Would South Carolina follow federal income-tax treatment for a savings-bank conversion and corporate reorganization involving X, Y, and Z?

Plain-English summary

South Carolina Private Letter Ruling 90-6 generally followed federal income-tax treatment for a proposed savings-bank conversion and corporate reorganization, but used an earlier federal-law cutoff for one bank bad-debt provision.

Z planned to convert from a federally chartered mutual savings bank to a federally chartered stock savings bank and, at the same time, become a wholly owned subsidiary of out-of-state holding company X. After the transaction, X would own both Z and Y.

For the reorganization provisions listed by the taxpayers, South Carolina followed the Internal Revenue Code as of December 31, 1988. For Z's bad-debt deduction under IRC § 593, South Carolina instead followed federal law as of December 31, 1986, including the Tax Reform Act of 1986.

The entities and transaction

Z and Y were associations taxed under South Carolina's historical building-and-loan association chapter. X was a holding company taxed under the corporate income-tax chapter.

The transaction involved federal provisions addressing reorganizations, stock exchanges, basis, carryovers, distributions, dividends, intercorporate deductions, and holding periods.

The ruling addressed only the specifically listed Code sections and South Carolina income-tax treatment.

General federal conformity

The historical corporate statute started South Carolina gross and taxable income with federal gross and taxable income, subject to state modifications.

For Chapter 7 corporations, the incorporated Internal Revenue Code was the Code as amended through December 31, 1988.

The building-and-loan chapter defined net income by reference to regular-corporation taxable income, with additional deductions and adjustments. That made federal conformity relevant to Z and Y as well as X.

None of the listed reorganization provisions was excluded or modified for South Carolina except the special treatment of IRC § 593.

Special rule for IRC § 593

IRC § 593 concerned reserves for losses and the bad-debt deduction of certain financial institutions.

South Carolina's historical building-and-loan statute fixed the allowable bad-debt deduction by reference to the Internal Revenue Code and regulations as amended through December 31, 1986.

The Tax Reform Act of 1986 had been enacted before that cutoff. The ruling therefore included its § 593 amendments when calculating Z's South Carolina bad-debt deduction.

The document said a later § 593 amendment applied only when a capital-gain differential existed, and no such differential then existed.

Limits of the ruling

The Commission expressly limited its conclusions:

• it addressed only the federal Code sections listed in the facts;
• the § 593 conclusion covered only Z's bad-debt deduction; and
• it expressed no opinion on shareholder distributions under IRC § 593(e).

What this means for you

Historical corporate reorganizations

South Carolina conformity had to be tested provision by provision against the state's fixed federal-law date and any special statutory cutoff.

Savings institutions

The bank bad-debt deduction used a different conformity date from the general corporate reorganization rules.

Current transactions

Do not use the 1986 or 1988 conformity dates for a modern reorganization. Check the current South Carolina conformity statute and financial-institution provisions.

Common questions

Q: Did South Carolina simply follow current federal law?

A: No. The PLR applied fixed historical conformity dates.

Q: What date applied to most listed reorganization sections?

A: December 31, 1988.

Q: What date applied to Z's IRC § 593 bad-debt deduction?

A: December 31, 1986, including the Tax Reform Act of 1986 amendments.

Q: Did the ruling decide the treatment of § 593(e) shareholder distributions?

A: No. It expressly declined to address them.

Citations and references

• S.C. Code Ann. §§ 12-7-20(11) and 12-7-415 — historical corporate federal conformity
• S.C. Code Ann. §§ 12-13-10 and 12-13-20 — historical taxation of building-and-loan associations and bad-debt conformity
• IRC §§ 243, 305, 307, 312, 316, 354, 358, 362, 368, 381, 593, 1012, 1032, and 1223 — provisions presented by the taxpayers
• 1985 Act No. 101 § 12 and 1987 Act No. 170 § 25P — state nonadoption provisions discussed

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR90-6.pdf

Original ruling text

SC PRIVATE LETTER RULING #90-6

TO:

X
Y
Z

SUBJECT:

Reorganization of Corporations
(Income Tax)

DATE:

February 28, 1990

REFERENCES:

S.C. Code Ann. Section 12-13-10 (Supp. 1989)
S.C. Code Ann. Section 12-7-415 (Supp. 1989)
S.C. Code Ann. Section 12-7-20 (11) (Supp. 1989)
S.C. Code Ann. Section 12-13-20 (Supp. 1989)
1985 Act No. 101, Section 12
1987 Act No. 170, Section 25 P

AUTHORITY:

S.C. Code Ann. Section 12-3-170 (1976)
SC Revenue Procedure #87-3

SCOPE:

A Private Letter Ruling is a temporary document issued to a taxpayer,
upon request, and it applies only to the specific facts or circumstances
related in the request. Private Letter Rulings have no precedential value
and are not intended for general distribution.

Question:
For purposes of the reorganization transaction involving the above-listed taxpayers, will South
Carolina follow federal treatment in connection with the Internal Revenue Code Sections
specifically listed in the "Facts" of this Private Letter Ruling?
Facts:
The above-listed companies are proposing the following transaction:
Z will convert from a federally-chartered mutual savings bank to a federally-chartered
stock savings bank. Simultaneously, Z will be acquired by X, an out of state corporation
resulting in Z being a separate, wholly owned subsidiary of X.
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At the conclusion of the above transaction, X will be the parent corporation of two wholly owned
subsidiaries, Z and Y.
The transaction as outlined by the taxpayers involves the following sections of the Internal
Revenue Code of 1986 ("IRC"):
IRC Section 368(a)(1)(F)
IRC Section 368
IRC Section 1032
IRC Section 362
IRC Section 354
IRC Section 305
IRC Section 358
IRC Section 307
IRC Section 1012
IRC Section 381
IRC Section 316
IRC Section 312
IRC Section 243
IRC Section 593
IRC Section 1223
Z and Y are both "associations" as defined in Code Section 12-13-10 and as such are taxed under
Chapter 13 of the South Carolina Code (Income Tax on Building and Loan Associations). X is a
holding company taxed under the/corporate income tax provisions of Chapter 7 of the South
Carolina Code.
Discussion:
Chapter 7 of Title 12 of the South Carolina Code of Laws imposes an income tax on
corporations. With respect to such taxation, Code Section 12-7-415 provides in part:
The South Carolina gross income and taxable income of a corporation, ... ,is the
corporation's gross income and taxable income as determined under the Internal Revenue
Code with modifications specified in Section 12-7-430.
Code Section 12-7-20 (11) defines "Internal Revenue Code" as "the Internal Revenue Code of
1986 as amended through December 31, 1988".
Chapter 13 of Title 12 of the South Carolina Code of Laws imposes an income tax on
corporations insured by the Federal Savings and Loan
Insurance Corporation or regulated by the Federal Home Loan Bank or State Board of Financial
Institutions. With respect to such taxation, Code Section 12-13-20 provides in part:

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The term "net income", as used in this chapter [Income Tax on Building and Loan
Associations], means taxable income as determined for a regular corporation in Chapter 7
of this title after deducting all earnings accrued, paid, credited, or set aside for the benefit
of holders of savings or investment accounts, any additions to reserves which are required
by law, regulation, or direction of appropriate supervisory agencies, and a bad debt
deduction....
As indicated above, taxable income as determined under Chapter 7 is determined under the
Internal Revenue Code as of December 31, 1988, except to the extent the Internal Revenue Code
is modified or specifically not adopted; therefore, taxable income under Chapter 13 is also
determined under the Internal Revenue Code. Since Z, Y, and X are taxed under Chapter 7 or
Chapter 13 of the South Carolina Code, income tax transactions involving these corporations are taxed based on the Internal Revenue Code as of
December 31, 1988, except to the extent it is modified or specifically not adopted.
In adopting the Internal Revenue Code, the State in Section 12 of 1985 Act No. 101, as amended
by Section 25 P of 1987 Act No. 170 specifically did not adopt certain federal code sections.
None of the Internal Revenue Code sections presented in the facts is specifically excluded from
South Carolina law except IRC Section 593. Additionally, none of the Internal Revenue Code
sections presented in the facts is modified by Code Section 12-7-430.
IRC Section 593 deals in part with reserves for losses for certain financial institutions. We must
now review the issue of the bad debt deduction of Z.
Code Section 12-13-20, which deals with the taxation of building and loan associations,
including Z, provides in part:
...The bad debt deduction allowable for South Carolina income tax purposes is the
amount determined under the Internal Revenue Code and the applicable regulations
amended through December 31, 1986....
IRC Section 593 has been amended only once since the Tax Reform Act of 1986 and that
amendment applies only if there is a capital gain differential. Since there currently is not a
capital gain differential, IRC Section 593, as amended by the Tax Reform Act of 1986, is the
applicable federal law.
The Tax Reform Act of 1986 was enacted on October 22, 1986. Although the amendments the
Tax Reform Act made to IRC Section 593 apply only to tax years beginning after December 31,
1986, the Internal Revenue Code was amended by the Tax Reform Act prior to December 31,
1986.
In summary, IRC Section 593 as amended through December 31, 1986, including the Tax
Reform Act of 1986, is incorporated in South Carolina Law by Code Section 12-13-20 to the
extent it affects the bad debt deduction allowable in South Carolina.

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Conclusion:
Except for IRC Section 593, South Carolina will follow the federal law as of December 31, 1988
as it pertains to the Internal Revenue Code sections listed in the "Facts" section of this ruling.
South Carolina will follow the federal law, as of December 31, 1986, including the amendments
made by the Tax Reform Act of 1986, as it pertains to the bad debt deduction of Z under IRC
Section 593.
Note: This document, with respect to IRC Section 593, only deals with the effect of the bad debt
deduction of Z and expresses no opinion as to the effect of distributions to shareholders under
IRC Section 593(e).
Note: This document addresses South Carolina income tax treatment only as it relates to those
IRC Code Sections specifically listed in the facts.

SOUTH CAROLINA TAX COMMISSION

s/S. Hunter Howard Jr.
S. Hunter Howard, Jr., Chairman

s/A. Crawford Clarkson Jr.
A. Crawford Clarkson, Jr., Commissioner

Columbia, South Carolina
, 1990
February 28

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