Would a federally tax-free conversion of a mutual holding company into a stock holding company also avoid Florida corporate tax?

Subject

Reorganization - Mutual Holding Co. into a Stock Holding Co.

Plain-English summary

Florida answered all 14 requested reorganization conclusions in the affirmative. Because Florida began with federal taxable income and used federal meanings for comparable tax terms, a transaction producing zero federal taxable income under the represented section 368 reorganization treatment also produced a zero Florida franchise-tax base attributable to the reorganization, assuming no Florida adjustment applied.

That did not eliminate the separate historical annual intangible-tax consequence. Each stockholder residing in Florida remained liable for the tax due on the shares, valued at fair market value at the end of the prior calendar year's last business day.

What this means for you

The ruling was expressly conditional. Its state corporate-tax outcome followed the represented federal treatment of the two mergers and the numerous continuity, control, asset, liability, and business-purpose facts supplied by the requester.

Common questions

Did Florida independently impose gain on the described reorganization? No, assuming federal taxable income from it was zero and no Florida adjustment applied.

Did the entities and stockholders receive the requested carryover basis, holding-period, and nonrecognition treatment? Yes, under the facts and federal qualification represented.

Were Florida-resident shareholders free of every state tax consequence? No. The ruling imposed the then-applicable annual intangible tax on their shares.

Citations and references

• Fla. Stat. §§ 199.052, 199.103, 213.22, 220.03(2)(c), and 220.43(1)
• I.R.C. § 368 and related provisions cited in the ruling

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 94C1-005

Original ruling text

Jul 14, 1994

Re: TAA 94(C)1-005
Reorganization - Mutual Holding Co. into a Stock Holding
Co.

Dear :

Your request for a technical assistance advisement on behalf of
XXX (hereinafter referred to as XXX) and XXX (hereinafter
referred to as XXX) has been referred to me 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 XXX
residing in Florida will be liable for all intangible tax due on
their shares of stock.

FACTS PRESENTED BY TAXPAYER'S REPRESENTATIVE

XXX, plans to merge into XXX, to be followed by a merger of XXX
(hereinafter referred to as "XXX") with and into the XXX. The
XXX's shareholders will exchange their XXX common stock solely
for shares of voting stock of a Delaware chartered stock holding
company (hereinafter referred to as "Company"). The proposed
transactions are being effectuated for the purpose of converting
the mutual holding company parent of the XXX into a stock
holding company. The proposed transactions collectively are
referred to as the "Conversion."

On February 1, 1994, the Board of Directors of XXX adopted the
Plan of Conversion and Reorganization, which plan was
subsequently amended (as amended, the "Plan of Conversion"),
pursuant to which XXX is converting from a Federally chartered
mutual holding company to a Delaware chartered stock holding
company to be named XXX (hereinafter referred to as "Company").
As part of the Conversion, each of the issued and outstanding
shares of common stock of the XXX, other than shares of common
stock owned by XXX (the "Minority Shares"), shall be converted

automatically, without further action by the holder thereof, into
the right to receive a to-be-determined number of shares of
common stock of the Company ("Common Stock") based on a to-bedetermined exchange ratio established by an independent financial
advisory firm. Pursuant to the Plan of Conversion, the
Conversion will be effected in the following steps, each of which
will be completed contemporaneously.

1. The XXX will organize the Company (which will become the
   stock holding company of the XXX) as a first tier whollyowned subsidiary of the XXX;
2. The Company will organize XXX as a wholly-owned Federal
   stock savings bank subsidiary of the Company;
3. XXX will merge in a statutory merger with and into the XXX
   ("XXX Merger") pursuant to the Agreement of Merger between
   XXX and the XXX ("XXX Merger Plan"), whereby each member of
   XXX will receive an interest in a liquidation account
   established in the XXX pursuant to regulations of the Office
   of Thrift Supervision ("OTS") ("Liquidation Account") in
   exchange for such member's ownership interest in the XXX.
   The function of the Liquidation Account is to establish a
   priority on liquidation of the XXX, and except in certain
   circumstances, the existence of the Liquidation Account will
   not operate to restrict the use or application of any of the
   net worth accounts of the XXX. In the event of a complete
   liquidation of the XXX, the former XXX members who continue
   to be account holders in the XXX will be entitled to receive
   a liquidation distribution from the Liquidation Account
   after satisfaction of the claims of creditors (including
   those of depositors, to the extent of their deposit
   balances). The interests in the Liquidation Account would
   be paid prior to any payment to stockholders. The
   Liquidation Account will equal the XXX's interest in XXX as
   of the date of the XXX's latest financial statement
   immediately prior to the Conversion. Each member of the XXX
   will also receive subscription rights to purchase stock in
   the Offering to the extent such member remains a depositor
   of the XXX at the time of the Offering (said rights are
   referred to herein as ("subscription rights").
4. XXX will merge in a statutory merger with and into the XXX
   with the XXX as the resulting institution ("XXX Merger")

pursuant to the Agreement of Merger between the XXX and XXX
("XXX Merger Plan"), whereby each of the Minority Shares
shall be converted automatically, without further action of
the holder thereof, into the right to receive a to be
determined number of shares of Common Stock of the Company;

5. As a result of the XXX Merger, the Company will own all of
   the common stock of the XXX, and the Company will offer for
   sale its Common Stock in an offering ("Offering") that will
   occur contemporaneously with the Conversion (discussed
   below).

The affirmative vote of a majority of the total eligible votes of
XXX's members at a special meeting of members is required to
approve the Plan of Conversion. By their approval of the Plan of
Conversion, the members of XXX will also be approving the XXX
Merger Plan and the XXX Merger Plan. The affirmative vote of the
holders of two-thirds of the outstanding common stock of the XXX
eligible to vote at the special meeting of stockholders of the
XXX is required to approve the XXX Merger Plan. Under OTS
regulations, Minority Stockholders will not have dissenters'
rights or appeal rights in connection with the exchange of
Minority Shares for shares of Common Stock of the Company.
Consummation of the Conversion is also subject to the approval of
the OTS.

Contemporaneously with the Conversion, the Company will offer
shares of its Common Stock in a subscription offering to the
members of the XXX, to the XXX's employee benefit plans, and to
the Minority Stockholders. Subject to the prior rights of
holders of subscription rights, the Company is offering the
shares of Common Stock not subscribed for in the subscription
offering for sale in a community offering to certain members of
the general public. Shares not subscribed for in the subscription
and community offerings will be offered for sale by the Company
to the general public in a syndicated community offering. The
subscription offering, the community offering, and syndicated
community offering are referred to collectively as the
"Offering".

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

With respect to merger of XXX into XXX ("XXX Merger"):

a. The fair market value of each member's interest in the
Liquidation Account established in the XXX will be
approximately equal to the fair market value of the voting
and liquidation rights surrendered by the XXX members in the
exchange.
b. There is no plan or intention by the members of the XXX who
have liquidation and voting rights with respect to 1% or
more of the XXX, and there is no plan or intention on the
part of the remaining members of XXX to sell, exchange or
otherwise dispose of their interest in the Liquidation
Account received in the transaction that would reduce the
interest of the former XXX members in the XXX to a value, as
of the date of the transaction, of less than 50% of the
value of their membership interests in XXX.
c. XXX has no plan or intention to reacquire any portion of the
Liquidation Account transferred to the former XXX members in
exchange for their voting and liquidation rights in XXX.
d. XXX has no plan or intention to sell or otherwise dispose of
any of the assets of XXX acquired in the XXX Merger, except
for dispositions made in the ordinary course of business or
transfers described in Section 368(a)(2)(C) of the Internal
Revenue Code (I.R.C.).
e. The liabilities of XXX assumed by XXX, if any, and the
liabilities to which the transferred assets of XXX are
subject, if any, were incurred by XXX in the ordinary course
of its business.
f. Following the XXX merger, XXX will continue the historic
business of XXX or use a significant portion of XXX's
historic business assets in the XXX's business.
g. XXX, XXX, and the shareholders of XXX will pay their
respective expenses, if any, incurred in connection with the
XXX Merger.
h. There is no intercorporate indebtedness existing between XXX
and XXX that was issued, acquired or will be settled at a
discount.
i. No two parties to the transaction are investment companies
as defined in Sections 368(a)(2)(F)(iii) and (iv) of the
I.R.C.

j. XXX 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 I.R.C.
k. The fair market value of the assets of XXX transferred to
XXX will equal or exceed the sum of the liabilities assumed
by XXX plus the amount of the liabilities, if any, to which
the transferred assets are subject.
l. To the best of the knowledge and belief of the taxpayer, the
statutory merger of XXX with and into XXX will qualify as a
reorganization under Section 368(a)(1)(A) of the I.R.C.

With respect to the merger of XXX into XXX ("XXX Merger"):

m. There is no plan or intention by the shareholders of XXX who
own 5 percent or more of the XXX stock, and to the best
knowledge of management of the XXX, there is no plan or
intention on the part of the remaining shareholders of XXX
to sell, exchange or otherwise dispose of a number of shares
of Company stock received in the transaction that would
reduce the XXX shareholders' ownership of Company stock to a
number of shares having a value, as of the date of the XXX
merger, of less then 50% of the value of all the formerly
outstanding stock of target as of the same date. For
purposes of this representation, shares of XXX stock
exchanged for cash or other property, surrendered by
dissenters, or exchanged for cash in lieu of fractional
shares of acquiring stock will be treated as outstanding
target stock on the date of the transaction. Moreover,
shares of Company stock and shares of Company stock held by
XXX shareholders and otherwise sold, redeemed, or disposed
of prior or subsequent to the XXX Merger will be considered
in making this representation.
n. Following the XXX Merger, XXX will hold at least 90% of the
fair market value of its net assets and at least 70% of the
fair market value of its gross assets and at least 90% of
the fair market value of XXX's net assets (other than stock
of Company distributed to XXX's shareholders in the
transaction) and at least 70% of the fair market value of
XXX's gross assets (other than stock of Company distributed
to XXX's shareholders in the XXX Merger) held immediately
prior to the XXX Merger. For purposes of this

representation, amounts paid by XXX or XXX to dissenters,
amounts paid by XXX or XXX to shareholders who receive cash
or other property, amounts used by XXX or XXX to pay
reorganization expenses, and all redemptions and
distributions (except for regular, normal dividends) made by
XXX will be included as assets of XXX or XXX, respectively,
immediately prior to the XXX Merger.
o. XXX has no plan or intention to sell or otherwise dispose of
any of the assets of XXX acquired in the XXX Merger, except
for dispositions made in the ordinary course of business or
transfers described in Section 368(a)(2)(C) of the I.R.C.
p. Prior to the XXX Merger, Company will be in control of XXX
within the meaning of Section 368(c) of the I.R.C.
q. XXX has no plan or intention to issue additional shares of
its stock that would result in Company losing control of XXX
within the meaning of Section 368(c) of the I.R.C.
r. Company has no plan or intention to reacquire any of its
stock issued in the XXX Merger.
s. Company has no plan or intention to liquidate XXX; to merge
XXX with or into another corporation; to sell or otherwise
dispose of the stock of XXX except for transfers of stock to
corporations controlled by Company; or to cause XXX to sell
or otherwise dispose of any of its assets or any of the
assets acquired from XXX, except for dispositions made in
the ordinary course of business or transfers of assets to a
corporation controlled by XXX.
t. XXX will have no liabilities to be assumed by XXX, and will
not transfer to XXX any assets subject to liabilities in the
XXX Merger.
u. Following the XXX Merger, XXX will continue its historic
business or use a significant portion of its historic
business assets in a business.
v. Company, XXX, XXX, and the shareholders of XXX will pay
their respective expenses, if any, incurred in connection
with the XXX Merger.
w. There is no intercorporate indebtedness existing between
Company and XXX or between XXX and XXX that was issued,
acquired, or will be settled at a discount.
x. In the XXX Merger, shares of XXX stock representing control
of XXX, as defined in Section 368(c) of the I.R.C., will be
exchanged solely for voting stock of Company. For purposes

of this representation, shares of XXX stock exchanged for
cash or other property originating with Company will be
treated as outstanding XXX stock on the date of the XXX
Merger.
y. At the time of the XXX Merger, XXX will not have outstanding
any warrants, options, convertible securities, or any other
type of right pursuant to which any person could acquire
stock in XXX that, if exercised or converted, would affect
Company's acquisition or retention of control of XXX, as
defined in Section 368(c) of the I.R.C.
z. Company does not own, nor has it owned during the past five
years, any shares of the stock of XXX.
aa. No two parties to the XXX Merger are investment companies as
defined in Sections 368(a)(2)(F)(iii) and (iv) of the I.R.C.
bb. On the date of the XXX Merger, the fair market value of the
assets of XXX will exceed the sum of its liabilities, plus
the amount of liabilities, if any to which the assets are
subject.
cc. XXX 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 I.R.C.
dd. The fair market value of the Company voting common stock to
be received by each XXX shareholder will be approximately
equal to the fair market value of the XXX stock surrendered
in the exchange.
ee. To the best knowledge and belief of the taxpayer, the
statutory merger of XXX with and into XXX will qualify as a
reorganization under Sections 368(a)(1)(A) and (a)(2)(E) of
the I.R.C.

SUMMARY OF REQUESTED ADVISEMENTS

1. Provided that the proposed merger of XXX with and into XXX
   qualifies as a statutory merger under applicable Federal
   laws, the XXX merger qualifies as a tax-free reorganization
   under the Florida Tax Code.
2. The XXX will not recognize any gain or loss on the transfer
   of its assets to the XXX in exchange for an interest in the
   Liquidation Account in XXX, and assumption of the
   liabilities of XXX, if any.
3. No gain or loss will be recognized to XXX upon the receipt

of the assets of the XXX in exchange for an interest in the
Liquidation Account in XXX.

4. The basis of the assets of XXX to be received by XXX will be
   the same as the basis of such assets in the hands of the XXX
   immediately prior to the transfer.
5. The holding period of the assets of the XXX to be received
   by XXX will include the holding period of those assets in
   the hands of XXX immediately prior to the transfer.
6. XXX members will recognize no gain or loss upon the receipt
   of an interest in the Liquidation Account in XXX in exchange
   for their membership interests in XXX.
7. Provided that the proposed merger of XXX with and into XXX
   qualifies as a statutory merger under applicable Federal
   laws, the XXX Merger qualifies as a tax-free reorganization
   under the Florida Tax Code.
8. XXX will not recognize any gain or loss on the transfer of
   its assets to the XXX in exchange for XXX stock and the
   assumption by the XXX of the liabilities, if any, of XXX.
9. The XXX will not recognize any gain or loss on the receipt
   of the assets of XXX in exchange for the transfer to XXX of
   XXX stock.
10. The XXX's basis in the assets received from XXX in the XXX
    Merger will, in each case, be the same as the basis of such
    assets in the hands of XXX immediately prior to the
    transaction.
11. The XXX's holding period in the assets received from XXX in
    the XXX Merger will, in each instance, include the period
    during which such assets were held by XXX.
12. The Company will not recognize any gain or loss upon its
    receipt of XXX stock in exchange for XXX stock.
13. A stockholder's aggregate basis in his or her shares of
    Company stock received in the proposed transaction will be
    the same as the aggregate basis of his or her shares of XXX
    stock surrendered in exchange therefor.
14. A stockholder's holding period in his or her Company stock
    received in the proposed transaction will include the period
    during which such XXX stock surrendered in exchange therefor
    was held by such stockholder, provided that such XXX stock
    is a capital asset in the hands of the stockholder on the
    date of the exchange.

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 368 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 368 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 XXX's Florida franchise tax base
attributable to the Reorganization will be $0 so long as the
XXX'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