When a New York mutual savings bank converts to stock form as a federal tax-free 'F reorganization,' does the bank owe any New York bank franchise (Article 32) tax on the conversion itself?

Plain-English summary

East River Savings Bank, a New York State chartered mutual savings bank, planned to convert to a New York State chartered stock savings bank. Under Banking Board General Regulations § 86.4(c), the conversion doesn't end the bank's corporate existence -- it simultaneously becomes a stock-form institution, keeping all its property, rights, debts, liabilities, and deposits intact, as a legal continuation of the same entity. For federal tax purposes, the bank had already determined this qualifies as a tax-free "F reorganization" under IRC section 368(a)(1)(F), with the now-familiar list of favorable federal consequences seen across this Department's many mid-1980s conversion rulings: no gain or loss to the bank or converted bank; carryover basis and tacked holding periods for assets; no gain or loss to account holders on receiving new time/savings accounts or liquidation-account interests in exchange for their old accounts; continuity of tax attributes and taxable year under IRC section 381; and continuation of bad-debt reserves without required restoration to income.

The Department held that this federal tax-free treatment carries straight through to the bank's own New York Article 32 franchise tax, because Article 32's entire net income definition (Tax Law § 1453(a)) starts from federal taxable income and its modification provisions (§ 1453(b) through (h)) contain nothing addressing an IRC section 368(a)(1)(F) reorganization specifically. Since Banking Board regulations mean the bank doesn't cease exercising its franchise at conversion, its taxable year doesn't end on the conversion date either -- the pre-conversion stub period simply rolls into the post-conversion return.

This original opinion was later modified. About a month after this opinion issued, the Department appended a further discussion to it -- see TSB-A-85(9.1)C, issued July 12, 1985, addressing a net-operating-loss carryover question (whether IRC section 382(b) matters to the New York computation) that this original opinion didn't cover.

What this means for you

Mutual savings institutions converting to stock form

If your federal F-reorganization determination for a mutual-to-stock conversion is solid, New York's Article 32 bank franchise tax generally follows automatically at the bank level -- there's no separate New York-specific reorganization test, since Article 32 has no modification addressing IRC section 368(a)(1)(F) transactions, and your taxable year won't be interrupted by the conversion.

Accountants and tax professionals

If a client's original conversion Advisory Opinion doesn't address a net operating loss carryover question, a follow-up Modified Advisory Opinion can be requested and issued separately, as happened here -- see the companion TSB-A-85(9.1)C.

Common questions

Q: Does converting from mutual to stock form trigger New York franchise tax on the bank itself?
A: Not if the conversion is a genuine federal tax-free F-reorganization under IRC section 368(a)(1)(F) -- Article 32 has no modification addressing this type of reorganization, so it follows the federal treatment.

Q: Does the bank's taxable year end when it converts?
A: No. Under Banking Board General Regulations § 86.4(c), the bank doesn't cease exercising its franchise at conversion, so its taxable year continues uninterrupted.

Q: Was this Opinion later changed?
A: Yes -- it was modified about a month later by TSB-A-85(9.1)C, which appended a discussion of a net operating loss carryover issue (IRC section 382(b)) that this original opinion didn't address.

Q: Can another converting bank rely on this Opinion?
A: No. It binds the Department only as to East River Savings Bank's own facts and cannot be relied upon by another institution, even in a materially identical conversion.

Citations and references

Statutes and regulations:

• Tax Law § 1453(a), § 1453(b)-(h), § 1455(a), § 1462(a)
• Internal Revenue Code § 368(a)(1)(F), § 368(b), § 361(a), § 1032(a), § 362(b), § 1223(2), § 354(a), § 358(a)(1), § 381, § 381(c)(4), § 593(e), § 316
• Rev. Rul. 80-105; Rev. Rul. 57-276

Related rulings:

• TSB-A-85(9.1)C -- the Modified Advisory Opinion appending an NOL carryover discussion to this original opinion

Date note: The document header repeats "June 18, 1985" three times, while the sign-off line reads "DATED: June 11, 1985." This week-long gap is consistent with internal signing before the header/publication date -- and matches the modified opinion's own reference to "an Advisory Opinion was issued to East River Savings Bank" on "June 11, 1985"; issued_date uses the header date without correction.

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1985.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a85_9c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-85 (9)C
Corporation Tax
June 18, 1985

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C840604A

On June 4, 1984 a Petition for Advisory Opinion was received from East River Savings
Bank, 26 Cortlandt Street, New York, New York 10007.
At issue is the tax treatment under Article 32 of the Tax Law of a proposed reorganization
of Petitioner where, for federal income tax purposes:

1. The change in the form of operation of Petitioner from a state mutual savings bank to a
   state stock savings bank will constitute a reorganization within the meaning of section 368(a)(1)(F)
   of the Internal Revenue Code of 1954 (hereinafter IRC), and no gain or loss will be recognized by
   Petitioner or the converted bank as a result of such conversion (Rev. Rul. 80-105, 1980-1C.B. 78).
   Petitioner and the converted bank will each be "a party to a reorganization" within the meaning of
   section 368(b) of the IRC.
2. No gain or loss will be recognized by the converted bank upon the receipt of the assets
   and liabilities of Petitioner pursuant to the conversion or upon the receipt of money or property in
   exchange for shares of its common and preferred stock (sections 361(a) and 1032(a) of the IRC).
3. The assets of Petitioner will have the same basis in the hands of the converted bank as in
   the hands of Petitioner immediately prior to the conversion (section 362(b) of the IRC).
4. The holding period of the assets of Petitioner to be received by the converted bank will
   include the period during which those assets were held by Petitioner prior to the conversion (section
   1223(2) of the IRC).
5. No gain or loss will be recognized by the eligible account holders and other account
   holders of Petitioner upon the constructive issuance to them of withdrawable time or savings
   accounts in the converted bank in a dollar amount equal to the withdrawal value of their time or
   savings accounts in Petitioner constructively surrendered in exchange therefor, and no gain or loss
   will be recognized by the eligible account holders of Petitioner upon the constructive issuance to
   them of interests in the liquidation account of the converted bank constructively exchanged for their
   time or savings account and proprietary interests in Petitioner (section 354(a) of the IRC).
6. The basis of the time or savings accounts in converted bank constructively received by
   the eligible account holders and other account holders of Petitioner will be, in each instance, the
   same as the basis of their time or savings accounts in Petitioner constructively surrendered in
   exchange therefor (section 358(a)(1) of the IRC). The basis of the interests in the liquidation account
   of the converted bank to be received by the eligible account holders will be zero (sections 1.307-1
   and 1.307-2 of the Treasury Regulations).

RODERICK G. W. CHU, COMMISSIONER
TP-8 (3/83)

GABRIEL B. DiCERBO, DEPUTY COMMISSIONER
FRANK J. PUCCIA, DIRECTOR

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TSB-A-85 (9)C
Corporation Tax
June 18, 1985

7. For purposes of section 381 of the IRC, the converted bank will be treated as if there had
   been no reorganization. The taxable year of Petitioner will not end on the effective date of the
   conversion and, accordingly, the part of the taxable year of Petitioner before the conversion will be
   included in the taxable year of the converted bank following the conversion (Rev. Rul. 57-276, 1957­
   1 C.B. 126). The earnings and profits and other tax attributes of Petitioner will be taken into account
   by the converted bank following the proposed transactions as if there had been no reorganization
   (section 1.381(b)-l(a)(2) of the Treasury Regulations).
8. Pursuant to the provisions of section 381(c)(4) of the IRC and section 1.381(c)(4)­
   1(a)(1)(ii) of the Treasury Regulations, the converted bank will succeed to and take into account the
   dollar amount of those accounts of Petitioner which represent bad debts reserves for which Petitioner
   has taken a bad debt deduction for taxable years ending on or before the date of the conversion. The
   bad debt reserves of Petitioner will not be required to be restored to the gross income of Petitioner
   or included in the gross income of the converted bank as a result of the proposed transactions and
   such bad debt reserves will have the same character in the hands of the converted bank as they would
   have had in the hands of Petitioner if no conversion had occurred.
9. Regardless of any book entries made to create the liquidation account, the conversion will
   not reduce the earnings and profits of the converted bank which are available for the distribution of
   dividends within the meaning of section 316 of the IRC (section 1.312-11(b) and (c) of the Treasury
   Regulations).
10. The creation of the liquidation account on the records of the converted bank will not
    affect its taxable income, its deductions under section 593 of the IRC for additions to its reserve for
    bad debts, or the tax consequences under section 593(e) of the IRC of any distributions to its
    shareholders.
    Petitioner is a New York State chartered mutual savings bank. Petitioner contemplates
    converting from a mutual savings bank to a New York State stock savings bank. Pursuant to section
    86.4(c) of the General Regulations of the Banking Board of the New York State Banking
    Department, at the time the conversion from mutual to stock-form becomes effective, the converting
    institution shall cease to be a mutual institution and shall simultaneously become a stock-form
    institution, and all the property of the mutual institution shall remain as the property of the stock­
    form institution. All of the rights, powers, franchises, debts, liabilities, obligations and duties of the
    mutual institution shall continue as such in the stock-form institution and all deposits therein shall
    remain as deposits of equal value and character of such stock-form institution. The corporate
    existence of the converting mutual institution shall not terminate, and such converted stock-form
    institution shall be a continuation of the mutual form institution which existed immediately before
    the filing of the amended organization certificate.
    Section 1455(a) of Article 32 of the Tax Law provides that the basic tax is 12 percent of the
    taxpayer's entire net income, or the portion thereof allocated to New York State, for the taxable year
    or part thereof.

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TSB-A-85 (9)C
Corporation Tax
June 18, 1985

Entire net income is defined in section 1453(a) of Article 32 of the Tax Law as follows:
"Entire net income means total net income from all sources which
shall be the same as the entire taxable income which the taxpayer is
required to report to the United States treasury department, except as
hereinafter provided."
Section 1453(b) through (h) of Article 32 of the Tax Law provides for the modifications
required by section 1453(a). However, there is no modification for a transaction treated as a
reorganization pursuant to section 368(a)(1)(F) of the IRC.
The only regulations promulgated, to date, in accordance with section 1453 of Article 32 of
the Tax Law pertain to the modification for the international banking facilities which is not herein
at issue.
The regulations promulgated in accordance with Articles 9-B and 9-C of the Tax Law, the
predecessor to Article 32 of the Tax Law, apply only to the extent that such regulations conform with
the provisions of such Article 32 and only in the absence of regulations promulgated in accordance
with such Article 32. In a letter to Commerce Clearing House, Inc., dated February 26, 1973, the
Director of the Corporation Tax Bureau made the following statement:
"Inasmuch as the provisions of Article 32 conform with Articles 9-B and 9-C,
except in areas of privilege period and Federal conformity, regulations issued under
Articles 9-B and 9-C remain applicable except when they are in conflict with the
provisions of Article 32. Federal taxable income is the starting point in computing
entire net income and therefore Federal regulations applicable to such computation
will be followed."
Section 1462(a) of Article 32 of the Tax Law states, in part:
"Every taxpayer . .
shall annually on or before the fifteenth day of the third month
following the close of each of its taxable years transmit to the tax commission a
return . . . and every taxpayer which ceases to exercise its franchise or to be subject
to the tax imposed by this article shall transmit to the tax commission a return on the
date of such cessation or at such other time as the tax commission may require
covering each year or period for which no return was theretofore filed."
Pursuant to section 1453 of Article 32 of the Tax Law, entire net income is computed by
starting with federal taxable income and making the modifications required by such section. Since
there is no modification for a reorganization under section 368(a)(1)(F) of the IRC, such
reorganization would, for purposes of section 1453 of Article 32 of the Tax Law, be treated the same
as it was treated for federal income tax purposes. For purposes of Article 32 of the Tax Law, a
taxpayer's taxable year does not change when converting from a mutual institution to a stock-form
institution if such taxpayer does not cease to exercise its franchise or cease to be subject to tax under
Article 32 of the Tax Law.

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TSB-A-85 (9)C
Corporation Tax
June 18, 1985
Accordingly, if Petitioner's change in form from a New York State chartered mutual savings
bank to a New York State chartered stock savings bank is a tax-free reorganization under section
368(a)(1)(F) of the IRC, such reorganization would be a tax-free reorganization for New York State
franchise tax purposes under Article 32 of the Tax Law. Also, pursuant to section 86.4(c) of the
General Regulations of the Banking Board of the New York State Banking Department, Petitioner
would not cease to exercise its franchise and the taxable year of Petitioner would not end on the
effective date of the conversion and, accordingly, the part of the taxable year of Petitioner before the
conversion would be included in the taxable year of the converted bank following the conversion.

DATED: June 11, 1985

FRANK J. PUCCIA
Director
Technical Services Bureau

NOTE: The opinions expressed in Advisory Opinions
are limited to the facts set forth herein.