Does a bank subsidiary's grandfather election to be taxed under Article 9-A survive a reincorporation from one state to another that qualifies as an F reorganization?

Plain-English summary

Corporation X, a bank subsidiary, had made the one-time section 1452(d) grandfather election to keep being taxed under Article 9-A (rather than Article 32) starting with its 1985 return. It planned to reincorporate from State A to State B by forming a new State B corporation and merging into it -- a transaction qualifying as an IRC section 368(a)(1)(F) reorganization (a mere change in place of incorporation). McDermott, Will & Emery asked whether the section 1452(d) election survives.

The Department held no:

• Following Pendex Real Estate Corp (TSB-A-99(10)C), a section 1452(d) election survives a merger only if the electing corporation is the surviving entity; if it is not the survivor, it ceases to exist and the election ceases with it -- it does not carry over.
• Although an F reorganization has no federal income tax effect and the IRC treats the old and new corporations as carrying the same attributes, New York looks at who the taxpayer is under section 1450(a). Corporation X (State A) made the election; after the reincorporation State A Corporation X is dissolved and is not the surviving entity, so its election does not carry over to State B Corporation X (a new taxpayer).

What this means for you

A 1452(d) election is personal to the electing corporation

The grandfather election to stay under Article 9-A belongs to the specific corporation that made it. If that corporation does not survive a merger or reincorporation, the election dies -- it does not pass to the successor.

F-reorganization "sameness" does not control New York

Even though an IRC 368(a)(1)(F) reincorporation is treated federally as a mere change of form with the same attributes, New York focuses on who the taxpayer is under section 1450(a). A newly formed State B corporation is a new taxpayer, and it starts fresh under the banking-tax rules.

Plan reincorporations carefully

A bank relying on a 1452(d) election should weigh that the election will not survive a reincorporation into a new entity, which could move it from Article 9-A to Article 32.

Common questions

Q: Does a section 1452(d) Article 9-A election survive a reincorporation in a new state?
A: No. If the electing corporation is not the surviving entity, the election ceases and does not carry over to the new corporation.

Q: Does it matter that the move is an F reorganization with no federal tax effect?
A: No. New York looks at who the taxpayer is under section 1450(a); the new State B corporation is a new taxpayer.

Q: What is the practical risk?
A: Losing the election could move the bank from Article 9-A back to Article 32 taxation.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 1452(d) (grandfather election by banking corporations to be taxed under Article 9-A)
- Tax Law section 1450(a) (taxpayer defined)
- Internal Revenue Code section 368(a)(1)(F) (reorganization; mere change in form or place of incorporation)
- McDermott, Will & Emery, TSB-A-03(12)C (Nov. 6, 2003)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_2003.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a03_12c.pdf

Original ruling text

New York State Department of Taxation and Finance

Office of Tax Policy Analysis
Technical Services Division

TSB-A-03(12)C
Corporation Tax
November 6, 2003

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C030529A

On May 29, 2003, a Petition for Advisory Opinion was received from McDermott, Will &
Emery, 50 Rockefeller Plaza, New York, New York 10020.
The issue raised by Petitioner, McDermott, Will & Emery, is whether a bank subsidiary’s
election to be taxed under Article 9-A of the Tax Law pursuant to the grandfather provision in
section 1452(d) of the Tax Law remains valid after the reincorporation of the subsidiary from
State A to State B, which reincorporation qualifies as a reorganization under Internal Revenue Code
(IRC) section 368(a)(1)(F).
Petitioner submits the following facts as the basis for this Advisory Opinion.
Corporation X was incorporated in State A in 1980. It has been qualified to do business in
New York State since 1981 and, since that time, has reported and paid corporation franchise tax
under Article 9-A of the Tax Law. Corporation X made the one-time election under section 1452(d)
of the Tax Law, on or before the due date for the filing of its return for its 1985 taxable year, to
continue being subject to taxation pursuant to Article 9-A of the Tax Law instead of Article 32 of
the Tax Law. Corporation X has not revoked that election and it has not engaged in any transactions
or activities that would cause the revocation of that election. Since it first made that election, it has
always been principally engaged in activities that may be properly conducted by a corporation
taxable under Article 9-A of the Tax Law.
For administrative efficiency reasons, Corporation X is contemplating reincorporating from
State A to State B. Such reincorporation would qualify as a tax-free reorganization under IRC
section 368(a)(1)(F). Mechanically, the reorganization would be effected by creating a new
corporation in State B and then merging Corporation X into the new corporation (“State B
Corporation X”).
For all practical and most significant legal purposes, Corporation X will be the same
corporation after the reincorporation. The content of the Charter and Bylaws of State B Corporation
X will be identical to the Charter and Bylaws of Corporation X, except to the extent required to be
changed due to differences in the corporate law of State A and State B. State B Corporation X will
assume and be liable for all liabilities and obligations of Corporation X. Any pending actions or
judicial proceedings, whether civil or criminal, to which Corporation X is a party will not abate or
be discontinued by reason of the reorganization but will continue in the same manner as if the
reincorporation had not taken place. After the reincorporation, the name, ownership and assets of
State B Corporation X will be the same as that of Corporation X. All of Corporation X’s operations
at each of its current business locations will continue uninterrupted and will remain the same after
the reincorporation. Accordingly, State B Corporation X will continue to be principally engaged

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in activities that may be properly conducted by a corporation taxable under Article 9-A of the Tax
Law. Finally, for federal income tax purposes, State B Corporation X will file all tax returns under
Corporation X’s federal employer identification number and upon the same reporting dates or
reporting periods as are required of Corporation X prior to the reincorporation.
Applicable law and regulations
Section 1450(a) of the Tax Law provides that “[t]he word ‘taxpayer’ means a corporation
or association subject to a tax imposed by this article.”
Section 1452(d) of the Tax Law provides, in part:
Corporations taxable under article nine-a. Notwithstanding the provisions of this article, all
corporations of classes now or heretofore taxable under article nine-a of this chapter shall
continue to be taxable under article nine-a, except: ... (3) banking corporations described in
paragraph nine of subsection (a) of section fourteen hundred fifty-two. Provided, however,
that a corporation described in paragraph three of this subsection which was subject to the
tax imposed by article nine-A of this chapter for its taxable year ending during nineteen
hundred eighty-four may, on or before the due date for filing its return (determined with
regard to extensions) for its taxable year ending during nineteen hundred eighty-five, make
a one time election to continue to be taxable under such article nine-A. Such election shall
continue to be in effect until revoked by the taxpayer. In no event shall such election or
revocation be for a part of a taxable year.
Section 16-2.5(j)(3) of the Banking Corporation Franchise Tax Regulations provides:
Any corporation described in paragraph (1) of this subdivision which was subject to the tax
imposed by article 9-A of the Tax Law for its taxable year ending during 1984 may, on or
before the due date for filing its return (determined with regard to extensions of time for
filing) for its taxable year ending during 1985, make a one-time election to continue to be
taxable under article 9-A. Such election shall continue to be in effect until revoked by the
taxpayer. In no event shall such election or revocation be for a part of a taxable year. The
election is made by the filing of a tax return pursuant to article 9-A of the Tax Law and the
revocation is made by the filing of a tax return pursuant to article 32 of the Tax Law.
IRC section 361(a) provides that:
General rule. – No gain or loss shall be recognized to a corporation if such corporation is a
party to a reorganization and exchanges property, in pursuance of the plan of reorganization,
solely for stock or securities in another corporation a party to the reorganization.
IRC section 368(a)(1) defines “reorganization”, in pertinent part, as follows:

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In general. – For purposes of parts I and II and this part, the term “reorganization” means –
*

*

*

(F) a mere change in identity, form or place of organization of one corporation, however
effected; ...
Treasury Regulation section 1.368-1 contains the purpose and scope of exception of
reorganization exchanges, and provides, in pertinent part:
(b) Purpose. Under the general rule, upon the exchange of property, gain or loss must be
accounted for if the new property differs in a material particular, either in kind or in extent,
from the old property. The purpose of the reorganization provisions of the Code is to except
from the general rule certain specifically described exchanges incident to such readjustments
of corporate structures made in one of the particular ways specified in the Code, as are
required by business exigencies and which effect only a readjustment of continuing interest
in property under modified corporate forms....
(c) Scope. The nonrecognition of gain or loss is prescribed for two specifically described
types of exchanges, viz.: The exchange that is provided for in section 354(a)(1) ... and the
exchange that is provided for in section 361(a) in which a corporation, a party to a
reorganization, exchanges property, in pursuance of a plan of reorganization, for stock or
securities in another corporation, a party to the same reorganization. Section 368(a)(1) limits
the definition of the term “reorganization” to six kinds of transactions and excludes all
others. . . .
IRC section 381(a) provides in pertinent part:
General Rule.– In the case of the acquisition of assets of a corporation by another
corporation –
*

*

*

(2) in a transfer to which section 361 (relating to nonrecognition of gain or loss to
corporations) applies, but only if the transfer is in connection with a reorganization described
in subparagraph ... (F) ... of section 368(a)(1),
the acquiring corporation shall succeed to and take into account, as of the close of the day
of distribution or transfer, the items described in subsection (c) of the distributor or
transferor corporation, subject to the conditions and limitations specified in subsections (b)
and (c)....

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Treasury Regulation section 1.381(b)-1(a)(2) provides:
Reorganizations under section 368(a)(1)(F). In the case of a reorganization qualifying under
section 368(a)(1)(F) (whether or not such reorganization also qualifies under any other
provision of section 368(a)(1)), the acquiring corporation shall be treated (for purposes of
section 381) just as the transferor corporation would have been treated if there had been no
reorganization. Thus, the taxable year of the transferor corporation shall not end on the date
of transfer merely because of the transfer; a net operating loss of the acquiring corporation
for any taxable year ending after the date of transfer shall be carried back in accordance with
section 172(b) in computing the taxable income of the transferor corporation for a taxable
year ending before the date of transfer; and the tax attributes of the transferor corporation
enumerated in section 381(c) shall be taken into account by the acquiring corporation as if
there had been no reorganization.
Opinion
In Pendex Real Estate Corp, Adv Op Comm T&F, January 27, 1999, TSB-A-99(10)C, the
issue was whether the petitioner’s election pursuant to section 1452(d) of the Tax Law continued
under three scenarios. Since the scenarios were hypothetical and the petitioner could not describe
the merger transactions or state which entity was the survivor, it was not possible to determine
whether the election would continue. However, the opinion did provide guidance in making such
determination, and held that when one or more corporations merged with the petitioner, where the
petitioner was the surviving entity, such transaction would not revoke the petitioner’s election
pursuant to section 1452(d). The opinion also held that if the petitioner was not the surviving entity
after the merger transaction, the petitioner would cease to exist, and the petitioner’s election
pursuant to section 1452(d) would also cease, and would not carry over to the surviving entity. (See
also Sutdex Real Estate Corp, Adv Op Comm T&F, January 27, 1999, TSB-A-99(11)C.)
Under IRC sections 361(a), 368(a)(1)(F) and 381, and Treasury Regulation sections
1.368-1(b) and (c) and 1.381(b)-1(a)(2), it is recognized that two distinct corporations are parties
to a reorganization. However, with respect to a reorganization under IRC section 368(a)(1)(F), there
is no gain or loss recognized by the transferor corporation as a result of the transaction, the taxable
year of the transferor corporation does not end on the date of transfer merely because of the transfer,
net operating losses of the acquiring corporation for taxable years ending after the transfer are
carried back in accordance with IRC section 172(b) in computing the taxable income of the
transferor corporation, and the tax attributes of the transferor corporation are taken into account by
the acquiring corporation as if there had been no reorganization.
In this case, it is assumed that Corporation X properly made the election, pursuant to section
1452(d) of Article 32 of the Tax Law, to continue to be subject to tax under Article 9-A of the
Tax Law. Petitioner states that Corporation X organized in State A is contemplating merging into

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a new corporation organized in State B. Under this scenario, Corporation X organized in State A
would be dissolved in State A, and the new corporation organized in State B would become State
B Corporation X. This transaction would meet the definition of a reorganization for federal income
tax purposes under IRC section 368(a)(1)(F) as a change in state of incorporation. As such, it is
recognized under the applicable provisions of the IRC that Corporation X and State B Corporation
X are two distinct corporations, but that there is no federal income tax effect resulting from the
transaction.
For purposes of Article 32 of the Tax Law, Corporation X organized in State A was the
corporation that was the taxpayer under section 1450(a) of the Tax Law that made the election
pursuant to section 1452(d) of the Tax Law by filing its 1985 tax return under Article 9-A of the Tax
Law. Since Corporation X organized in State A would not be the surviving entity after the merger
transaction contemplated in this case, Corporation X organized in State A would cease to exist, and
following Pendex, supra, the election made by Corporation X would also cease. Accordingly, the
election made by Corporation X pursuant to section 1452(d) of the Tax Law would not carry over
to State B Corporation X, the new taxpayer under section 1450(a) of the Tax Law.

DATED: November 6, 2003

NOTE:

/s/
Jonathan Pessen
Tax Regulations Specialist IV
Technical Services Division

The opinions expressed in Advisory Opinions are
limited to the facts set forth therein.