Did South Carolina follow federal nonrecognition treatment for the bank holding-company reorganization described in PLR 95-10?

Plain-English summary

South Carolina Private Letter Ruling 95-10 followed federal tax treatment for a bank reorganization that created a holding-company structure.

An interim corporation would merge into the bank. Bank shareholders would surrender bank stock for holding-company stock, dissenting shareholders would receive cash, and the holding company would own all bank stock afterward.

The Department concluded that South Carolina would apply the federal treatment under the specifically listed reorganization provisions to every party. It reasoned that the federal nonrecognition rules cover a change in corporate form without a substantive change in ownership rights and extended that policy to the bank taxed under Chapter 11 as well as corporations taxed under Chapter 7.

The conclusion addressed only South Carolina income tax, the listed IRC provisions, and this transaction.

Common questions

Q: Did the PLR approve every aspect of the bank transaction? No. It addressed only South Carolina income-tax treatment under the listed federal provisions.

Q: Why did federal treatment apply to the bank? The Department extended the same change-of-form policy used for ordinary corporations to the Chapter 11 bank.

Q: Did the ruling cover other reorganizations? No. It expressly limited reliance to this transaction.

Q: Can another bank rely on PLR 95-10? No. The ruling states it has no precedential value and only the addressee may rely on it.

Citations and references

• S.C. Code Ann. §§ 12-7-415 and 12-7-20(11) (historical federal conformity)
• S.C. Code Ann. § 12-11-10 and Chapter 11 of Title 12 (bank taxation)
• IRC §§ 354, 357, 358, 361, 368, 1032, and 1223 (listed reorganization provisions)

Subject

Bank Reorganizations

Source

• Landing page: https://dor.sc.gov/advisory-opinion-search
• Original PDF: https://dor.sc.gov/sites/dor/files/policies/PLR95-10.pdf

Original ruling text

State of South Carolina

Department of Revenue
301 Gervais Street, P. O. Box 125, Columbia, South Carolina 29214

SC PRIVATE LETTER RULING #95-10 (TAX)

TO:

Bank

SUBJECT:

Bank Reorganizations
(Tax on Banks and Bank Holding Companies)

DATE:

August 28, 1995

REFERENCE:

S.C. Code Ann. Section 12-7-415 (Supp. 1994)
S.C. Code Ann. Section 12-7-20(11) (Supp. 1994)

AUTHORITY:

S.C. Code Ann. Section 12-4-320 (Supp. 1994)
SC Revenue Procedure #94-1

SCOPE:

A Private Letter Ruling is an official advisory opinion issued by the
Department of Revenue to a specific person.

NOTE:

A Private Letter Ruling may only be relied upon by the person to whom it is
issued and only for the transaction or transactions to which it relates. A
Private Letter Ruling has no precedential value.

Question:
For purposes of the reorganization transaction involving Bank, Interim and Holding, will South
Carolina follow the federal treatment of the Internal Revenue Code ("IRC") sections specifically
listed in the Facts of this private letter ruling?
Conclusion:
For purposes of the reorganization transaction involving Bank, Interim and Holding, South
Carolina will follow the federal treatment as to all parties to the reorganization.
Facts:
Bank is a national bank that was formerly a federally chartered stock savings bank. Holding has
been formed by Bank in order to allow Bank to engage in a reorganization. Immediately prior to
the reorganization, all of the stock of Holding will be held by Bank. Holding will, in turn, form
Interim. Immediately prior to the reorganization, all of the stock of Interim will be held by
Holding. Both Bank and Holding are South Carolina corporations.

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Bank will report its South Carolina taxable income each year based upon its taxable income
calculated and reported for federal income tax purposes adjusted for deductions of interest
income earned on federal obligations and federal income tax incurred.
On the date of the reorganization, Interim will merge into Bank and the shareholders of Bank
will surrender their stock in Bank and will receive stock of Holding in exchange for their stock
in Bank. The dissenting shareholders will receive cash in the reorganization. Immediately after
the transaction, all of the stock of Bank will be held by Holding, the new holding company.
The transaction as outlined by the taxpayers involves the following sections of the Internal
Revenue Code of 1986 ("IRC"), as amended:
IRC Sections 368(a)(1)(A), 368(a)(2)(E), 368(b), 354, 358, 357, 361, 1032 and 1223.
Bank will be a "bank" as that term is defined in Section 12-11-10 of the South Carolina Code of
Laws ("Code") and as such is taxed under Chapter 11, Title 12 of the Code (Income Tax on
Banks). Holding will be a holding company taxed under the corporate income tax provisions of
Chapter 7, Title 12 of the Code and Interim (during the period of its existence) will be a
corporation taxed under the corporate income tax provisions of Chapter 7, Title 12 of the Code.
Discussion:
Chapter 11 of Title 12 of the Code imposes a tax upon every bank engaged in business in this
State with respect to the net income of the taxpayer doing a banking business within this State or
from sales or rentals of property within this State, computed at the rate of four and one half
percent of the entire net income of such bank or taxpayer.
Chapter 7 of Title 12 of the Code imposes an income tax on corporations (excluding banks and
certain other types of corporations). With respect to such taxation, 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 the modifications specified in Section 12-7-430."
Section 12-7-20(11) of the Code as amended by Act. No. 60(July 12, 1995) defines "Internal
Revenue Code" as the Internal Revenue Code of 1986 as amended through December 31, 1994.
In adopting the Internal Revenue Code, South Carolina, in Section 12 of 1985 Act No. 101, as
amended by Section 25P of 1987 Act No. 170, specifically did not adopt certain federal code
sections. None of the IRC code sections cited in the Facts above are specifically excluded from
the South Carolina law. The question is whether the principles embodied in the Internal Revenue
Code sections listed in the Facts which apply to corporations taxed under Chapter 7, Title 12 of
the Code should apply to transactions involving banks taxed under Chapter 11, Title 12 of the
South Carolina Code of Laws.

2

The traditional theory of the reorganization provisions of the Internal Revenue Code is that gain
or loss should not be recognized on mere changes of form when there is no substantive change in
the rights of the parties and their relationship to the corporate assets. The reorganization
provisions generally provide that there is no gain or loss recognized at the shareholder level on
the exchange of stock in the old corporation for stock in the new corporation or to the
corporation on the exchange of its assets provided the transaction can meet the requirements of
creating a tax free reorganization. See, Bittker & Eustice, Federal Income Taxation of
Corporations and Shareholders paragraph 12.01[2] and 3. The same policy
reasons that encouraged the adoption by South Carolina of the Internal Revenue Code sections
listed in the Facts to corporations taxed under Chapter 7 of Title 12 encourage the extension of
these provisions to transactions that occur among taxpayers subject to tax under Chapter 11,
Title 12. Thus, in this case, South Carolina will follow the federal tax treatment of the
reorganization.
Note: This document addresses the South Carolina income tax treatment only as it relates to
those IRC sections specifically listed in the Facts. Additionally, Chapter 11 of the Code is
currently under review and this PLR may only be relied upon for this transaction.

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