When a New York mutual savings bank converts to stock form -- a federal tax-free 'F reorganization' -- does New York's bank franchise tax and personal income tax follow the same tax-free treatment, both for the bank itself and for its depositors who receive stock subscription rights?

Plain-English summary

Apple Bank for Savings, 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 continuation of the same legal entity. For federal tax purposes, the bank had already determined (per Rev. Rul. 80-105) that this qualifies as a tax-free "F reorganization" under IRC section 368(a)(1)(F), triggering a long list of favorable federal consequences: no gain/loss to the bank or converted bank; carryover basis and tacked holding periods for assets; no gain/loss to depositors ("eligible account holders") on receiving converted-bank deposit accounts plus liquidation-account interests in exchange for their old accounts, or on receiving nontransferable stock subscription rights, or on EXERCISING those rights; carryover basis (zero basis for the liquidation-account interest and subscription rights) and tacked/fresh holding periods as applicable; no interruption of the bank's tax year or attributes under IRC section 381; no reduction of NOL carryovers under section 382(a) or (b); and continuation of bad-debt reserves without required restoration to income.

On the bank's own Article 32 franchise tax, the Department held the federal tax-free treatment carries straight through: since Article 32 has no modification provision specifically addressing an IRC section 368(a)(1)(F) reorganization, the reorganization is treated the same way for New York franchise tax purposes as federally. However, New York's own permanent modification barring an NOL deduction (section 1453(b)(3)) means the entire net income computation isn't affected by an NOL deduction allowable federally either way -- making it "immaterial" whether federal IRC section 382(a) or (b) limits the converted bank's federal NOL carryovers, since New York doesn't allow that deduction regardless. The bank's taxable year doesn't end on the conversion date, so the pre-conversion stub period rolls into the post-conversion return.

On the DEPOSITORS' side (Article 22), the Department reasoned that since Article 22's own definition of adjusted gross income (sections 612(a), 632(a)) has no modification addressing bank reorganizations, New York simply follows the federal result: because eligible account holders recognize no gain/loss federally on receiving new deposit accounts, liquidation-account interests, or nontransferable subscription rights, and no taxable income on EXERCISING those rights, they likewise owe no New York tax on any of it -- and their New York basis and holding periods for all of these items mirror the federal figures exactly.

This appears to be the Department's earliest recorded ruling on this specific mutual-to-stock conversion doctrine. Issued October 11, 1985, it predates the near-identical TSB-A-86(8)C, (5)I (Rochester Community Savings Bank, April 1986) -- which covers the exact same two-tier Article 32/Article 22 analysis using essentially the same template language and section numbering -- by roughly six months, along with its own bank-level-only companion TSB-A-85(21)C (Binghamton Savings Bank, filed the same week) and the later 1986 bank-level-only rulings TSB-A-86(3)C, TSB-A-86(9)C, and TSB-A-86(10)C.

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 franchise tax generally follows automatically -- there's no separate New York-specific reorganization test, since Article 32 has no modification addressing IRC section 368(a)(1)(F) transactions. And New York's permanent NOL disallowance under section 1453(b)(3) applies regardless of the reorganization, so federal NOL-carryover limitation questions (section 382) are often simply irrelevant to your New York computation.

Depositors of a converting mutual savings bank

If you receive new deposit accounts, liquidation-account interests, or nontransferable stock subscription rights as part of your bank's conversion, and the transaction is federally tax-free, you generally owe no New York personal income tax on any part of it either -- including exercising the subscription rights -- and your New York basis/holding period simply tracks your federal figures.

Common questions

Q: Does New York's bank franchise tax have its own separate test for whether a mutual-to-stock conversion is tax-free?
A: No -- Article 32 has no modification addressing IRC section 368(a)(1)(F) reorganizations, so it follows the federal determination directly.

Q: Does it matter whether IRC section 382(a) or (b) limits the converted bank's federal NOL carryovers?
A: No, for New York purposes -- since New York's section 1453(b)(3) already disallows any NOL deduction regardless of federal treatment, the section 382 question is immaterial to the New York computation.

Q: Do depositors owe New York tax on receiving stock subscription rights or exercising them?
A: No -- if the transaction is federally tax-free (no gain/loss and no taxable income recognized), it's equally tax-free for New York personal income tax purposes, since Article 22 has no contrary modification.

Q: Can another bank rely on this specific ruling?
A: No. It binds the Department only for this petitioner's specific facts and can't be relied upon by other converting institutions, even with very similar conversion structures -- see the separately issued companion rulings for Binghamton Savings Bank and Rochester Community Savings Bank.

Citations and references

Statutes, regulations, and rulings:

• Tax Law § 1453(a), § 1453(b)-(i), § 1453(b)(3), § 1462(a)
• Tax Law § 611(a), § 612(a), § 631(a), § 632(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), § 381, § 381(c)(4), § 382(a), § 382(b), § 593(e)
• Rev. Rul. 80-105; Rev. Rul. 56-572; Rev. Rul. 71-233; Rev. Rul. 57-276
• Banking Board General Regulations § 86.4(c)

Related rulings:

• TSB-A-85(21)C -- Binghamton Savings Bank, filed the same week, bank-level Article 32 only
• TSB-A-86(8)C, (5)I -- Rochester Community Savings Bank, the near-identical later (April 1986) version of this same two-tier analysis
• TSB-A-86(3)C, TSB-A-86(9)C, TSB-A-86(10)C -- later 1986 bank-level-only rulings using the same template

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/multitax/a85_22c_7i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85 (22) C
Corporation Tax
TSB-A-85 (7) I
Income Tax
October 11, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. Z850506A

On May 6, 1985 a Petition for Advisory Opinion was received from Apple Bank for Savings,
205 East 42nd Street, New York, New York 10017.
At issue is the tax treatment under Articles 22 and 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), and no gain or loss will be recognized by
   Petitioner or the converted bank as a result of such conversion (Rev. Rul. 80-105, 1980-1C.B. 78).
   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 common 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 to be received by the converted bank will
   include the period during which those assets were held by Petitioner prior to the conversion (section
   1223(2) of the IRC).
5. No gain or loss will be recognized by the eligible account holders upon the issuance to
   them of savings accounts in the converted bank in the same dollar amount as their savings accounts
   in Petitioner, plus interests in the liquidation account of the converted bank in exchange for their
   savings accounts in Petitioner (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 by the eligible account holders as a result of the
   exercise of the nontransferable subscription rights (Rev. Rul. 56-572, 1956-2 C.B. 182).

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

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

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8. The basis of the savings accounts in the converted bank received by the eligible account
   holders of Petitioner will be the same as the basis of their savings accounts in Petitioner surrendered
   in exchange therefor (section 358(a)(1) of the IRC). The basis of the interests in the liquidation
   account of the converted bank received by the eligible account holders will be the same as the basis
   of the proprietary interest surrendered in exchange therefor. Therefore, the basis of each eligible
   account holders 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 1.307-1 and 1.307-2 of the
   Treasury Regulations). The basis of the common stock of the converted bank to its shareholders will
   be the purchase price thereof (section 1012 of the IRC). The shareholders' holding period will
   commence upon the date on which the subscriptions are exercised (section 1223(6) of the IRC).
9. For purposes of section 381 of the IRC, the converted bank will be treated as if there had
   been no reorganization. Accordingly, the taxable year of Petitioner will not end on the effective date
   of the conversion, and the tax attributes of Petitioner will be taken into account by the converted
   bank as if there had been no reorganization (section 1.381(b)-l(a)(2) of the Treasury Regulations).
   The part of the taxable year of Petitioner before the conversion will be includable in the taxable year
   of the converted bank following the conversion (Rev. Rul. 57-276, 1957-1C.B. 126).
10. Regardless of book entries made for the creation of the liquidation account, the
    conversion will not diminish the accumulated earnings and profits of the converted bank available
    for the subsequent distribution of dividends, if any, within the meaning of section 316 of the IRC
    (section 1.312-11(b) and (c) of the Treasury Regulations).
11. The conversion of Petitioner to the converted bank will not cause section 382(a) of the
    IRC to apply to reduce the net operating loss carryovers available to the converted bank.
12. The conversion of Petitioner to the converted bank will not cause section 382(b) of the
    IRC to apply to reduce the net operating loss carryovers available to the converted bank.
13. Pursuant to the provisions of section 381(c)(4) and section 1.381(c)(4)-1 (a)(1)(ii) of the
    Treasury Regulations, the converted bank will succeed to and take into account immediately after
    the reorganization the dollar amounts of those accounts of Petitioner which represent bad debt
    reserves in respect of which Petitioner has taken a bad debt deduction for taxable years ending on
    or before the date of the transfer. The bad debt reserves will not be required to be restored to gross
    income of Petitioner for the taxable year of the transfer, and such bad debt reserves will have the
    same character in the hands of the converted bank as they would have had in the hands of Petitioner
    if no distribution or transaction had occurred.

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14. The creation of the liquidation account on the records of the converted bank will have
    no effect on its 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.
    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. Ail 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 1453(a) of Article 32 of the Tax Law provides that the basic tax is 9 percent of the
    taxpayer's entire net income, or portion thereof allocated to New York State, for the taxable year or
    part thereof.
    Entire net income is defined in section 1453(a) of the Tax Law as follows:
    "Entire net income means total net income from all sources which
    shall be the same as entire taxable income which the taxpayer is
    required to report to the United States treasury department, except as
    hereinafter provided.
    Section 1453(b) through (i) of the Tax Law provides the modifications to entire net income required
    by section 1453(a).
    The only regulations promulgated, to date, in accordance with section 1453 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. In a letter to Commerce Clearing House, Inc., dated February 26,
    1973, the Director of the Corporation Tax Bureau made the following statement:

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"Inasmuch 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 1453(b) through (i) of the Tax Law does not provide a modification for a transaction
treated as a reorganization pursuant to section 368(a)(1)(F) of the IRC. Therefore, for purposes of
Article 32 of the Tax Law, such organization would be treated the same as it was treated for federal
income tax purposes.
Section 1453(b)(3) of the Tax Law provides for a modification to entire net income when a
net operating loss deduction for the taxable year is allowable for federal income tax purposes. Such
net operating loss deduction is not allowable when computing entire net income and must be added
to the entire taxable income required to be reported for federal income tax purposes (federal taxable
income).

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."
For purposes of Article 32 of the Tax Law, a taxpayer's taxable year does not change when
coverting 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.
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 reorganization would be a tax-free reorganization for New York State
franchise tax purposes under Article 32 of the Tax Law. Also, since a net operating loss deduction
is not allowable for New York State franchise tax purposes pursuant to section 1453(b)(3) thereof,
entire net income of Petitioner is not affected when a net operating loss deduction is allowable for
federal income tax purposes. It is immaterial whether section 382(a) or (b) of the IRC regarding the
net operating loss carryovers available to the converted bank for federal income tax purposes
becomes operative as a result of the reorganization. Finally, pursuant to section 86.4(c) of the
General Regulations of the Banking Board of the New York State Banking Department, Petitioner

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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.
Additionally, section 611(a) of the Tax Law provides:
(a) The New York taxable income of a resident individual shall be his
New York adjusted gross income less his New York deduction and
New York personal exemptions as determined under this part.
Section 612(a) of the Tax Law provides:
(a) The New York adjusted gross income of a resident individual
means his federal adjusted gross income as defined in the laws of the
United States for the taxable year, with the modifications specified in
this section.
Section 631(a) of the Tax Law provides:
The New York taxable income of a nonresident individual shall be his
New York adjusted gross income less his New York deduction and
New York personal exemptions, as determined under this part.
Section 632(a) of the Tax Law provides:
The New York adjusted gross income of a nonresident individual
shall be the sum of the following:
(1) The net amount of items of income, gain, loss and deduction
entering into his federal adjusted gross income, as defined in the laws
of the United States for the taxable year, derived from or connected
with New York sources.., and
(2) The portion of the modifications described in subsections (b) and
(c) of section six hundred twelve relate to income derived from New
York sources ....
(3) The modification described in paragraph fourteen of subsection
(b) of section six hundred twelve.
Section 612 of the Tax Law does not contain any modification which pertains to the effects
of the reorganization of a savings bank on the eligible account holders thereof, as addressed in this
advisory opinion.
Accordingly, if no gain or loss will be recognized for federal income tax purposes by the
eligible account holders upon the issuance to them of savings accounts in the converted bank in the
same dollar amount as their savings accounts in Petitioner plus their interest in the liquidation

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account of the converted bank in exchange for their savings accounts in Petitioner and if no gain or
loss will be recognized for federal income tax purposes by the eligible account holders upon the
distribution to them of the nontransferable subscription rights to purchase shares of stock in the
converted bank, then no gain or loss will be recognized for New York State income tax purposes by
such eligible accounts holders because of such issuance and such distribution.
Furthermore, if no taxable income will be realized for federal income tax purposes by eligible
account holders as a result of the exercise of the nontransferable subscription rights, no taxable
income will be realized for New York State income tax purposes by such eligible account holders
because of the exercise of such nontransferable subscription rights.

Finally, the account holders' basis for New York State income tax purposes of savings
accounts in the converted bank, of interest in the liquidation account of the converted bank,
nontransferable subscription rights and of common stock of the converted bank will be the same as
such account holders' basis for federal income tax purposes. Similarly, the shareholders' holding
period for New York State income tax purposes will be the same as such shareholders' holding
period for federal income tax purposes.

DATED: October 11, 1985

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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