When a Connecticut state bank converts to a national bank, does the conversion reduce or eliminate its corporation business tax operating loss carry-overs?

Plain-English summary

Connecticut lets a company carry a past net operating loss forward to reduce corporation business tax in later years (Conn. Gen. Stat. § 12-217(a)). This ruling answers whether a state bank's conversion to a national bank — a change of charter, not a sale of the business — costs the bank those accumulated operating loss carry-overs.

The Bank is a full-service, FDIC-insured Connecticut state bank (offering fiduciary services), and a wholly-owned subsidiary of B (itself a subsidiary of bank-holding-company C). It planned to convert to a national bank through the Office of the Comptroller of the Currency: file applications, amend its articles, adopt resolutions, and change its name — represented to qualify as a type F tax-free reorganization (26 U.S.C. § 368(a)(1)(F)). Afterward it would keep the same branches, employees, officers, directors, and business.

DRS ruled the carry-overs survive, applying the same six-factor test (from the 1939 Internal Revenue Code) it used in the companion ruling:

1. Statutory merger or consolidation? A conversion doesn't create a new corporation — the existing entity just modifies its corporate documents — but it's represented to qualify as a type F reorganization for federal income tax purposes.
2. Same ownership before and after? Yes — before and after, the Bank is a wholly-owned subsidiary of B.
3. Tax avoidance not the primary purpose? Yes — the purpose is simply to change from a state to a national charter.
4. Continuity of business enterprise? Yes — the Bank continues substantially the same banking business.
5. Loss entity maintained separately / income separately accounted for? Not needed — the only business after conversion is the same banking business as before.
6. Carry-overs used only against post-transaction income? Yes — only the Bank's own business income.

Because all six factors are met, the conversion does not reduce or eliminate the operating loss carry-overs deductible under § 12-217(a). DRS decided the companion Ruling No. 97-3 (a two-step subsidiary reorganization before a public offering) the same day under the identical test — named here in prose, not linked.

What this means for you

Banks changing charter (state ↔ national)

A charter conversion that keeps the same ownership and same banking business generally preserves Connecticut operating loss carry-overs, even though a national-bank conversion technically doesn't create a new corporation. The key is that the represented type F characterization holds and the business simply continues in a new charter form.

Corporate and bank tax counsel

DRS uses a six-factor test from the 1939 Internal Revenue Code — not modern § 382 mechanics — to decide whether a reorganization impairs Connecticut carry-overs. A type F "mere change of form" that leaves ownership and business intact is the paradigm case for preservation. Confirm the federal characterization and that tax avoidance isn't the primary purpose.

Accountants and tax professionals

The carry-over deduction is § 12-217(a), with combined-return mechanics in Regs. § 12-223a-2. Losses may offset only the same continuing business's future income. Keep documentation that the conversion was for a genuine business/regulatory purpose (state-to-national charter) rather than to traffic in losses.

Common questions

Q: Does converting from a state bank to a national bank cost the bank its loss carry-overs?
A: No, when DRS's six-factor test is met. The conversion here kept the same ownership and the same banking business and was represented to qualify as a type F reorganization, so the operating loss carry-overs survived.

Q: A conversion doesn't create a new corporation — does that matter?
A: DRS acknowledged that. The first factor asks whether it's a statutory merger/consolidation; even though a conversion just modifies the existing entity's documents, it was represented to qualify as a type F reorganization, and the remaining factors were satisfied.

Q: What is the six-factor test?
A: (1) statutory merger/consolidation (or type F reorganization); (2) same ownership before and after; (3) tax avoidance not the primary purpose; (4) continuity of business enterprise; (5) loss entity maintained separately or income separately accounted for; (6) carry-overs used only against post-transaction income.

Q: Is there a companion ruling?
A: Yes. The same day, Ruling No. 97-3 applied the same test to a two-step subsidiary reorganization ahead of a public offering and likewise preserved the carry-overs.

Citations and references

Statutes and regulations:

• Conn. Gen. Stat. § 12-217(a) (corporation business tax operating loss carry-over deduction)
• Conn. Agencies Regs. § 12-223a-2 (operating loss carry-overs, combined returns)

Federal provision referenced:

• 26 U.S.C. § 368(a)(1)(F) (mere change in identity or form reorganization)

Companion ruling:

• Ruling No. 97-3 (same six-factor test applied to a two-step subsidiary reorganization before a public offering)

Source

• Landing page: Connecticut DRS Rulings
• Ruling: Ruling 97-2

Original ruling text

Ruling 97-2, Corporation Business Taxes / Operating Loss Carry-Overs

Ruling 97-2

Corporation Business Tax

Operating Loss Carry-Overs

FACTS:

A state bank ("the Bank"), that is a full-service, FDIC-insured banking entity, transacting banking business, including fiduciary services, in Connecticut, will convert from a state bank to a national bank under procedures established by the United States Office of the Comptroller of the Currency.

To effectuate the conversion of the Bank into a national bank, the Bank must file applications and receive approval from the United States Office of the Comptroller of the Currency. Once approval is granted, the Bank will become a national bank by amending its articles of organization, adopting certain required corporate resolutions, and changing its name to refer to itself as a national bank. The "conversion" of the Bank to a national bank, it is represented, will be considered a tax-free reorganization under 26 U.S.C. §368(a)(1)(F). After the conversion, the Bank will change its name to reflect that it is a national bank.

After the Bank converts to a national bank and changes its name to refer to itself as a national bank, it will continue to be a full service, FDIC- insured, banking entity, transacting a general banking business, including fiduciary services, in Connecticut, and will carry on the same business that the Bank presently carries on and will operate out of the same branches, employ the same employees, and have the same officers and directors as it presently does. However, after the conversion there may be some adjustments made in the ordinary course of business and in response to prevailing economic conditions, or adjustment made for reasons unrelated to the conversion, such as opening new branches and/or changing its services to meet market demands. After the conversion of the Bank to a national bank, the Bank does not intend to exercise any limited additional powers accorded a national bank.

The Bank is a wholly-owned subsidiary of Corporation B (" B "). B is a subsidiary of Corporation C (" C "). C is a bank holding company under the federal Bank Holding Company Act of 1956. After the conversion of the Bank to a national bank, the Bank will continue to be a wholly-owned subsidiary of B and B will continue to be a subsidiary of C .

ISSUE:

Whether after the conversion of a state bank into a national bank, the operating loss carry-overs of the state bank, which could otherwise be deducted under the rules of Conn. Gen. Stat. §12-217(a) and Conn. Agencies Reg. §12-223a-2, will be reduced or eliminated.

DISCUSSION:

In determining whether the planned corporate restructuring will eliminate or reduce the operating loss carry-overs of the Bank which may be deducted by the Bank after it converts to a national bank, the Department looks to the following 6 factors:

1. Whether the transaction is a statutory merger or consolidation. Pursuant to the rules for conversion established by the Office of the Comptroller of the Currency, a new corporation is not created when a state bank converts to a national bank. Rather, the state bank's corporate entity is required to modify its existing corporate documents to reflect certain required corporate structural changes. The conversion of the Bank to a national bank, however, is represented to qualify as an type F tax-free reorganization for federal income tax purposes.

2. Whether the ownership of the bank prior to the conversion is the same after the conversion . Prior to the conversion, the Bank is a wholly-owned subsidiary of B , and after the conversion it will be a wholly-owned subsidiary of B .

3. Whether tax avoidance is not the primary purpose of the transaction. The primary purpose of the transaction is to change the Bank from a state bank to a national bank.

4. Whether after the transaction there is a continuity of business enterprise. The business of the Bank will continue to be operated in substantially the same form as before the conversion.

5. Whether the loss entity is maintained as a separate division, or its assets separately accounted for, such that the taxpayer can show that the non-surviving entity or its assets generated income following the transaction . The only business of the Bank after the conversion will be the Bank's business before the conversion, so there is not any need to segregate or separately account for income from the Bank's business.

6. Whether the losses which are carried over are used only to offset that income which is generated following the transaction. The only income which will be offset by the operating loss carry-overs will be income from the Bank's business.

Accordingly, the proposed conversion of the Bank to a national bank will not eliminate or reduce the operating loss carryovers which may be deductible by the Bank under the rules of Conn. Gen. Stat. §12-217(a) and Conn. Agencies Reg. §12-223a-2.

RULING:

If the tests under the 1939 Internal Revenue Code are met, then the conversion of a state bank into a national bank will not eliminate or reduce the amount of operating loss carry-overs which may be deducted by a bank after the conversion.

LEGAL DIVISION

July 7, 1997