When a savings bank reorganizes into a bank holding company structure by merging a shell subsidiary into itself and exchanging shareholder stock for holding-company stock, do the bank, its new parent, or its shareholders owe New York tax?

Plain-English summary

Binghamton Savings Bank wanted to restructure into a bank holding company for greater operational flexibility. It created a new Delaware parent, BSB Bancorp, Inc., which in turn formed a temporary New York merger subsidiary ("Sub"). Sub then merged into Binghamton Savings Bank, with each share of Binghamton stock (except dissenters') automatically converting into one share of BSB Bancorp stock -- ending with BSB Bancorp owning 100% of Binghamton Savings Bank and the bank's former shareholders now holding Bancorp stock instead. Binghamton asked whether the bank, the new parent, Sub, or the shareholders would owe New York tax on this restructuring.

The Department found no separate New York tax exposure. Federally, this is a classic reverse triangular merger that qualifies as a tax-free reorganization under IRC § 368(a)(1)(A), permitted to use parent stock in the exchange under § 368(a)(2)(E) — the fact that pre-conversion depositors' liquidation-account interests aren't "stock" for control purposes (per IRS guidance tracing back to Paulsen v. Commissioner) didn't disqualify the deal. Because Article 32's "entire net income" for banks and Article 22's income calculations for individuals both start from the federal figures with no modification covering this kind of reorganization, New York simply mirrors the federal no-gain-no-loss treatment for the bank, Sub, BSB Bancorp, and non-dissenting shareholders. Shareholders who exercise dissenters' rights and take cash are taxed the same way New York treats any other stock redemption under IRC § 302.

What this means for you

Community banks reorganizing into a holding-company structure

Converting to a bank holding company through a standard reverse-merger structure (new parent, temporary merger subsidiary, stock-for-stock exchange) is New York tax-neutral for the bank and its shareholders, as long as it independently qualifies as a tax-free reorganization federally under IRC § 368(a)(1)(A)/(a)(2)(E). New York adds no extra layer of tax or reporting complexity for a transaction that's already federally tax-free.

Accountants and tax professionals

Compare this ruling to its same-batch companion, TSB-A-88(15)C/(8)I (North Side Savings Bank/Richmond Hill Savings Bank), which reaches the same "no separate New York tax" conclusion but through a different federal path — a cash acquisition treated as an IRC § 338(d)(3) stock purchase followed by § 332 liquidation, rather than a genuine stock-for-stock § 368(a)(1)(A) reorganization. Both examples confirm that Articles 32 and 22 simply track whatever federal characterization applies; there's no independent New York merger-tax regime to separately analyze.

Shareholders who dissent from the reorganization

If you perfect dissenters' rights under Banking Law § 6022 and take cash instead of holding-company stock, you're taxed on that redemption under IRC § 302 principles for both federal and New York purposes — different treatment from shareholders who exchange stock tax-free.

Common questions

Q: Does creating a new holding company and shell merger subsidiary itself trigger tax?
A: No — the transitory existence and merger of the shell subsidiary is disregarded as part of the overall tax-free reorganization, both federally and for New York purposes.

Q: Do non-dissenting shareholders recognize any gain when they exchange bank stock for holding-company stock?
A: No — under IRC § 354(a)(1), no gain or loss is recognized, and New York's Article 22 has no modification that would change that result.

Q: Can another bank restructuring into a holding company rely on this specific ruling?
A: No. This opinion binds the Department only for Binghamton Savings Bank and BSB Bancorp on these facts; any other bank should confirm its own reorganization independently qualifies under IRC § 368 before assuming the same New York result.

Citations and references

Statutes:

• Tax Law § 1451, § 1453(a) (Article 32 banking franchise tax; entire net income)
• Tax Law § 611(a), § 612(a) (Article 22 personal income tax)
• New York State Banking Law § 6022 (dissenters' rights)
• IRC § 368(a)(1)(A), § 368(a)(2)(E) (tax-free statutory merger; reverse triangular merger)
• IRC § 354(a)(1), § 358(a)(1), § 302 (shareholder nonrecognition; basis; redemption)
• Bank Holding Company Act of 1956
• Paulsen v. Commissioner, 469 U.S. 131 (1985)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a88_14c_7i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88 (14) C
Corporation Tax
TSB-A-88 (7) I
Income Tax
June 15, 1988

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. Z880323A

On March 23, 1988, a Petition for Advisory Opinion was received from
Binghamton Savings Bank, 58-68 Exchange Street, Binghamton, New York 13902.
The issue raised is whether the merger of Binghamton Interim Savings Bank
(hereinafter "Sub"), a subsidiary of BSB Bancorp, Inc. (hereinafter "Parent"),
into Petitioner will constitute a tax-free reorganization for purposes of
Articles 22 and 32 of the Tax Law.
Specifically, the questions are:
1.

For purposes of Article 32, will "entire net income", as defined in
section 1453 of the Tax Law, be recognized to Parent, Sub or
Petitioner as a result of the reorganization.

2.

For purposes of Article 22, will income be taxed to the shareholders
of Parent or Petitioner under section 611 and section 612 of the Tax
Law, other than to those who perfect their dissenters' rights under
section 6022 of the New York State Banking Law.

3.

For purposes of any other provision of the Tax Law, will income be
taxed to Parent, Sub, Petitioner or the shareholders of Parent or
Petitioner.

Petitioner is a New York State stock savings bank. On September 26, 1985,
Petitioner converted from a New York State mutual savings bank to a New York
State stock savings bank in a transaction intended to qualify as a reorganization
within the meaning of section 368(a)(1)(F) of the Internal Revenue Code
(hereinafter "IRC"). At that time, Petitioner established a liquidation account
for the benefit of its eligible account holders in recognition of their
proprietary interests in an amount equal to the net worth of Petitioner prior to
the conversion. Petitioner has outstanding 3,123,182 shares of common stock.
The present directors and officers of Petitioner beneficially own approximately
7.63 percent of the outstanding Petitioner stock.
Parent is a Delaware corporation recently organized by Petitioner to engage
in business as a bank holding company under the Bank Holding Company Act of 1956,
as amended.
Parent will not engage in any business activity prior to
consummation of the proposed transaction. Parent has authorized 5,000,000 shares
of $0.01 par value common stock and 2,500,000 shares of $0.01 par value preferred
stock.
Sub will be formed by Parent as a New York State stock savings bank solely
to effect the proposed transaction. Sub will issue its common stock to Parent.
TP-8 (3/83)

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Corporation Tax
TSB-A-88 (7) I
Income Tax
June 15, 1988

The Board of Directors of Petitioner believes that a holding company
structure will provide Petitioner with greater operational flexibility and
opportunity for expansion and diversification. Accordingly, pursuant to an
Agreement and Plan of Merger and Reorganization, the following transaction has
been proposed:
(1)

Pursuant to applicable law, Sub will merge with and into Petitioner.
The separate corporate existence of Sub will terminate upon the
effective date of the merger, and Petitioner will acquire all of the
assets of Sub.

(2)

Each share of Petitioner common stock outstanding on the effective
date of the merger, except those held by dissenting shareholders,
will be exchanged for one share of Parent common stock. Accordingly,
no fractional shares of Parent common stock will be issued.

(3)

Petitioner shareholders who dissent to the transaction, if any, will
receive cash from Petitioner for their shares under section 6022 of
the New York State Banking Law.

(4)

On the effective date of the merger, each share of Parent stock held
by Petitioner will be canceled and each share of Sub common stock
outstanding will be automatically exchanged for one share of
Petitioner common stock. As a result of the merger, Parent will own
all of the issued and outstanding stock of Petitioner.

For federal income tax purposes, the following has been held:
(1)

Provided that (a) the proposed merger of Sub with and into
Petitioner qualifies as a statutory merger under applicable law, (b)
after the transaction Petitioner will hold substantially all of its
assets and substantially all of the assets of Sub, and (c) in the
transaction, the shareholders of Petitioner exchange an amount of
Petitioner common stock representing control of Petitioner within
the meaning of section 368(c) of the IRC solely for Parent common
stock, but prior recipients of Petitioner liquidation account
interests (i.e. pre-conversion Petitioner deposit account holders)
will retain such interests, the transaction will qualify as a
reorganization within the meaning of section 368(a)(1)(A) of the
IRC. The reorganization will not be disqualified by reason of the
fact that stock of Parent is used in the transaction (section
368(a)(2)(E) of the IRC and Rev. Rul. 77-428, 1977-2 C.B. 117). The
Internal Revenue Service has determined that Petitioner's deposits
with liquidation account interests do not constitute stock for
purposes of section 368(c) of the IRC. A liquidation account
interest is a mere component of the deposit and is not divisible
from the deposit. While the Internal Revenue Service rules that a
conversion may qualify for tax free reorganization treatment based
on a finding that there is sufficient proprietary interest for
continuity of interest purposes found in the liquidation

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Corporation Tax
TSB-A-88 (7) I
Income Tax
June 15, 1988

account interest due to the unique nature of the financial structure
and control of regulated mutual savings banks (Rev. Rul. 80-105,
1980-1 C.B. 78), the Internal Revenue Service believes that the
entire deposit with liquidation rights in a stock bank is virtually
cash equivalent in light of the United States Supreme Court decision
in Paulsen v. Commissioner, 469 U.S. 131 (1985), 1985-1 C.B. 127.
(But see Rev. Ruls. 69-3, 1969-1 C.B. 103, and 69-646, 1969-2 C.B.
54, the interest received rises to the level of "stock" and thus,
section 354 of the IRC applies). The Court held that the debt
characteristics of a mutual deposit represented by its withdrawal
value are so predominant that the deposit is virtually a cash
equivalent. It is the Internal Revenue Service's view that a stock
bank deposit represents even less proprietary interest than a mutual
deposit because depositors of a stock bank have no voting rights and
their only proprietary right is a liquidation account that does not
increase in value even if the net worth of the bank increases. [Cf.
Helvering v. Southwest Consolidated Corp., 315 U.S. 194, 202 (1942)
(a creditor's interest can constitute a proprietary interest in an
insolvent corporation for continuity of interest purposes, yet not
constitute stock for control purposes)].
(2)

For purposes of ruling (1), "substantially all" means at least 90
percent of the fair market value of the net assets and at least 70
percent of the fair market value of the gross assets of each of
Petitioner and Sub. Parent, Sub, and Petitioner will each be "a
party to a reorganization" within the meaning of section 368(b) of
the IRC.

(3)

No gain or loss will be recognized to Sub on the transfer of its
assets to Petitioner in exchange for Petitioner common stock
(section 361(a) of the IRC).

(4)

No gain or loss will be recognized to Petitioner upon the receipt of
the assets of Sub in exchange for Petitioner common stock (section
1032(a) of the IRC).

(5)

The basis of the assets of Sub acquired by Petitioner will be the
same in the hands of Petitioner as the basis of such assets in the
hands of Sub immediately prior to the exchange (section 362(b) of
the IRC).

(6)

No gain or loss will be recognized to Parent upon the receipt of
stock of Petitioner solely in exchange for stock of Sub (section
354(a)(1) of the IRC).

(7)

The holding period of the assets of Sub in the hands of Petitioner
will, in each instance, include the holding period during which such
assets were held by Sub (section 1223(2) of the IRC).

(8)

No gain or loss will be recognized to the shareholders of Petitioner
upon the exchange of their Petitioner stock solely for Parent common
stock (section 354(a)(1) of the IRC).

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Corporation Tax
TSB-A-88 (7) I
Income Tax
June 15, 1988

(9)

The basis of the Parent common stock received by the shareholders of
Petitioner will be the same as the basis of Petitioner stock
surrendered in exchange therefor (section 358(a)(1) of the IRC).

(10)

The holding period of the Parent common stock received by the
shareholders of Petitioner will include the period during which
Petitioner stock surrendered therefor was held, provided the stock
of Petitioner is a capita] asset in the hands of the shareholders of
Petitioner on the date of the exchange (section ].223(1) of the
IRC).

(11)

Where cash is received by a dissenting Petitioner shareholder from
Petitioner, that cash will be treated as received by that
shareholder in redemption of his Petitioner stock subject to the
provisions and limitations of section 302 of the IRC.

Question 1
Section 1451 of the Tax Law imposes, annually, a franchise tax on every
banking corporation for the privilege of exercising its franchise or doing
business in New York State in a corporate or organized capacity.
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
(but not alternative minimum taxable income).., which the taxpayer is required
to report to the United States treasury department,... subject to the
modifications and adjustments hereinafter provided."
Section 1453(b) through (k) 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, provide for the modifications and adjustments required by section
1453(a). However, there is no modification or adjustment applicable to a tax-free
reorganization where, for federal income tax purposes, the transaction
constitutes a statutory merger pursuant to section 368(a)(1)(A) of the IRC, and
pursuant to section 368(a)(2)(E) of the IRC, stock of a corporation which before
the merger was in control of the merged corporation is used in the transaction.
Therefore, for purposes of section 1453 of Article 32 of the Tax Law, such
reorganization would be treated the same as it is treated for federal income tax
purposes.
Accordingly, since Sub's merger into Petitioner is a tax-free statutory
merger under section 368(a)(1)(A) of the IRC, such merger would be a tax-free
transaction for both Sub and Petitioner under Article 32 of the Tax Law. Also,
since Petitioner and Parent are each "a party to a reorganization" within section
368(b) of the IRC and the stock of Parent is used in the transaction pursuant to
section 368(a)(2)(E) of the IRC, and no gain or loss is recognized for the

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Income Tax
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exchange of stock for federal income tax purposes pursuant to section 354(a)(1)
of the IRC, no gain or loss from such exchange would be recognized for New York
State franchise tax purposes under Article 32.
Question 2
Section 611(a) of the Tax Law provides: "[t]he New York taxable income of
a resident individual shall be his New York adjusted gross income less his New
York deduction and New York exemptions as determined under this part."
Section 612(a) of the Tax Law provides: "[t]he 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 612 of the Tax Law does not contain any modification that affects
the shareholders of the corporations that are each a party to a tax-free
reorganization, where for federal income tax purposes the transaction constitutes
a statutory merger pursuant to section 368(a)(1)(A) of the IRC and, pursuant to
section 368(a)(2)(E) of the IRC, stock of a corporation which before the merger
was in control of the merged corporation is used in the transaction.
Accordingly, if no taxable income will be realized by shareholders of
Petitioner or Parent for federal income tax purposes as a result of a tax-free
reorganization treated as a statutory merger of Sub into Petitioner pursuant to
section 368(a)(1)(A) of the IRC including the exchange of stock pursuant to
section 368(a)(2)(E) of the IRC, no taxable income will be realized for New York
State personal income tax purposes. Where shareholders perfect their dissenters'
rights under section 6022 of the Banking Law, such transaction, for New York
State personal income tax purpose, will be accorded the same treatment as the
transaction receives for federal income tax purposes.
Question 3
There is no other provision of the Tax Law where income would be taxed to
Parent, Sub, Petitioner or the shareholders of Parent or Petitioner as a result
of the tax-free reorganization as described herein.

DATED: June 15, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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