REVENUE RULING ON GAIN NONRECOGNITION WHEN TRUST CERTIFICATE EXCHANGED FOR SHARE OF TRUST ASSETS

March 1, 1990 TO: TAX MEMBERS NO. 11-90 UNIT INVESTMENT TRUST MEMBERS NO. 16-90 RE: REVENUE RULING ON GAIN NONRECOGNITION WHEN TRUST CERTIFICATE EXCHANGED FOR SHARE OF TRUST ASSETS __________________________________________________________ In Revenue Ruling 90-7 (attached), the Internal Revenue Service holds that a certificate holder in an investment trust with a single class of ownership interests and a fixed portfolio of stocks, who exchanges certificates for a proportionate share of each of the trust's assets, will not recognize gain or loss on that exchange. The trust instrument involved in the Ruling permits certificate holders to exchange trust certificates for a proportionate amount of each of the trust's assets. The certificate holder at issue pays $200 for 100 certificates, exercises the exchange right when the value of the 100 certificates is $300 and receives a proportionate amount of each of the 15 stocks held by the trust (with a value of $295), plus $1 of cash as his proportionate share of a reserve for administrative expenses and $4 of cash in lieu of fractional shares of stock (which is funded from the other certificate holders' shares of the reserve for administrative expenses). In the Ruling, the IRS holds that the certificate holder is the owner of an undivided interest in all of the trust's assets for Federal income tax purposes. Thus, when the certificates are exchanged for the trust's underlying securities, the certificate holder went from being a co-owner of all of the trust's stock to being the sole owner of a proportionate share of the trust's stock. Consequently, no gain or loss is recognized on the exchange of the certificates for the stock. For similar reasons, the certificate holder's receipt of $1 for his share of the reserve for administrative expenses results in no gain or loss. The receipt of $4 of cash in lieu of fractional shares is a taxable transaction, however, and the certificate holder must recognize gain or loss based upon the difference between the amount of cash received and the adjusted basis in the fractional shares. Revenue Ruling 68-633, which held that a conversion of certificate shares into the underlying stock held by the trust is a taxable event, is revoked by Revenue Ruling 90-7. However, the holding in Revenue Ruling 90-7 will not be applied adversely to a taxpayer if the exchange of trust certificates for trust assets occurred before January 29, 1990. We will keep you informed of developments. Keith D. Lawson Assistant General Counsel KDL:bmb Attachment