Did a mutual savings bank's section 351 reorganization into a mutual holding company and stock savings bank create Florida taxable income?

Subject

Reorganization/Mutual Savings Bank to Stock Savings Bank

Plain-English summary

The described savings-bank reorganization did not create Florida taxable income if it produced zero federal taxable income and no Florida adjustment applied. A mutual savings bank would transfer substantially all assets and liabilities to a new stock savings bank for common stock, become a mutual holding company, and offer a minority of the new bank's common stock to outside purchasers.

The Department answered all 14 requested advisements affirmatively. Those answers covered nonrecognition by both banks, carryover basis and holding periods, no depreciation or investment-credit recapture, continuation of the bad-debt reserve without a new Florida deduction for the opening reserve, and no gain or loss to the mutual bank's members solely from the reorganization.

The Department separately said each stockholder residing in Florida would owe the annual intangible personal property tax then in effect on the fair market value of the shares.

What this means for you

Florida followed federal taxable-income treatment for this transaction because the Florida Income Tax Code started from federal taxable income and required no reorganization adjustment on the stated facts. The ruling also shows that a tax-free corporate reorganization did not eliminate a shareholder's separate historical intangible-tax obligation.

Common questions

Q: Did the reorganization create Florida corporate taxable income? No, so long as federal taxable income attributable to it was zero and no Florida adjustment applied.

Q: Did the Department approve the requested basis, holding-period, reserve, and nonrecognition consequences? Yes. It answered all 14 requested advisements in the affirmative.

Q: Were Florida-resident stockholders free of tax on the resulting shares? No. The ruling said they owed the annual intangible tax then imposed on their shares.

Citations and references

• Fla. Stat. § 220.43(1) — federal taxable income treatment
• Fla. Stat. § 220.03(2)(c) — federal-law meanings in the Florida Income Tax Code
• IRC § 351 — property transferred to a corporation for stock
• IRC § 593 — thrift bad-debt reserves
• Fla. Stat. §§ 199.052 and 199.103 — annual intangible tax on corporate stock
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 93C1-004

Original ruling text

Dec 09, 1993

Re: Technical Assistance Advisement 93C1-004
Reorganization/Mutual Savings Bank to Stock Savings Bank
under Section 351 of I.R.C. and s. 220.43(1), F.S. (Federal
Savings Bank of Florida)

Dear :

Your request for a technical assistance advisement on behalf of
XXX (hereinafter referred to as "Bank") has been referred to
this office for a response.

Based on the facts and circumstances of your specific situation
presented, the Department answers all the requested advisements
in the affirmative. Furthermore, each stockholder of Stock
Savings Bank residing in Florida will be liable for all
intangible tax due on their shares of stock.

FACTS PRESENTED BY TAXPAYER'S REPRESENTATIVE

On July 8, 1993, the board of directors of Bank adopted that
certain Plan of Reorganization from Mutual Bank to Mutual
Holding Company and Stock Issuance Plan, which was amended on
July 13, 1993, and again on August 19, 1993. In general, Bank
will be reorganized from a federally-chartered mutual savings
bank into a mutual holding company and a federally-chartered
capital stock savings bank (the "Stock Savings Bank") will be
incorporated. Bank will transfer to Stock Savings Bank
substantially all of its assets (except for up to $200,000 and
its investment in FSC, Inc., an inactive Florida subsidiary,
which had a book value of $342,000 at June 30, 1993) and
liabilities, including all of the depository liabilities, in
exchange for common stock of Stock Savings Bank, and certain
other persons and entities also will be given the opportunity to
purchase the common stock of Stock Savings Bank pursuant to a
public stock offering. These transactions are referred to as
the "Reorganization." As of the date of the Reorganization, the
common stock issued to Bank and public owners by Stock Savings

Bank will be the only issued and outstanding shares of capital
stock of Stock Savings Bank's capital stock. Upon the closing of
the Reorganization, Bank will exchange its Federal mutual
savings bank charter for a Federal mutual holding company
charter, and will become the mutual holding company (the "MHC")
of Stock Savings Bank.

Following the completion of the Reorganization, all depositors
who had membership or liquidation rights with respect to the
Bank will continue to have such rights solely with respect to
the MHC so long as they continue to hold deposit accounts with
the Stock Savings Bank. In addition, all persons who become
depositors of the Stock Savings Bank subsequent to the
Reorganization will have such membership and liquidation rights
with respect to the MHC.

Prior to or following the approval of the Plan of Reorganization
by the Office of Thrift Supervision ("OTS"), a special meeting
of members of the Bank to approve the Plan of Reorganization
will be scheduled in accordance with the Bank's Bylaws. An
affirmative vote of not less than a majority of the members of
the Bank is required for approval of the Plan of Reorganization.

Following the Reorganization, Stock Savings Bank will have the
power to issue shares of capital stock (including common and
preferred stock) to persons other than the MHC. So long as the
MHC is in existence, however, it must own a majority of the
voting stock of Stock Savings Bank. Stock Savings Bank may
issue any amount of non-voting stock to persons other than MHC.
No such non-voting stock will be issued as of the date of the
Reorganization.

Contemporaneously with the Reorganization, an offering of the
common stock of Stock Savings Bank will be made subject to the
approval of the board of directors of Stock Savings Bank and the
Office of Thrift Supervision (the "OTS). The stock offering
will be made to the non-bank owners described above. The common
stock issued in the offering will be sold at a total price equal
to the estimated pro forma market value of such common stock,
based upon an independent valuation. The aggregate amount of
outstanding common stock owned or controlled by persons other

than MHC at the close of the proposed stock offering shall be
less than 50 percent of the Stock Savings Bank's total
outstanding common stock. MHC and the non-bank owners (as a
class) will be the sole owners of Stock Savings Bank's total
outstanding common stock. A stock offering will not be made
only if market conditions dictate against such offering or
regulatory approvals cannot be obtained. No subscription rights
will be granted in connection with the Reorganization.

The principal purpose of the Reorganization is to reorganize the
Bank into a corporate structure that enables it to access
capital sources not available to mutual savings banks. The
Reorganization also is expected to facilitate acquisitions and
the diversification of the MHC's activities.

The sale of capital stock will provide the Stock Savings Bank
with new equity capital and will enable Stock Savings Bank to
increase capital in response to the higher and more stringent
capital requirements established by the OTS. The sale of common
stock represents a means for the orderly preservation and
expansion of Bank's capital base and will allow flexibility to
respond to sudden and unanticipated capital needs.

In connection with the Reorganization, Bank has made the
following representations:

1. No stock or securities will be issued for services
   rendered to or for the benefit of Stock Savings Bank
   in connection with the Reorganization, and no stock or
   securities will be issued for indebtedness of Stock
   Savings Bank that is not evidenced by a security, or
   for interest on indebtedness of Stock Savings Bank
   which accrued on or after the beginning of the holding
   period for the debt of the Bank, or the debt of other
   persons who purchased Stock Savings Bank common stock
   pursuant to the Plan.
2. An offering of the common stock of Stock Savings Bank
   is intended to be made to non-bank owners (as
   described above) contemporaneously with the transfer
   by Bank of its assets and liabilities to Stock Savings
   Bank in exchange for the common stock of Stock Savings

Bank.

3. Bank will not transfer "Section 306 stock" within the
   meaning of Section 306(c) of the I.R.C. of 1986, as
   amended ("Code") to Stock Savings Bank in the proposed
   transaction.
4. Bank did not incur any acquisition indebtedness with
   respect to stock of another corporation that is part
   of the property being transferred by Bank to Stock
   Savings Bank. In addition, there exists no debt or
   other liabilities relating to such stock other than
   those which arose in the normal course of business.
   Moreover, no liabilities of Bank will be assumed by
   Stock Savings Bank in connection with the transfer of
   such stock.
5. The transfers are not the result of the solicitation
   by a promoter, broker, or investment firm.
6. Bank will not retain any right or continuing interest
   in the property being transferred to Stock Savings
   Bank.
7. The value of the common stock received by Bank in
   exchange for accounts receivable will equal the net
   value of the accounts transferred; i.e., the face
   amount of the accounts receivable previously included
   in income less the amount of the reserve for bad
   debts.
8. Stock Savings Bank will establish a reserve for losses
   and loans equal to the reserve maintained by Bank
   immediately before the transfer in accordance with
   Revenue Ruling 80-270, 1980-2 C.B. 200.
9. The adjusted basis and the fair market value of the
   assets to be transferred by Bank to Stock Savings Bank
   will, in each instance, equal or exceed the
   liabilities to be assumed by Stock Savings Bank and
   the liabilities to which the transferred assets are
   subject.
10. The liabilities of Bank to be assumed by Stock Savings
    Bank were incurred in the ordinary course of business
    and are associated with the assets to be transferred.
11. There is no indebtedness between Bank and Stock
    Savings Bank, and there will be no indebtedness
    created in favor of bank as a result of the proposed

transaction.

12. The transfers and exchanges will occur pursuant to the
    Plan which was agreed upon before the transaction and
    under which the rights of the parties are defined.
13. The transfer of the assets and liabilities and the
    receipt of common stock in exchange therefor will
    occur on approximately the same date.
14. There is no plan or intention on the part of the Bank
    to redeem or otherwise reacquire any stock or
    indebtedness to be issued in the proposed transaction.
15. Bank and the purchasers of the common stock of Stock
    Savings Bank in the Offering will receive 100 percent
    of the common stock of Stock Savings Bank issued as of
    the date of the Reorganization.
16. Bank and the purchasers of the common stock of Stock
    Savings Bank in the Offering will receive common stock
    of Stock Savings Bank approximately equal to the fair
    market value of the property transferred to Stock
    Savings Bank.
17. Bank will receive only common stock of Stock Savings
    Bank in exchange for the property transferred to Stock
    Savings Bank.
18. Stock Savings Bank will remain in existence and retain
    and use the property transferred to it in a trade or
    business.
19. There is no plan or intention by Stock Savings Bank to
    dispose of the transferred property other than in the
    normal course of business transactions.
20. Stock Savings Bank is not an investment company within
    the meaning of Code Section 351(e)(1) and Section
    1.351-1(c)(1)(ii) of the Income Tax Regulations.
21. Bank is not under the jurisdiction of a court in a
    Title 11 or similar case (within the meaning of
    Section 368(a)(3)(A) of the Code) and common stock of
    Savings Bank received in the Exchange will not be used
    to satisfy the indebtedness of Bank.
22. Stock Savings Bank will not be a "personal service
    corporation" within the meaning of Section 269A of the
    Code.
23. Following the transaction, the section 38 property, if
    any, held by Bank will be retained by Stock Savings

Bank as section 38 property in the same trade or
business as before the transaction.

24. Substantially all the assets (whether or not Section
    38 property) necessary to operate the business will be
    transferred to Stock Savings Bank. The only assets
    that will not be transferred are $200,000 in cash and
    the Bank's interest in FSC, its wholly owned inactive
    subsidiary.

SUMMARY OF REQUESTED ADVISEMENTS

1. The Reorganization qualifies as a tax-free exchange of
   assets and liabilities solely for stock.
2. Bank will recognize no gain or loss upon the transfer
   of substantially all of its assets and liabilities to
   Stock Savings Bank solely in exchange for voting
   common stock of Stock Savings Bank.
3. Bank will recognize no depreciation recapture income
   as a result of the transfers to Stock Savings Bank.
4. Bank will recognize no investment credit recapture
   upon its transfer of assets and liabilities to Stock
   Savings Bank.
5. Bank will recognize no income with respect to its bad
   debt reserve (established under Code section 593) as a
   result of the transfer.
6. Bank's basis in the common stock of Stock Savings Bank
   received in the Reorganization will be the same as the
   basis of the property transferred in exchange
   therefor, reduced by the sum of the liabilities
   assumed by Stock Savings Bank or to which assets
   transferred are taken subject.
7. Bank's holding period for the common stock of Stock
   Savings Bank received in the Reorganization will
   include the period during which the property exchanged
   was held by Bank, provided that such property was a
   capital asset on the date of the exchange.
8. Stock Savings Bank will recognize no gain or loss upon
   its receipt of property from Bank in exchange for its
   common stock.
9. Stock Savings Bank's basis in the property received
   from Bank will be the same as the basis of such

property in the hands of Bank immediately prior to the
reorganization.

10. Stock Savings Bank's holding period for the property
    received from Bank will include the period during
    which such property was held by Bank.
11. Stock Savings Bank will be required to establish a
    reserve for bad debts equal to the reserve maintained
    by the Bank immediately before the transfer. For
    purposes of Florida law, the establishment of this
    initial reserve will not be considered an addition to
    the reserve for bad debts, and thus the amounts of
    this initial reserve will not be deductible by the
    Stock Savings Bank.
12. Following the Reorganization, assuming that Stock
    Savings Bank otherwise continues to qualify under
    Section 593 of the Code, Stock Savings Bank may deduct
    an addition to its bad debt reserve in the same manner
    that Bank could have calculated a deductible addition
    to its bad debt reserve prior to consummation of the
    Reorganization, including specifically, that Stock
    Savings Bank may deduct any addition necessary to
    maintain the balance of the Stock Savings Bank's
    reserve at an amount consistent with the balance of
    the Bank's base year reserve for losses on loans as of
    December 31, 1987.
13. Bank's members will recognize no gain or loss solely
    by reason of the Reorganization.
14. After the Reorganization, each depositor in Bank will
    have a basis in his or her Stock Savings Bank deposit
    account equal to the fair market value, or account
    balance, of his or her Bank deposit account.

DEPARTMENTAL RESPONSE

Section 220.43(1), F.S., states:

"To the extent not inconsistent with the provisions of this
code or forms or regulations prescribed by the department,
each taxpayer making a return under this code shall take
into account the items of income, deduction, and exclusion
on such return in the same manner and amounts as reflected

in such taxpayer's federal income tax return for the same
taxable year."

Section 220.03(2)(c), F.S., provides that any term used in the
Florida Tax Code has the same meaning as when used in a
comparable context in the Internal Revenue Code and other
statutes of the United States relating to federal income taxes,
as such code and statutes are in effect on January 1, 1993.

Florida has not specifically adopted provisions similar to those
of Internal Revenue Code section 351 dealing with the tax-free
exchange of assets and liabilities for stock and the
corresponding tax treatment of the parties to the exchange.
However, since the terms used in the Florida Income Tax Code
generally have the same meaning as when used in the Internal
Revenue Code, the result to the parties to the exchange should
be the same for Florida state tax purposes as if Florida had
specifically adopted Code section 351 and the corresponding
affected Code sections. The starting point for Florida taxable
income is Federal taxable income.

Therefore, if a particular transaction would lead to $0 Federal
taxable income that same transaction would lead to $0 Florida
taxable income assuming no Florida adjustments apply. Since
under these provisions of the Florida Income Tax Code no
adjustments to Federal taxable income are required by reason of
the Reorganization, the Stock Savings Bank's Florida franchise
tax base attributable to the Reorganization will be $0 so long
as the Stock Savings Bank's Federal taxable income attributable
to the Reorganization is $0.

Accordingly, the responses outlined in the summary of requested
advisements are all answered in the affirmative.

Intangible Tax

Section 199.052, F.S., requires every person who owns taxable
intangible property to report and pay the tax on all intangible
property having a taxable situs in this state. Under s.
199.103, F.S., stock of a corporation is to be valued at fair
market value at the close of business on the last business day

of the previous calendar year. Applying these statutes to the
situation described above, each stockholder residing in Florida
will be liable for all intangible tax due on their shares of
stock.

This response constitutes a technical assistance advisement
under s. 213.22, F.S., which is binding on the Department only
under the facts and circumstances described in the request for
this advice as specified in s. 213.22, F.S. Our response is
predicated on those facts and the specific situation summarized
above. You are advised that subsequent statutory or
administrative rule changes or judicial interpretations of the
statutes or rules upon which this advice is based may subject
similar future transactions to different treatment than
expressed in this response.

You are further advised that this response and your request are
public records under Chapter 119, F.S., which are subject to
disclosure to the public under the conditions of section 213.22,
F.S. Your name, address, and any other details which might lead
to identification of the taxpayer must be deleted by the
Department before disclosure. In an effort to protect
confidential information, we request you notify the undersigned
in writing within 15 days of any deletions you wish made to the
request or this response.

Sincerely,

Val Poliuto
Technical Assistant
Statutory Compliance Section