 

 the hands of the member in the year in which the allocation is made. If 



If however, the allocated capital gains are all, or partially, paid in cash 

 to the members, then these cash allocations would be taxable in the hands 

 of the patrons. This also applies to allocations not now paid in cash, 

 but paid in cash at a future date to patrons. The question that arises, 

 hov;ever, with allocations paid in cash, either now or in the future, is 

 whether these cash allocations are ordinary income and thus taxable at 

 the appropriate Federal income taji rate, or are capital gains and thus 

 taxable at the capital gains rate. 



W Excelsior - Leader Laundry Co., oBTAlGS, Dec. 2820 (Nonacq.) 



Zj This conclusion is based upon the tentative regulations issued by 

 the Internal Revenue Service and published in the Federal Register 

 for Wednesday, March 11, 1959. Interested persons have been heard 

 on these regulations and the time for further suggestions has 

 expired, but the final regulations were not issued as of Aug. 21, 1959. 



