When a New York S corporation reincorporates into a different state through a tax-free F-reorganization merger, does its New York S election survive, or do the shareholders have to make a brand-new election and file two short-period corporate returns?

Plain-English summary

X Corp, a New York corporation with a valid federal and New York S corporation election (and a 52-53 week reporting period), will merge into Y Corp, a newly formed Delaware corporation, at the close of business June 30, 1991. The merger qualifies as a tax-free reorganization under IRC section 368(a)(1)(F) -- a "mere change in identity, form, or place of organization." Y Corp will continue X Corp's business, keep its federal employer ID number, and register to do business in New York. Martin Galuskin asked whether the merger terminates X Corp's New York S election (requiring a fresh shareholder election) and whether two short-period returns must be filed for the year of the merger.

On the S election: it survives, tracking the federal result. Under Tax Law section 660(c), a New York S election terminates only when (1) the federal S election ceases, (2) shareholders owning a majority revoke it, or (3) a new shareholder affirmatively refuses to consent. Federal Revenue Ruling 64-250 holds that an F-reorganization -- reincorporating into a different state through a merger where the surviving corporation also qualifies as an S corporation -- does not terminate the federal S election. Because New York personal income tax law follows federal interpretations of federal terms (section 607(a)), and per the Department's own prior Spectrum Energy, Inc., TSB-A-87(11)C, the New York election likewise survives without any new shareholder election, provided X Corp's federal S election isn't independently terminated by the merger.

On short-period returns: two are still required, regardless. Even though federal law needs only one return for the year, X Corp ceases to exercise its New York franchise when it merges into Y Corp (a foreign corporation newly authorized to do business here) -- so two short-period Article 9-A returns are required for 1991: one for the period through the merger, one for the period after. Which specific forms apply depends on whether the federal S election survives: if it does, both periods use Form CT-3S; if the merger happens to terminate the federal S election too, the first period uses CT-3S and the second uses the regular CT-3. The ruling also flags Y Corp's separate obligations as a newly authorized foreign corporation: an annual $300 maintenance fee (Tax Law section 181.2, halved if the period is six months or less) and a one-time license fee (section 181.1) payable when it first qualifies to do business in New York.

What this means for you

S corporations reincorporating in another state via an F-reorganization

Your New York S election should carry through the reincorporation without a fresh shareholder vote, as long as the transaction genuinely qualifies as an F-reorganization and your federal S election survives it. But budget for the administrative burden of two short-period New York franchise tax returns in the transition year, even though only one federal return is needed.

Businesses planning a state-of-incorporation change

Factor in the surviving corporation's new foreign-corporation obligations in New York -- the annual maintenance fee and one-time license fee apply regardless of the S election analysis.

Accountants and tax professionals

This ruling illustrates New York's general approach of following IRS revenue rulings on federal-law interpretation questions (per section 607(a)) for personal income tax purposes, while still applying independent New York franchise-tax return mechanics (the short-period-return requirement) that don't track the federal return count.

Common questions

Q: Does reincorporating in another state through an F-reorganization end an S corporation's New York S election?
A: No, as long as the federal S election survives the reorganization (per Revenue Ruling 64-250) and none of the section 660(c) termination triggers occur -- no new shareholder election is needed.

Q: Why are two New York returns needed if only one federal return is required?
A: Because the original New York corporation ceases to exercise its New York franchise when it merges into the new out-of-state corporation, triggering a short-period return requirement independent of the federal filing.

Q: What New York fees does the surviving foreign corporation owe?
A: An annual maintenance fee under section 181.2 (reduced 50% if the period is six months or less) and a one-time license fee under section 181.1 for authority to do business in New York.

Citations and references

Statutes and regulations:

• Tax Law section 660(a), (b)(4), (c) (New York S corporation election, effectiveness, and termination triggers)
• Tax Law section 607(a) (federal-term conformity)
• Tax Law section 181.1 (foreign corporation license fee); section 181.2 (annual maintenance fee)
• IRC section 368(a)(1)(F) (mere change of identity/form reorganization)

Prior authority cited in the ruling:

• Revenue Ruling 64-250, 1964-2 C.B. 333
• Spectrum Energy, Inc., TSB-A-87(11)C

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a91_14c_5i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-91 (14) C
Corporation Tax
TSB-A-91 (5) I
Income Tax
May 28, 1991

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. Z910315B

On March 15, 1991, a Petition for Advisory Opinion was received from Martin
Galuskin, c/o Milgrom, Galuskin, Rosner & Company, 2025 Lincoln Hwy., Edison, New
Jersey 08817.
The issue raised by Petitioner, Martin Galuskin, is whether a corporation's
New York S status is terminated by a tax-free merger under section 368(a)(1)(F)
of the Internal Revenue Code (hereinafter "IRC") thereby requiring the
shareholders to make a new election and requiring two short period returns to be
filed for the federal taxable year during which the merger occurs.
At the close of business on June 30, 1991, X Corp, a New York corporation,
will be merged into Y Corp, a Delaware corporation. The merger will be tax-free
pursuant to section 368(a)(1)(F) of the IRC.
X Corp had previously adopted S status for both federal and New York State
tax purposes and has adopted a 52-53 week reporting period for the filing of its
tax returns. Y Corp will qualify to do business in New York State and will
operate the business formerly carried on by X Corp. Y Corp will continue to use
the federal employer identification number assigned to X Corp.
Under section 660(a) of the Tax Law, shareholders of a federal S
corporation are permitted to make an election to treat the corporation as a New
York S corporation whereby the shareholders take into account, to the extent
provided for under Article 22 of the Tax Law, their pro rata share of the S
corporation's items of income, loss, deduction and reduction for taxes described
in section 1366(f)(2) and (3) of the IRC which are taken into account for federal
income tax purposes.
Section 660(b)(4) of the Tax Law provides that the election made under
section 660(a) is effective for the taxable year of the corporation for which it
is made and for all succeeding taxable years of the corporation until such
election is terminated.
Pursuant to section 660(c) of the Tax Law, termination occurs when the
election made under section 660(a) ceases to be effective. The election will
cease to be effective:
1.

on the day the election to be treated as an S corporation for
federal income tax purposes ceases;

2.

if shareholders owning a majority of the shares revoke the
election; or

3.

on the day a person becomes a new
affirmatively refuses to consent to
treatment.

TP-9 (9/88)

shareholder if he
the S corporation

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TSB-A-91 (14) C
Corporation Tax
TSB-A-91 (5) I
Income Tax
May 28, 1991

For federal income tax purposes, Revenue Ruling 64-250 (1964-2 CB 333)
holds that based on the facts presented, a reorganization under section
368(a)(1)(F) of the IRC did not cause a termination of the election to be treated
as an S corporation under section 1372 of the IRC. The facts in the revenue
ruling provided that the shareholders of M (an electing S corporation)
reincorporated in a state other than that of original incorporation by
organizing, a new corporation, N, in the other state and merged M into N. The
surviving corporation, N, also met the requirements for qualifying as an S
corporation under section 1371(a) of the IRC.
Based on federal Revenue Ruling 64-250, it appears that when X Corp files
for a section 368(a)(1)(F) reorganization for federal income tax purposes, X
Corp's merger into Y Corp will not change its federal status and the transaction
will not terminate the S corporation election for federal income tax purposes.
Section 607(a) of the Tax Law provides that "[a]ny term used in this
article shall have the same meaning as when used in a comparable context in the
laws of the United States relating to federal income taxes, unless a different
meaning is clearly required." When an interpretation of a law of the United
States relating to federal income taxes is established by the Internal Revenue
Service through a Revenue Ruling or a Revenue Procedure, such federal
interpretation will be followed for New York State personal income tax purposes,
as well.
Therefore, for New York personal income tax purposes, Revenue Ruling 64-250
would be followed and since the section 368(a)(1)(F) reorganization would not
terminate the federal S corporation election, such reorganization would not cause
a termination of the New York S corporation election. See Spectrum Energy. Inc.,
Adv 0p St Tax Comm, May 29, 1987, TSB-A-87(ll)C.
Herein, X Corp will file for a section 368(a)(1)(F) reorganization for
federal income tax purposes. Therefore, if X Corp's election to be treated as a
S corporation for federal income tax purposes is not terminated because of its
merger into Y Corp in 1991, X Corp's New York S corporation status will not
terminate pursuant to section 660(c) of the Tax Law. Since none of the causes for
termination of the New York S corporation election exist, Y Corp will continue
to be a New York S corporation for taxable year 1991.
However, when X Corp merges into Y Corp, X Corp will cease to exercise its
New York State franchise.
Y Corp will be a foreign corporation that has
authority to do business in New York State.
Therefore, assuming X Corp's S corporation election is not terminated, for
taxable year 1991, two short period CT-3S returns will be required for New York
State franchise tax purposes, even though only one return is required for federal
income tax purposes. A short period return will be required for the period from
the beginning of its federal taxable year up to and including the day X Corp
ceases to exercise its franchise. Also, a short period return will be required
for the period from the day Y Corp merges X Corp to the end of its federal
taxable year.

If X Corp's election to be treated as an S corporation for federal income
tax purposes is terminated when X Corp merges into Y Corp in 1991, X Corp's

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TSB-A-91 (14) C
Corporation Tax
TSB-A-91 (5) I
Income Tax
May 28, 1991

election to be a New York S corporation is also terminated. In such instance,
for taxable year 1991, two short period returns will be required for New York
State franchise tax purposes. A CT-3S short period return will be required for
the period X Corp's election is in effect and a CT-3 short period report will be
required to be filed by Y Corp for the period the election ceases to be in
effect.
It should be noted, that section 181.2 of the Tax Law provides that every
foreign corporation that is authorized to do business in New York State pursuant
to Article 13 or Article 15-a of the Business Corporation Law shall pay an annual
maintenance fee of $300 for each year or portion thereof for which it is so
authorized, provided however such fee is reduced by 50 percent if the period for
which the fee is imposed consists of no more than six months. Such fee is to be
paid annually until the corporation surrenders its authority to do business in
New York State.
Additionally, section 181.1 of the Tax Law provides that a foreign
corporation, including a New York S corporation, must pay a license fee for the
privilege of carrying on its business in New York State. This fee is payable
only once unless the capital share structure changes or the amount of capital
stock employed in New York State has increased since the last license fee report,
form CT-240, was filed.

DATED: May 28, 1991

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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