Rev. Rul. 69-3

Advice has been requested whether the acquisition of all of the assets of a mutual savings and loan association by another mutual savings and loan association will constitute a reorganization under section 368(a)(1)(A) of the Internal Revenue Code of 1954 under the circumstances described.

X corporation and Y corporation are both federally chartered nonstock membership savings and loan associations that are owned entirely by their respective share account holders. The share accounts of both X and Y are evidenced by passbooks. Both X and Y are domestic building and loan associations within the meaning of section 7701(a)(19) of the Code.

X proposes to merge into Y under the laws of the United States. Pursuant to the plan, all the assets of X will vest in, and all the liabilities of X will be assumed by Y on the effective date of the merger. Y will issue to each share account holder of X a share account equal to the same dollar amount evidenced by his passbook. The share accounts of Y will represent the same rights that the X account holders had in X. X will cease to exist and Y will be the surviving association carrying on the business operations of the combined associations.

Section 368(a)(1)(A) of the Code provides that the term "reorganization" includes a statutory merger or consolidation. Section 1.368-1(b) of the Income Tax Regulations provides that an otherwise qualified transaction does not constitute a reorganization within the meaning of the Code unless the continuity of interest requirement is satisfied.

In the instant case, it is necessary to ascertain the nature of the consideration to be received by the equity owners of X in exchange for their proprietary interests. The entire equity interest in a nonstock mutual association, including the right to vote on matters affecting the association, the right to share in current earnings and the right to share in its assets upon liquidation, is vested in the share account holders who as members of the association own passbooks evidencing their interests. The rights of a share account holder in a federally chartered mutual association include a proprietary interest. See sections 7701(a)(7) and (8) of the Code; Rev. Rul. 54-624, C.B. 1954-2, 16.

However, Revenue Ruling 66-290, C.B. 1966-2, 112, holds that for purposes of section 1.334-1(c)(4)(v) of the regulations dealing with the allocation of basis to assets received in certain liquidations the phrase "cash and its equivalent" includes share accounts in savings and loan associations. Thus, share accounts in a Federal association also include cash equivalents in the face amounts of the account balances. See section 1.451-2 of the regulations dealing with amounts credited to the accounts of shareholders of savings and loan associations.

Consequently, the members of a Federal nonstock mutual association have a dual relationship to the association: (1) as Members of a mutual association they possess proprietary interests therein, and (2) as share account holders they possess withdrawable deposits which are the equivalent of cash.

In the instant case, the passbooks to be issued by Y to the share account holders of X will reflect the same dollar amount as reflected by their passbooks in X at the date of the exchange. In no instance will any share account holder of X be issued a passbook by Y reflecting an account balance greater or less than that appearing in his passbook at the date of the exchange.

Since the share account holders of X will receive proprietary interests in Y equivalent to their equity interests in X prior to the exchange, and inasmuch as no change will occur in their cash deposits, the substitution of identical cash deposits is not significant and the substance of the exchange will be solely an equity-for-equity exchange that satisfies the continuity of interest requirement. Accordingly, under these facts, the transaction is a reorganization within the meaning of section 368(a)(1)(A) of the Code. No gain or loss will be recognized to the share account holders of X on the exchange of their passbook accounts for passbook accounts of the same amount in Y as provided in section 354 of the Code.