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