Gold Kist conversion raises big tax questions

A national farm cooperative's pending decision to convert itself into a publicly traded corporation could have major financial consequences for its members, according to an Alabama Cooperative Extension System economist.

Like other farm cooperatives, Gold Kist, which also happens to be the nation's third largest chicken company, is owned by its members. Company profits are earned by these members/owners in what are known as patronage dividends.

That, however, will change if the membership votes to convert to a corporation.

Members will be given cash and stock in exchange for their retained patronage dividends, according to Jerry Piece, an Extension farm business economist based in Scottsboro.

Therein lies the rub. Cash the members choose to receive before the conversion occurs will be subject to state and federal income taxes as well as self-employment tax. Tax liability could be steep in some cases, Pierce says.

Poultry growers will not be the only people impacted by these changes. Hog producers, former peanut and pecan producers, and patrons of the old Gold Kist Store also will be affected.

Pierce has used data compiled by the Alabama Farm Analysis Association to illustrate how steep these tax liabilities could be.

Based on the average poultry farm participating in Farm Analysis, total taxes would amount to $4,800, providing the farmer opts to receive no cash. This assumes the operation is a four-house broiler operation with some beef cattle and custom work income, a $46,000 off-farm income, with one child using the standard deduction.

Electing to receive $12,000 in cash would increase the tax liability to $8,690, though the farm would remain in the same federal tax bracket.

However, opting to receive between $12,000 and $76,250 would move the farm into the 25-percent tax bracket. At the highest end of that bracket, taxes would exceed $35,000 — roughly 40 percent of the cash received.

“Clearly, members who choose to receive cash should be prepared to pay larger than usual income tax bills next spring,” Pierce says.

That's why he is advising everyone affected by the conversion to work with their tax advisors to develop an individual tax estimate this fall.

By estimating their tax liability now, members can make plans to reduce their overall tax burden, he says.

Stock received by members as a result of the conversion will not be taxed until it's sold. Gains from the sale of New Gold Kist stock will most likely be treated as long-term capital gain. Long-term capital gain tax rates currently are 5 and 15 percent, depending on the individual's federal tax bracket. Capital gains are not subject self-employment tax, Pierce says.

It's important that individuals affected by the changes understand one other important but often misunderstood point, he says — namely that the basis of the new stock will not be its fair market value.

Pierce says it will be zero for member's non-qualified equity and the actual amount of member's qualified equity.

“Qualified equity is the retained patronage dividends that already have been taxed — not the price stock brings at conversion,” Pierce says.

A gain on stock is the sale price minus the member's basis, he says.

Gold Kist's board of directors announced in June its desire to convert from a cooperative to a for-profit corporation.

Pending approval by its membership, Gold Kist will be merged into a newly formed corporation called Gold Kist Holdings Inc. The conversion not only requires approval by Gold Kist members but the completion of an initial public offering of common stock by Gold Kist Holdings.

In the initial public offering, the corporation expects to offer 18 million shares of the common stock of Gold Kist Holdings. Proceeds from this offering are expected to be used to provide cash to Gold Kist members in connection with the conversion, repay certain indebtedness and cover general corporate purposes.

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