Did Florida follow federal tax-free treatment for a savings association's reorganization into a stock association under a mutual holding company?

Plain-English summary

Florida answered all 16 requested corporate-income-tax rulings in the affirmative, assuming the transactions qualified for the stated federal tax-free treatment.

The savings association planned a multi-step charter exchange and reorganization that would leave a stock savings association under a mutual holding company, with up to 49.9% of the stock offered to minority shareholders.

Florida began with federal taxable income and used federal tax terms unless state law required otherwise. Because the transaction was assumed to qualify under Internal Revenue Code sections 368(a)(1)(F) and 351, and no Florida adjustment applied, the Department followed the federal no-gain/no-loss, transferred-basis, and tacked-holding-period treatment described in the request.

The separate intangible-tax result was not tax-free for every owner. Each Florida-resident stockholder remained liable for intangible tax on the stockholder's shares unless a specific exemption applied.

What this means for you

The ruling depended on a long set of factual representations and on successful federal qualification. Its Florida corporate-income result followed the federal computation; the stockholder intangible-tax obligation was analyzed separately.

Common questions

Q: Did Florida recognize gain on the association exchange? A: No, assuming the federal F reorganization qualified and no Florida adjustment applied.

Q: Did Florida recognize gain on the section 351 exchange? A: No, on the stated federal qualification and facts.

Q: Did bases and holding periods carry over? A: Yes, as described in the 16 requested rulings.

Q: Were Florida-resident stockholders exempt from intangible tax? A: No blanket exemption was granted. They remained liable on their shares unless specifically exempt by law.

Citations and references

• Fla. Stat. §§ 220.43(1) and 220.03(2)(c) — federal taxable income and federal definitions
• I.R.C. §§ 351 and 368(a)(1)(F) — exchange and reorganization provisions assumed in the ruling
• Fla. Stat. §§ 199.052 and 199.103 — intangible-tax reporting and stock valuation
• Fla. Stat. § 213.22 — Technical Assistance Advisements

Source

• Landing page: Florida Tax Law Library
• Advisement: TAA 95C1-005

Original ruling text

May 11, 1995

Re: Technical Assistance Advisement No. 95(C)1-005 Corporate Income Tax, Chapter 220, F.S., and Intangible Tax, Chapter 199, F.S. Reorganization from Mutual Holding Co. to Stock Holding Co.

Dear :

Your request for a technical assistance advisement on behalf of XX (hereinafter the "Association"); XX (hereinafter referred to as "XX"), a Federally-chartered mutual holding company; and XX (the "Stock Association"), a Federally-chartered stock savings association, has been referred to me for a response. This response to your request constitutes a Technical Assistance Advisement under Chapter 12-11, Florida Administrative Code, and is issued to you under the authority of s. 213.22, Florida Statutes.

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 XX (the "Stock Association") residing in Florida will be liable for all intangible tax due on their shares of stock.

FACTS PRESENTED BY TAXPAYER'S REPRESENTATIVE

XX, (the "Association"), proposes an exchange of the charter of the Association for a Federal stock savings association charter to become the Stock Association in a transaction (the "Association Exchange") followed by a merger of an interim savings association second-tier subsidiary ("Interim") with and into Stock Association for the purpose of establishing a mutual holding company of the Association (to be known as "XX"). The stockholders of the Stock Association will exchange their Stock Association common stock for membership interests in XX. The proposed transactions are being effectuated for the purpose of reorganizing the Association into a mutual holding company. The proposed transactions

collectively are referred to herein as the "Reorganization".

On November 8, 1994, the Board of Directors of the Association adopted the Plan of Reorganization from Mutual Savings Association to XX and Stock Issuance Plan (the "Plan of Reorganization" or "Plan"). Pursuant to the Plan, the Association will be affected by the following steps, each of which will be completed contemporaneously.

1. Association will organize a wholly owned subsidiary
   (Interim). Interim will be organized on an interim basis as a stock savings association.
2. Interim will organize a stock savings association
   (Transitory) as a wholly owned subsidiary.
3. The following events will occur simultaneously: Association
   will exchange its charter for that of a federally chartered stock savings association (becoming Stock Association). Transitory will merge with and into Stock Association with Stock Association surviving and Interim obtaining the stock of Stock Association. Interim will cancel its outstanding stock and exchange its charter for that of a federally chartered mutual holding company (becoming XX), the members of which will be the former members of Association immediately before this transaction. As a result, Stock Association, formerly Association, will be the wholly-owned subsidiary of XX, a mutual entity in which the former members of Association will hold ownership interests comparable to those they previously held in Association.
4. Stock Association will offer up to 49.9 percent of its
   stock for sale in a public offering. The stock will be offered in descending order of priority to account holders and other members, employee stock benefit plans, and certain members of the general public. XX will own a majority of the Stock Association stock as long as XX remains in existence.

It is the taxpayers' intent that the transactions, described in step 3 above, be treated as, in substance, the conversion of the Association to stock form followed by the contribution of Association/then Stock Association by its owners to XX in exchange for mutual ownership interests in XX.

Further, the taxpayer intends that the conversion of Association to Stock form be treated as a reorganization described in Section 368(a)(1)(F) of the Internal Revenue Code (also sometimes referred to herein as the "Association Conversion"), and that the contribution of Association/then Stock Association by its owners to XX in exchange for mutual ownership interests in XX be treated as a transfer of property solely in exchange for stock described in Code Section 351 (also sometimes referred to herein as the "351 Transaction").

At the conclusion of these steps the former members of the Association will own all of the XX by virtue of their membership interests in the XX, and XX will own all the outstanding stock of Stock Association. These transactions are referred to herein collectively as the "Reorganization." The Reorganization and Plan are subject to Office of Thrift Supervision (OTS) approval.

Contemporaneously with the Reorganization, as set forth above in step 4, the opportunity to purchase up to 49.9% of the common stock of the Stock Association will be offered in a stock offering (the "Offering") pursuant to regulations of the OTS, to depositors and borrowers of the Association; the Association's tax-qualified employee stock benefit plan(s); and members of the community pursuant to priorities established by the board of directors of the Association. Any remaining shares may be offered to the public at the sole discretion of the board of directors. These persons are collectively referred to herein as the "Minority Shareholders." The common stock will be sold in the Offering on a best efforts basis by a registered brokerdealer. 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 the XX at the close of the proposed Offering will be less than 50% of the Stock Association's total outstanding common stock. As of the date of the Reorganization, the common stock issued to the XX and minority shareholders by the Stock Association will be the only issued and outstanding shares of capital stock of the Stock Association. The Offering will not be made if market conditions dictate against such offering or regulatory approvals cannot be obtained.

Following the completion of the Reorganization, all depositors who had membership or liquidation rights with respect to the Association will continue to have such rights solely with respect to the XX so long as they continue to hold deposit accounts with the Stock Association. In addition, all persons who become depositors of the Stock Association subsequent to the Reorganization will have such membership and liquidation rights with respect to the XX. Borrower members at the time of the Reorganization will have the same membership rights in the XX that they had in the Association, immediately prior to the Reorganization, so long as their existing borrowings remain outstanding. Borrowers will not receive membership rights in connection with new borrowings made after the Reorganization.

Following the approval of the Plan of Reorganization by the OTS, a special meeting of members of the Association to approve the Plan of Reorganization will be scheduled in accordance with the Association's Bylaws. An affirmative vote of not less than a majority of the votes of members of the Association is required for approval of the Plan of Reorganization.

Following the Reorganization, Stock Association will have the power to issue shares of capital stock (including common and preferred stock) to persons other than the XX. So long as the XX is in existence, however, it must own a majority of the voting stock of Stock Association. Stock Association may issue any amount of non-voting stock to persons other than the XX. No such non-voting stock will be issued as of the date of the Reorganization. In the future the XX may elect to convert to stock form, but it currently has no plan to do so.

In connection with the Reorganization, the following representations have been made:

With respect to the exchange of the Association's charter for a stock bank charter pursuant to the Association Exchange:

a. To the best of the knowledge and belief of the taxpayer, the exchange of the Association's charter for a Federal

stock savings association will qualify as a reorganization under Section 368(a)(1)(F) of the Code. b. The fair market value of the Stock Association stock constructively received by the members of the Association in exchange for their equity interest in the Association will be approximately equal to the fair market value of the equity interest in the Association constructively surrendered in the exchange. c. There is no plan or intention by the members of the Association, to sell, exchange, or otherwise dispose of any of the shares of Stock Association stock constructively received in the Association Exchange, other than as described herein. Following the transaction, the Stock Association may sell up to 49.9% of its authorized but unissued shares to depositors and borrowers of the Stock Association, and to members of the general public. d. Immediately following the consummation of the Association Exchange, the members of the Association will own all of the outstanding Stock Association stock and will own such stock solely by reason of their ownership of all of the equity interests in Association immediately prior to the Association Exchange. e. Stock Association has no plan or intention to issue additional shares of its stock following the Association Exchange, except as set forth in the Plan. Pursuant to the Plan, Stock Association has applied for approval from the Office of Thrift Supervision to issue additional shares of common stock to depositors, borrowers, and members of the general public in a public offering. At any time, the Stock Association's Board of Directors may elect not to consummate the Offering if it determines conditions are not favorable. If the Stock Association issues additional shares to Minority Shareholders, the additional shares issued will not exceed 49.9% of the total number of shares authorized and outstanding. f. Immediately following consummation of the Association Exchange, Stock Association will possess the same assets and liabilities, except for assets used to pay expenses incurred in connection with the Association Exchange, as those possessed by Association immediately prior to the Association Exchange. Assets used to pay expenses, will,

in the aggregate, constitute less than one percent of the net assets of Association. Members of the Association will not have dissenters rights in connection with the Reorganization. Also there will be no property distributed to any shareholder in connection with this Association Exchange and no distributions other than the regular distributions (i.e., interest credited to accounts). Additionally cash, as raised in the Offering, may be held by the Stock Association immediately following consummation of this transaction. g. At the time of the Association Exchange, Association will not have outstanding any warrants, options, convertible securities, or any other type of right pursuant to which any person could acquire stock of Association. h. Stock Association has no plan or intention to reacquire any of its stock issued in the Association Exchange. i. Stock Association has no plan or intention to sell or otherwise dispose of any of the assets of Association acquired in the Association Exchange, except for dispositions made in the ordinary course of business. j. The liabilities of Association assumed by Stock Association plus the liabilities, if any, to which the transferred assets are subject were incurred by Association in the ordinary course of its business and are associated with the assets transferred. k. Following the Association Exchange, Stock Association will continue the historic business of Association or use a significant portion of Association's historic business assets in a business. l. The shareholders will pay their respective expenses, if any, incurred in connection with the Association Exchange. m. Association 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 Internal Revenue Code.

With respect to transfer of Stock Association stock to XX for membership interests (the "351 Transaction"):

n. No stock or securities will be issued for services rendered to or for the benefit of the XX in connection with the 351 Transaction, and no stock or securities will be issued for

indebtedness of the XX that is not evidenced by a security, or for interest on indebtedness of the XX which accrued on or after the beginning of the holding period for the debt. o. None of the assets to be transferred were received by the Stock Association shareholders as part of a plan of liquidation of another corporation. p. The property to be transferred to the XX will not include accounts receivable, loans receivable, or commissions. Solely stock of Stock Association will be transferred. q. None of the stock to be transferred is "Section 306 stock" within the meaning of Section 306(c) of the Code. r. The Stock Association shareholders did not incur any acquisition indebtedness with respect to stock of Stock Association that is part of the property being transferred to the XX. s. The transfer is not the result of the solicitation by a promoter, broker, or investment firm. t. The Stock Association shareholders will not retain any right or continuing interest in the property being transferred to the XX. u. The adjusted basis and the fair market value of the assets to be transferred to XX by Stock Association shareholders will, in each instance, equal or exceed the sum of the liabilities to be assumed by XX plus the liabilities to which the transferred assets are subject. v. The XX will assume no liabilities of the Stock Association shareholders in connection with the 351 Transaction. w. There is no indebtedness between the XX and Stock Association shareholders, and there will be no indebtedness created as a result of the 351 Transaction. x. The transfers and exchanges will occur pursuant to the Plan which was agreed upon before the 351 Transaction and under which the rights of the parties are defined. y. All exchanges will occur on approximately the same date. z. There is no plan or intention on the part of the XX to redeem or otherwise reacquire any stock or securities to be issued in the 351 Transaction. aa. Taking into account any issuance of additional shares of XX's equity, any issuance of stock for services, the exercise of any stock rights, warrants or subscriptions; a public offering of stock; and the sale, exchange, transfer

by gift, or other disposition of any equity of the XX to be received in the 351 Transaction, the Stock Association shareholders will be in "control" of XX within the meaning of Section 368(c) of the Code. bb. The Stock Association shareholders will receive only membership interests of XX approximately equal to the fair market value of the property transferred to XX. cc. XX will remain in existence and retain and use the property transferred to it in a trade or business. dd. There is no plan or intention by XX to dispose of the transferred property other than in the normal course of business operations. ee. Each of the parties to the 351 Transaction will pay its own expenses, if any, incurred in connection with the proposed transaction. ff. XX will not be an investment company within the meaning of Section 351(e)(1), I.R.C., and Section 1.351-1(c)(1)(ii) of the Income Tax Regulations. gg. The Stock Association shareholders are 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 the equity interests in XX received in the Exchange will not be used to satisfy any indebtedness. hh. XX will not be a "personal service corporation" within the meaning of Section 269A of the Code. ii. The Association is not a "loss corporation" within the meaning of Section 382(k) of the Code. jj. To the best of the knowledge and belief of the taxpayer, the Stock Association Stockholders' exchange of their stock in the Stock Association for membership interests in XX qualifies as an exchange of property for Stock within the meaning of Section 351 of the Code.

SUMMARY OF REQUESTED ADVISEMENTS

With respect to the Association Exchange

1. Assuming that the transaction qualifies as a tax-free
   reorganization for purposes of Section 368(a)(1)(F) of the Internal Revenue Code, the transaction will constitute a tax-free reorganization for purposes of Florida law.

2. No gain or loss will be recognized by Association under Florida law upon the transfer of its assets to Stock Association solely in exchange for shares of Stock Association stock and the assumption by Stock Association of the liabilities of Association.

3. Under Florida law, no gain or loss will be recognized by
   Stock Association upon the receipt of the assets of Association in exchange for shares of Association common stock.
4. Under Florida law, Stock Association's holding period in
   the assets received from Association will include the period during which such assets were held by the Association.
5. Under Florida law, Stock Association's basis in the assets
   of Association will be the same as the basis of such assets in the hands of Association immediately prior to the proposed transaction.
6. Under Florida law, Association members will recognize no
   gain or loss upon the constructive receipt of Stock Association common stock solely in exchange for their membership interests in Association.
7. Under Florida law, the basis of the Stock Association
   common stock to be constructively received by the Association's members will be the same as their basis in their membership interests in the Association surrendered in exchange therefore.
8. The holding period of the Stock Association common stock
   constructively received by the members of the Association will include the period during which the Association held their membership interests, provided that the membership interests were held as capital assets on the date of the exchange.

With respect to the 351 Transaction:

9. Assuming that the transaction qualifies as a tax-free
   exchange of property by the Stock Association stockholders "stock" (i.e., the membership interests) in the XX pursuant to Section 351 of the Internal Revenue Code, the transaction will constitute a tax-free exchange of property for stock under Florida law.

10. Stock Association's stockholders will recognize no gain or loss upon the transfer of the Stock Association stock they constructively received in the Association Exchange solely in exchange for membership interests in the XX.

11. Stock Association stockholder's basis in the membership
    interests in XX received in the transaction will be the same as the basis of the property transferred in exchange therefore, reduced by the sum of the liabilities assumed by, or to which assets transferred are taken subject.
12. Stock Association stockholder's holding period for the
    membership interests in XX received in the transaction will include the period during which the property exchanged was held by Stock Association stockholders, provided that such property was a capital asset on the date of the exchange.
13. XX will recognize no gain or loss upon the receipt of
    property from Stock Association Stockholders in exchange for membership interests in the XX.
14. XX's basis in the property received from Stock Association
    Stockholders will be the same as the basis of such property in the hands of Stock Association Stockholders immediately prior to the transaction.
15. XX's holding period for the property received from Stock
    Association's stockholders will include the period during which such property was held by Stock Association stockholders.
16. Stock Association stockholders will recognize no gain or
    loss solely by reason of the transaction.

DEPARTMENTAL RESPONSE

Corporate Income Tax

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, 1994.

Florida has not specifically adopted provisions similar to those of Code Section 368 dealing with tax-free reorganizations or Section 351 dealing with the tax-free exchange of assets and liabilities for stock and 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 Sections 368 and 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 Association's franchise tax base attributable to the Reorganization will be $0 so long as the Association'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 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, including those shares held by the XX, unless specifically exempted by law.

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 based 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 a 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 s. 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 the confidentiality of such information, we request you notify the undersigned in writing within 15 days of any deletions you wish made to the request or the response.

Sincerely,

Bruce H. Williams
Technical Assistant
Statutory Compliance Section

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