When a stock savings bank reorganizes into a holding company structure through a transaction the IRS treats as a tax-free IRC section 351 exchange, does that reorganization also stay tax-free for New York bank franchise tax and personal income tax purposes?

Plain-English summary

Cayuga Savings Bank, originally a mutual savings bank converted to a stock savings bank in 1986, undertook a classic bank holding-company reorganization. The bank formed Iroquois Bancorp, Inc. ("Holding") as a new holding company, then organized "New Bank" as Holding's wholly owned subsidiary purely as a mechanical step: New Bank merged into Cayuga Bank (Bank surviving), and every share of Bank common and preferred stock (including outstanding stock options) was converted into an identical share of Holding stock with the same rights and terms. The net result: Holding ends up owning 100% of Bank, and Bank's former shareholders end up owning Holding instead -- with Bank's pre-existing liquidation account (from its 1986 mutual-to-stock conversion) carried forward unaffected.

The IRS had already blessed this as tax-free, and New York followed suit for both Article 32 and Article 22. The IRS ruled the transaction should be treated (disregarding the mechanical New Bank merger step) as shareholders directly exchanging their Bank stock for Holding stock in a tax-free IRC section 351(a) exchange -- no gain or loss to shareholders, no gain or loss to Holding on its stock issuance, carryover basis and holding periods, continuation of the same affiliated group with Holding as new parent, and no section 382 ownership-change limitation triggered. For Article 32 bank franchise tax, since Bank's entire net income under section 1453(a) is defined by reference to federal taxable income and none of the regulatory modifications listed in section 1453(b)-(k) carve out federal section 351 exchanges, the transaction is automatically tax-free for both Bank and Holding under Article 32 as well -- consistent with the Department's earlier Home & City Savings Bank ruling (TSB-A-89(1)C) reaching the same result for a similar reorganization. For Article 22 personal income tax, since New York adjusted gross income under section 612(a) tracks federal adjusted gross income and section 612 contains no modification touching parties to a federal section 351 exchange, Bank's shareholders realize no New York taxable income from the stock conversion either -- and even shareholders who exercise dissenters' rights under Banking Law section 6022 (i.e., who cash out rather than convert) get New York tax treatment that mirrors whatever federal treatment applies to them.

What this means for you

Banks and bank holding companies planning a holding-company reorganization

If your reorganization qualifies as a tax-free federal IRC section 351 exchange, you can generally expect the same tax-free treatment to carry through automatically to both the bank's own Article 32 franchise tax and its shareholders' Article 22 personal income tax -- New York's bank franchise tax and personal income tax bases are both anchored to federal taxable income/AGI without special carve-outs for these transactions.

Bank shareholders facing a holding-company conversion

Simply having your bank stock automatically converted into equivalent holding-company stock in this kind of reorganization shouldn't trigger New York taxable income, mirroring the federal tax-free treatment -- this holds even if you exercise dissenters' rights, in which case your New York tax treatment will track whatever your federal treatment turns out to be.

Accountants and tax attorneys handling bank reorganizations

This ruling and its cited predecessor (Home & City Savings Bank, TSB-A-89(1)C) establish a reliable pattern: New York generally follows federal tax-free reorganization treatment for bank holding company formations under both Article 32 and Article 22, since neither tax base includes a modification specific to section 351 exchanges.

Common questions

Q: Does a bank holding-company reorganization automatically get the same tax treatment in New York as it gets federally?
A: When the reorganization qualifies as a tax-free federal IRC section 351 exchange, yes -- both the bank's Article 32 tax base and the shareholders' Article 22 tax base are defined by reference to federal income figures, with no New York-specific modification for these transactions.

Q: What happens if a shareholder exercises dissenters' rights instead of converting their stock?
A: Their New York State personal income tax treatment mirrors whatever federal income tax treatment applies to their dissenters'-rights payout.

Q: Does forming an intermediate "New Bank" that merges into the operating bank complicate the tax analysis?
A: No -- the IRS (and by extension the Department) disregarded that mechanical step and analyzed the transaction as a direct shareholder exchange of Bank stock for Holding stock.

Citations and references

Statutes:

• Tax Law section 1451, 1453(a)-(k) (Article 32 franchise tax; entire net income tied to federal taxable income)
• Tax Law section 611(a), 612(a) (Article 22 New York taxable income tied to federal adjusted gross income)
• Internal Revenue Code section 351(a), 358(a)(1), 382(l)(3), 1032(a), 1223(1)-(2) (tax-free controlled-corporation exchange and related basis/holding-period rules)
• Banking Law section 6022 (dissenters' rights)

Prior opinions and rulings cited:

• Home & City Savings Bank, Adv Op Comm T&F, January 17, 1989, TSB-A-89(1)C
• Rev Rul 67-448, 1967-2 CB 144; Rev Rul 82-152, 1982-1 CB 205

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a90_11c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90(11)C
Corporation Tax
February 21, 1990

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I891205A

On December 5, 1989, a Petition for Advisory Opinion was received from Cayuga Savings
Bank, 107-115 Genesee Street, Auburn, New York 13021.
The issue raised by Petitioner, Cayuga Savings Bank, is whether the reorganization of Cayuga
Savings Bank, to form a holding company and become a wholly-owned subsidiary of such holding
company in a transaction treated by the Internal Revenue Service as a section 351 exchange, will
constitute a transaction which is not taxable for purposes of Articles 22 and 32 of the Tax Law.
Cayuga Savings Bank, (hereinafter "Bank") was originally chartered as a New York State
mutual savings bank. On January 22, 1986, pursuant to approval by the appropriate regulatory
authorities and its voting members, Bank was converted to a New York State chartered stock savings
bank. Under the plan of conversion and pursuant to the regulations of the New York State banking
board, a liquidation account was established for the benefit of the account holders. As of March 31,
1989, Bank's authorized capital stock consisted of 3,000,000 shares of common stock, of which
941,323 shares were issued and outstanding, and 3,000,000 shares of non-voting preferred stock, of
which 40,000 shares were issued and outstanding. Options for the purchase of 41,250 shares of
Bank common stock were held by 10 key employees pursuant to Bank's 1988 Stock Option Plan.
Bank has one subsidiary with which it files consolidated federal income tax returns.
Pursuant to a plan of reorganization (hereinafter "Plan") adopted by Bank's board of directors,
Bank organized Iroquois Bancorp, Inc., (hereinafter "Holding") on March 21, 1989 as a New York
State corporation and holding company with Bank as its sole shareholder. New Bank, a New York
State stock savings bank, is being organized as a wholly owned subsidiary of Holding for the purpose
of effectuating the transaction described below.
Pursuant to the Plan, New Bank will be merged with and into Bank pursuant to applicable
federal and New York State law, with Bank as the surviving corporation. Bank will acquire all of
the assets and assume all of the liabilities of New Bank. On the effective date of the transaction,
each share of Bank common and preferred stock will be converted into and deemed exchanged for
one share of Holding common and preferred stock, respectively. Each outstanding stock option held
by Bank shareholders will be converted into and deemed exchanged for one stock option in Holding.
Each share of Holding common and preferred stock will have the identical rights and terms as the
Bank common and preferred stock exchanged therefor.
As a result of the transaction, the shares of common stock of New Bank held by Holding will
be converted by operation of law into shares of Bank common stock. The shares of Holding
common stock held by Bank prior to the transaction will be cancelled, and Holding will
TP-9 (9/88)

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Corporation Tax
February 21, 1990
own all of the shares of the converted Bank stock. The liquidation account of Bank will remain
outstanding and will be unaffected by the transaction.
The Internal Revenue Service has ruled as follows:
(1)

For federal income tax purposes, the formation of New Bank and its
merger with and into Bank will be disregarded and the transaction will be
viewed as a transfer by the transferor shareholders of Bank of all their
Bank common and non-voting preferred stock in exchange for Holding
common and non-voting preferred stock (Rev Rul 67-448, 1967-2 CB
144).

(2)

No gain or loss will be recognized by Bank's shareholders upon the
deemed transfer of their Bank common and non-voting preferred stock to
Holding in exchange for Holding's common and non-voting preferred
stock (section 351 (a) of the Internal Revenue Code (hereinafter "IRC")).

(3)

No gain or loss will be recognized by Holding upon its deemed receipt of
common and non-voting preferred stock of Bank in exchange for Holding
common and non-voting preferred stock (section 1032(a) of the IRC).

(4)

The basis of the Holding common and non-voting preferred stock to be
received by Bank's shareholders in the transaction will be the same as the
basis of the Bank common and non-voting preferred stock deemed
exchanged therefor (section 358(a)(1) of the IRC).

(5)

The affiliated group of which Bank was the common parent continues in
existence with Holding as the new common parent (Rev Rul 82-152,
1982-1 CB 205).

(6)

The basis of the Bank common stock in the hands of Holding will be
equal to the net inside basis of the property of Bank immediately after the
transaction, adjusted as necessary in accordance with section 1.1502­
3iT(a)(2) of the Treasury Regulations (section 1.1502-31T of the
Treasury Regulations).

(7)

The earnings and profits of Holding, as new common parent of the
affiliated group, will be adjusted to reflect the earnings and profits of
Bank (sections 1.1502-31T and 1.1502-33T of the Treasury Regulations).

(8)

The holding period of the Holding common and non-voting preferred
stock to be received by Bank's shareholders will include the holding
period of Bank stock deemed exchanged therefor, provided that Bank
shareholders held such stock as a capital asset on the date of the
transaction (section 1223(1) of the IRC).

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Corporation Tax
February 21, 1990
(9)

The holding period of Bank common and non-voting preferred stock
deemed received by Holding in the transaction will include the period
during which such stock was held by the shareholders of Bank (section
1223(2) of the IRC).

(10)

The proposed transaction will not affect the federal income tax
consequences of Bank's prior conversion from a mutual to stock savings
bank.

(11)

The deemed exchange of Bank stock for Holding stock will not result in
a change of ownership within the meaning of section 382(g), and
therefore section 382 will not apply to Bank as a result of the transaction
(section 382(1)(3)).

Section 351(a) of the IRC states: "[no] gain or loss shall be recognized if property is
transferred to a corporation by one or more persons solely in exchange for stock or securities in such
corporation and immediately after the exchange such person or persons are in control (as defined in
section 368(c)) of the corporation."
Section 1451 of Article 32 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 transaction where, for federal income tax purposes, the transaction
constitutes a tax-free exchange within the meaning of section 351 of the IRC. Therefore, for
purposes of section 1453 of the Tax Law, such transaction would be treated the same as it is treated
for federal income tax purposes.
Accordingly, since the transaction by which all of the outstanding shares in Bank are
exchanged by shareholders for shares in Holding, is a tax-free transaction under section 351(a) of
the IRC, such exchange is a tax-free transaction for both Bank and Holding under Article 32 of the
Tax Law. See Home & City Savings Bank, Adv Op Comm T & F, January 17, 1989, TSB-A­
89(1)C.

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Section 611(a) of Article 22 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 transaction, that for federal purposes constitutes a tax­
free transaction pursuant to section S51(a) of the IRC.
Accordingly, if for federal income tax purposes, no taxable income will be realized by the
shareholders as a result of an exchange of Bank stock for Holding stock that is treated as a tax-free
transaction pursuant to section 351(a) of the IRC, no taxable income will be realized by the
shareholders for New York State personal income tax purposes. If shareholders perfect their
dissenters' rights under section 6022 of the Banking Law, such transaction, for New York State
personal income tax purposes, will be accorded the same treatment as the transaction receives for
federal income tax purposes. See Home & City Savings Bank, supra.

DATED: February 21, 1990

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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