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

The Rochester Community Savings Bank, a New York State chartered mutual savings bank, planned to convert to a New York State chartered STOCK savings bank. Under section 86.4(c) of the Banking Board's General Regulations, the converting institution doesn't terminate its 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 conversion is 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; assuming the conversion and related stock sale complete by November 30, 1986, no reduction of NOL carryovers under section 382(a), and no reduction under section 382(b) at all; and continuation of bad-debt reserves without required restoration to income.

This is the most comprehensive of three nearly identical 1986 mutual-to-stock conversion rulings this Department issued -- see the companion TSB-A-86(9)C (North Side Savings Bank) and TSB-A-86(10)C (Skaneateles Savings Bank), both of which address ONLY the bank-level Article 32 franchise tax question using essentially the same template language. This ruling additionally and uniquely addresses the DEPOSITOR-level Article 22 personal income tax consequences.

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 (deposit accounts, liquidation-account interests, subscription rights, and any common stock later acquired by exercising the rights) mirror the federal figures exactly.

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. But remember 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 North Side Savings Bank and Skaneateles Savings Bank.

Citations and references

Statutes and regulations:

• Tax Law § 1453(a), § 1453(b)(3), § 1455(a), § 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-86(9)C -- North Side Savings Bank, the same conversion issue addressed for the bank-level franchise tax only
• TSB-A-86(10)C -- Skaneateles Savings Bank, same template, bank-level only
• TSB-A-85(22)C, (7)I -- Apple Bank for Savings, issued October 1985, roughly six months earlier and appearing to be the Department's original ruling on this same two-tier Article 32/Article 22 doctrine

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1986.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a86_8c_5i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-86 (8) C
Corporation Tax
TSB-A-86 (5) I
Income Tax
April 10, 1986

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. Z860219B

On February 19, 1986, a Petition for Advisory Opinion was received from The
Rochester Community Savings Bank, 40 Franklin Street, Rochester, New York 14604.
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,
   as amended (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 voting 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 constructively
   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 deposit accounts in the converted bank in the same dollar
   amount as their deposit accounts in Petitioner, plus interests in the liquidation
   account of the converted bank, in exchange for their deposit 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 voting common 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).
8. The basis of the deposit accounts in the converted bank received by the
   eligible account holders of Petitioner will be the same as the basis of their

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deposit 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. Conse­
quently, the basis of each eligible account holder's 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 (sections 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),
and the holding period of the common stock acquired through the exercise of
subscription rights shall commence upon the date of such exercise (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. Assuming that the conversion and related sale of the converted bank's
    voting common stock are completed by November 30, 1986, neither the conversion
    of Petitioner to the converted bank nor the related sale of the converted bank's
    voting common stock will 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) of the IRC 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 conversion, 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 conversion. The bad debt reserves will not
    be required to be restored to the gross income of Petitioner for the taxable year
    of the conversion, 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 conversion 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 share­
    holders 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.
    Franchise Tax Consequences pursuant to Article 32 of the Tax Law
    Section 1455(a) 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 "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 depart­
    ment, except as hereinafter provided."
    Section 1453(b) through (i) of the Tax Law and sections 18-2.3, 18-2.4 and
    18-2.5 of the Franchise Tax on Banking Corporations Regulations, promulgated
    thereunder on December 2, 1985, provide 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. Therefore, for New
    York State franchise tax purposes, such reorganization would be treated the same
    as it is treated for Federal income tax purposes.
    The modification provided in section 1453(b)(3) of the Tax Law states that
    any net operating loss deduction for the taxable year allowable for Federal
    income tax purposes is not allowable when computing entire net income pursuant
    to section 1453 of the Tax Law. Thus, when computing entire net income, a
    taxpayer must add the amount of any net operating loss deduction that is
    allowable for Federal income tax purposes to the entire taxable income required
    to be reported for Federal income tax purposes (Federal taxable income).
    Section 1462(a) of the Tax Law states, in part:
    "Every taxpayer . . . shall annually on or before the

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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 itsfranchise or to be subject to the tax
imposed bythis 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 1462 (a) 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.
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, the 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 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.
Income Tax consequences pursuant to Article 22 of the Tax Law
Section 611(a) of the Tax Law provides:
"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:
"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:

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Income Tax
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"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...
(2) The portion of the modifications described in subsections (b)
and (c) of section six hundred twelve which 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 deposit
accounts in the converted bank in the same dollar amount as their deposit
accounts in Petitioner plus their interest in the liquidation account of the
converted bank in exchange for their deposit 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
account 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 nontrans­
ferable 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.

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Corporation Tax
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Income Tax
April 10, 1986

Finally, the account holders' basis for New York State income tax purposes
of deposit accounts in the converted bank, of interest in the liquidation account
of the converted bank, of 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: April 10, 1986

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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