When a New York mutual savings bank converts to stock form as a federal tax-free 'F reorganization,' does the bank owe any New York bank franchise (Article 32) tax on the conversion itself?

Plain-English summary

The Binghamton Savings Bank, a New York State chartered mutual savings bank, planned to convert to a New York State chartered stock savings bank. Under Banking Board General Regulations § 86.4(c), the conversion doesn't end the bank's corporate existence -- it simultaneously becomes a stock-form institution, keeping all its property, rights, debts, liabilities, and deposits intact, as a legal continuation of the same entity. For federal tax purposes, the bank had already determined this qualifies as a tax-free "F reorganization" under IRC section 368(a)(1)(F), with a dozen listed federal consequences: no gain or loss to the converted bank on issuing stock or to depositors on receiving new accounts, liquidation-account interests, or nontransferable stock subscription rights (or on later exercising those rights); carryover basis and tacked holding periods for the bank's assets; continuity of the bank's tax attributes and taxable year under IRC section 381; and continuation of bad-debt reserves without required restoration to income.

The Department held that this federal tax-free treatment carries straight through to the bank's own New York Article 32 franchise tax, because Article 32's entire net income definition (Tax Law § 1453(a)) starts from federal taxable income and its modification provisions (§ 1453(b) through (i)) contain nothing addressing an IRC section 368(a)(1)(F) reorganization specifically. Since Banking Board regulations mean the bank doesn't cease exercising its franchise at conversion, its taxable year doesn't end on the conversion date either -- the pre-conversion stub period simply rolls into the post-conversion return, same as if no reorganization had occurred.

This is one of a family of near-identical mid-1980s mutual-to-stock conversion rulings. It addresses only the bank-level Article 32 question, using essentially the same template language as the later TSB-A-86(9)C (North Side Savings Bank) and TSB-A-86(10)C (Skaneateles Savings Bank). Its companion filed the same week, TSB-A-85(22)C, (7)I (Apple Bank for Savings), additionally covers the depositor-level Article 22 personal income tax question -- and, issued October 11, 1985, appears to be the Department's earliest recorded ruling on this specific conversion doctrine, predating TSB-A-86(3)C and TSB-A-86(8)C, (5)I by roughly six months.

What this means for you

Mutual savings institutions converting to stock form

If your federal F-reorganization determination for a mutual-to-stock conversion is solid, New York's Article 32 bank franchise tax generally follows automatically at the bank level -- there's no separate New York-specific reorganization test, since Article 32 has no modification addressing IRC section 368(a)(1)(F) transactions, and your taxable year won't be interrupted by the conversion.

Accountants and tax professionals

This ruling covers only the converting bank's own franchise tax. If you also need the depositor/account-holder side (Article 22 income tax on subscription rights), see the companion TSB-A-85(22)C, (7)I, which addresses both levels for a different bank on the same facts pattern.

Common questions

Q: Does converting from mutual to stock form trigger New York franchise tax on the bank itself?
A: Not if the conversion is a genuine federal tax-free F-reorganization under IRC section 368(a)(1)(F) -- Article 32 has no modification addressing this type of reorganization, so it follows the federal treatment.

Q: Does the bank's taxable year end when it converts?
A: No. Under Banking Board General Regulations § 86.4(c), the bank doesn't cease exercising its franchise at conversion, so its taxable year continues uninterrupted.

Q: Does this Opinion cover what happens to depositors' New York income tax?
A: No -- this ruling addresses only the bank-level Article 32 franchise tax. See the companion TSB-A-85(22)C, (7)I for the Article 22 depositor-level analysis.

Q: Can another converting bank rely on this ruling?
A: No. It binds the Department only as to Binghamton Savings Bank's own facts and cannot be relied upon by another institution, even in a materially identical conversion.

Citations and references

Statutes and regulations:

• Tax Law § 1453(a), § 1453(b)-(i), § 1455(a), § 1462(a)
• Internal Revenue Code § 368(a)(1)(F), § 368(b), § 1032(a), § 362(b), § 1223(2), § 1223(6), § 354(a), § 305(a), § 358(a)(1), § 307, § 381, § 381(c)(4), § 593(e)
• Rev. Rul. 56-572; Rev. Rul. 71-233
• Banking Board General Regulations § 86.4(c)

Related rulings:

• TSB-A-85(22)C, (7)I -- Apple Bank for Savings, filed the same week, additionally covering the Article 22 depositor income tax question
• TSB-A-86(3)C, TSB-A-86(9)C, TSB-A-86(10)C -- later 1986 rulings using the same template

Date note: The document header repeats "October 11, 1985" four times, but the sign-off line reads "DATED: October 10, 1985." This one-day gap is consistent with internal signing before the header/publication date; issued_date uses the header date without correction.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1985.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a85_21c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85 (21) C
Corporation Tax
October 11, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C850806A

On August 6, 1985 a Petition for Advisory Opinion was received from The Binghamton
Savings Bank, 58-68 Exchange Street, Binghamton, New York 13902.
At issue is the tax treatment under Article 32 of the Tax Law of a proposed reorganization
of Petitioner where, for federal income tax purposes:

1. The change in the form of operation of Petitioner from a state mutual savings bank to a
   state stock savings bank will constitute a reorganization within the meaning of section 368(a)(1)(F)
   of the Internal Revenue Code of 1954 (hereinafter IRC). Petitioner and the converted bank will each
   be "a party to a reorganization" within the meaning of section 368(b) of the IRC.
2. No gain or loss will be recognized by the converted bank upon the receipt of money in
   exchange for shares of its stock (section 1032(a) of the IRC).
3. The assets of Petitioner will have the same basis in the hands of the converted bank as in
   the hands of Petitioner immediately prior to the conversion (section 362(b) of the IRC).
4. The holding period of the assets of Petitioner which will be received by the converted
   bank will include the period prior to the conversion (section 1223(2) of the IRC).
5. No gain or loss will be recognized by the eligible account holders of Petitioner upon
   constructive issuance to them of savings accounts in the converted bank in the same dollar amount
   as their savings accounts in Petitioner plus interest in the liquidation account of the converted bank
   (section 354(a) of the IRC).
6. No gain or loss will be recognized to the eligible account holders upon the distribution
   to them of the nontransferable subscription rights to purchase shares of stock in the converted bank
   (section 305(a) of the IRC).
7. No taxable income will be realized upon exercise of the nontransferable subscription right
   by the eligible account holders (Rev. Rul. 56-572, 1956-2 C.B. 182).
8. The basis of the savings accounts in the converted bank will be the same as the basis of
   the savings accounts in Petitioner surrendered in exchange (section 358(a)(1) of the IRC). The
   eligible account holder's interest in the liquidation account of the converted bank will be the same
   as the basis of the proprietary interest surrendered. The basis of each eligible account holder's

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

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TSB-A-85 (21) C
Corporation Tax
October 11, 1985
interest in the liquidation account will be zero (Rev. Rul. 71-233, 1971-1 C.B. 113). The basis of
the nontransferable subscription rights will be zero (section 307 of the IRC). The basis of the
common stock of the converted bank to its shareholders will be the purchase price (section 1012 of
the IRC).

9. The creation of the liquidation account on the records of the converted bank will have no
   effect on taxable income, deductions for addition to reserves for bad debts under section 593 of the
   IRC, or distributions to shareholders under section 593(e) of the IRC.
10. The taxable year of Petitioner will not end on the effective date of the conversion and
    all tax attributes will be taken into account by the converted bank (section 1.381(b)-(1)(a)(2) of the
    Treasury Regulations).
11. Pursuant to the provisions of section 381(c)(4) and section 1.381(c)(4)-1(a)(1)(ii) of the
    Treasury Regulations, the reorganization will not affect the bad debt reserve established prior to
    conversion. The reserve and method of deduction will carryover to the converted bank. The bad
    debt reserve will not be required to be restored to gross income of Petitioner.
12. The eligible account holder shareholder's holding period for the stock of the converted
    bank shall include the period beginning with the date on which the subscription rights are exercised
    (section 1223(6) of the IRC).
    Petitioner is a New York State chartered mutual savings bank. Petitioner contemplates
    converting from a mutual savings bank to a New York State stock savings bank. Pursuant to section
    86.4(c) of the General Regulations of the Banking Board of the New York State Banking
    Department, at the time the conversion from mutual to stock-form becomes effective, the converting
    institution shall cease to be a mutual institution and shall simultaneously become a stock-form
    institution, and all the property of the mutual institution shall remain as the property of the stock­
    form institution. All of the rights, powers, franchises, debts, liabilities, obligations and duties of the
    mutual institution shall continue as such in the stock-form institution and all deposits therein shall
    remain as deposits of equal value and character of such stock-form institution. The corporate
    existence of the converting mutual institution shall not terminate, and such converted stock-form
    institution shall be a continuation of the mutual form institution which existed immediately before
    the filing of the amended organization certificate.
    Section 1455(a) of Article 32 of the Tax Law provides that the basic tax is 9 percent of the
    taxpayer's entire net income, or the portion thereof allocated to New York State, for the taxable year
    or part thereof.
    Entire net income is defined in section 1453(a) of Article 32 of the Tax Law as follows:
    "Entire net income means total net income from all sources which
    shall be the same as the entire taxable income which the taxpayer is
    required to report to the United States treasury department, except as
    hereinafter provided."

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TSB-A-85 (21) C
Corporation Tax
October 11, 1985
Section 1453(b) through (i) of Article 32 of the Tax Law provides for the modifications
required by section 1453(a). However, there is no modification for a transaction treated as a
reorganization pursuant to section 368(a)(1)(F) of the IRC.
The only regulations promulgated, to date, in accordance with section 1453 of Article 32 of
the Tax Law pertain to the modification for the international banking facilities which is not herein
at issue.
The regulations promulgated in accordance with Articles 9-B and 9-C of the Tax Law, the
predecessor to Article 32 of the Tax Law, apply only to the extent that such regulations conform with
the provisions of such Article 32 and only in the absence of regulations promulgated in accordance
with such Article 32. In a letter to Commerce Clearing House, Inc., dated February 26, 1973, the
Director of the Corporation Tax Bureau made the following statement:
"Inasmcuh as the provisions of Article 32 conform with Articles 9-B and 9-C,
except in areas of privilege period and Federal conformity, regulations issued under
Articles 9-B and 9-C remain applicable except when they are in conflict with the
provisions of Article 32. Federal taxable income is the starting point in computing
entire net income and therefore Federal regulations applicable to such computation
will be followed."
Section 1462(a) of Article 32 of the Tax Law states, in part:
"Every taxpayer . . . shall annually on or before the fifteenth day of the third month
following the close of each of its taxable years transmit to the tax commission a
return . . . and every taxpayer which ceases to exercise its franchise or to be subject
to the tax imposed by this article shall transmit to the tax commission a return on the
date of such cessation or at such other time as the tax commission may require
covering each year or period for which no return was theretofore filed."
Pursuant to section 1453 of Article 32 of the Tax Law, entire net income is computed by
starting with federal taxable income and making the modifications required by such section. Since
there is no modification for a reorganization under section 368(a)(1)(F) of the IRC, such
reorganization would, for purposes of section 1453 of Article 32 of the Tax Law, be treated the same
as it was treated for federal income tax purposes. For purposes of Article 32 of the Tax Law, a
taxpayer's taxable year does not change when converting from a mutual institution to a stock-form
institution if such taxpayer does not cease to exercise its franchise or cease to be subject to tax under
Article 32 of the Tax Law.

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TSB-A-85 (21) C
Corporation Tax
October 11, 1985
Accordingly, if Petitioner's change in form from a New York State chartered mutual savings
bank to a New York State chartered stock savings bank is a tax-free reorganization under section
368(a)(1)(F) of the IRC, such reorgani-zation would be a tax-free reorganization for New York State
franchise tax purposes under Article 32 of the Tax Law. Also, pursuant to section 86.4(c) of the
General Regulations of the Banking Board of the New York State Banking Department, Petitioner
would not cease to exercise its franchise and the taxable year of Petitioner would not end on the
effective date of the conversion and, accordingly, the part of the taxable year of Petitioner before the
conversion would be included in the taxable year of the converted bank following the conversion.

DATED: October 10, 1985

s/FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth herein.