When a mutual savings bank converts first from a federal to a state charter and then from mutual to stock form -- both treated as tax-free federal reorganizations -- how does that affect its New York Article 32 bank franchise tax filings?

Plain-English summary

Goldome FSB, a federally chartered mutual savings bank, planned a two-step conversion: first from a federal to a New York State charter (still as a mutual institution), and then from mutual to stock form. For federal tax purposes, the bank had already lined up a lengthy list of confirmations that the whole sequence would qualify as a tax-free "F-reorganization" under IRC § 368(a)(1)(F) -- no gain or loss to the bank or its account holders, carryover basis and holding periods, no interruption of its taxable year, and continuity of bad debt reserves -- and asked the Department to confirm the New York Article 32 (bank franchise tax) consequences follow the same federal treatment.

The Department agreed the reorganization is tax-free under Article 32 as well: nothing in the statute's list of modifications to federal taxable income singles out an F-reorganization for different treatment, so New York simply follows the federal answer. But the Department flagged an important filing wrinkle tied to WHICH conversion is happening. Converting from a federal charter to a New York State charter is a change in which sovereign issued the bank's charter -- so for the period the bank still holds only its federal charter, it is taxed under Article 32 by virtue of that federal charter, and it ceases to be subject to tax under that basis exactly when the state charter takes effect, triggering a required return for that short period; a second short-period return then covers the remainder of the year under its new state charter. That's true even though the bank files only ONE return with the IRS for the full year -- Article 32's return requirements aren't tied to the federal return period when a taxpayer's basis for New York tax liability actually changes mid-year. By contrast, the Department noted that the LATER step -- converting from a state-chartered MUTUAL bank to a state-chartered STOCK bank -- doesn't trigger this same split-return requirement, because New York Banking Board regulations treat that conversion as an unbroken continuation of the same corporate existence and franchise, with no cessation of the bank's New York taxable status at any point.

What this means for you

Banks undergoing charter conversions or reorganizations

A transaction that's tax-free at the federal level under an IRC § 368 reorganization provision is generally tax-free for New York Article 32 purposes too, since Article 32's entire net income modifications don't carve out special treatment for reorganizations. But don't assume your federal filing calendar controls your New York filing calendar -- changing WHICH charter (federal vs. state) a bank operates under can require splitting a single federal tax year into two New York short-period returns, even when no gain or loss is recognized.

Distinguishing a charter-sovereign change from a mutual-to-stock form change

These are different events for New York filing purposes: a federal-to-state (or state-to-federal) charter change ends and restarts the bank's basis for New York taxation, requiring two short-period returns; a mutual-to-stock conversion within the SAME state charter is treated by Banking Board regulation as a seamless continuation, requiring no split return.

Common questions

Q: Does the tax-free federal reorganization treatment automatically carry over to New York?
A: Yes for entire net income computation -- Article 32 has no modification provision that would change the federal answer for an F-reorganization.

Q: Why would two New York returns be needed if only one federal return is filed?
A: Because Article 32 requires a return whenever a taxpayer ceases to be subject to tax under a particular basis (here, its federal charter) -- a rule tied to New York taxable status, not to the federal tax year.

Q: Can another bank rely on this specific ruling for its own conversion?
A: No. It binds the Department only for this petitioner's specific facts and can't be relied upon by other institutions, even ones undergoing a similar charter conversion sequence.

Citations and references

Statutes and regulations:

• Tax Law § 1455(a) (Article 32 basic tax); § 1453(a)-(k), (m) (entire net income and short-period computation)
• Tax Law § 1462(a) (return requirement on cessation of tax status); § 1462(c) (extensions)
• IRC § 368(a)(1)(F) and related reorganization provisions (§§ 1032(a), 362(b), 1223(2), 354(a), 305(a), 358(a)(1), 381, 593, 593(e))
• General Regulations of the Banking Board of the NYS Banking Department § 86.4(c)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1987.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a87_21c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-87 (21) C
Corporation Tax
August 28, 1987

STATE OF NEW YORK
STATE TAX COMMISSION
ADVISORY OPINION

PETITION NO. C870608A

On June 8, 1987, a Petition for Advisory Opinion was received from Goldome FSB, One
Fountain Plaza, Buffalo, New York 14203.
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 federal 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 1986 (hereinafter IRC), and no gain or loss will be recognized to
   Petitioner as a result of such conversion (Rev. Rul. 80-105, 1980-1C.B. 78). Petitioner and the
   converted bank will be a "party to a reorganization" within the meaning of section 368(b) of the IRC.
2. No gain or loss will be recognized to the converted bank on the receipt of money in
   exchange for the conversion stock (section 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 the assets were held by the bank prior to the conversion (section
   1223(2) of the IRC).
5. No gain or loss will be recognized by the eligible account holders, or other members upon
   the issuance to them of deposit accounts in the converted bank in the same dollar amount as their
   deposit accounts in Petitioner plus interests in the liquidation account of the converted bank in
   exchange for their deposit accounts in the bank (section 354(a) of the IRC).
6. No gain or loss will be recognized by the eligible account holders, or other members upon
   the distribution to them of the nontransferable subscription rights to purchase shares of stock in the
   converted bank (section 305(a) of the IRC).
7. The basis of the deposit accounts in the converted bank received by the account holders
   of Petitioner will be the same as the basis of their deposit accounts in Petitioner surrendered in
   exchange therefor (section 358(a)(1) of the IRC). The basis of the interests in the liquidation account
   of the converted bank received by the eligible account holders will be zero. The basis of the
   nontransferable subscription rights will be zero (sections 1.307-1 and 1.307-2 of the Treasury
   Regulations). The basis for the common stock of the converted bank to its shareholders will be the
   purchase price thereof (section 1012 of the IRC). The shareholder's holding period will commence
   upon the exercise of the subscription (section 1223(6) of the IRC).

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

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

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8. No taxable income will be realized by the eligible account holders, or other members as
   a result of the exercise of the nontransferable subscription rights (Rev. Rul. 56-572, 1956-2 C.B.
   182).
9. For purposes of section 381 of the IRC, the converted bank will be treated as if there had
   been no reorganization. Accordingly, the taxable year of Petitioner will not end on the effective date
   of the conversion, and the tax attributes of Petitioner will be taken into account by the converted
   bank as if there had been no reorganization (section 1.381(b)-(1)(a)(2) of the Treasury Regulations).
   The part of the taxable year of Petitioner before the conversion will be included in the taxable year
   of the converted bank after the conversion (Rev. Rul. 57-276, 1957-1C.B. 126).
10. 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,
    immediately after the reorganization the dollar amounts of those accounts of Petitioner which
    represent bad debt reserves in respect of which Petitioner has taken a bad debt deduction for taxable
    years ending on or before the date of the transfer. The bad debt reserves will not be required to be
    restored to gross income of Petitioner for the taxable year of the transfer, 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 distribution or transfer had occurred.
11. Regardless of book entries made for the creation of the liquidation account, the
    conversion will not diminish the accumulated earnings and profits of the converted bank available
    for the subsequent distribution of dividends within the meaning of section 316 of the IRC (section
    1.312-11(b) and (c) of the Treasury Regulations). The creation of the liquidation account on the
    records of the converted bank will have no effect on its taxable income, deductions for addition to
    reserves for bad debts under section 593 of the IRC, or distributions to shareholders under section
    593(e) of the IRC. (Rev. Rul. 68-475, 1968-2 C.B. 259).
    Petitioner is a federally chartered savings bank organized in mutual form. Petitioner
    contemplates converting from a mutual to a stock form of organization subsequent to conversion
    from a federal to a New York State chartered mutual savings bank. The Board of Directors will
    continue the policies and business operations of Petitioner under the New York State stock charter
    on the same basis as before the conversion. All pending actions and other judicial proceedings to
    which Petitioner is a party will not abate or be discontinued by reason of the conversion but will
    continue in the same manner as if the conversion had not taken place. Each account holder will have
    a deposit account in the converted bank in the same dollar amount and upon the same terms and
    conditions (other than voting and liquidation rights) as prior to the conversion. For federal income
    tax purposes, Petitioner will continue to file all tax returns under existing identification numbers and
    upon the same reporting dates or reporting periods as is required of Petitioner prior to the conversion.
    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,

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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 the Tax Law provides that the basic tax is 9 percent of the taxpayer's
entire net income, or portion thereof allocated to New York State, for the taxable year or part thereof.
Entire net income is defined in section 1453(a) of the Tax Law as "total net income from all
sources which shall be the same as the entire taxable income (but not alternative minimum taxable
income) (1) which the taxpayer is required to report to the United States treasury department, ...
subject to the modifications and adjustments hereinafter provided."
Section 1453(b) through (k) of the Tax Law and sections 18-2.3, 18-2.4 and 18-2.5 of the
Franchise Tax on Banking Corporations Regulations, promulgated thereunder, provide for the
modifications and adjustments required by section 1453(a). However, there is no modification or
adjustment for a transaction treated as a reorganization pursuant to section 368(a)(1)(F) of the IRC.
Therefore, for New York State franchise tax purposes, such reorganization would be treated the same
as it is treated for federal income tax purposes.
Section 1462(a) 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 thereto-fore filed."
Section 1462(c) of Article 32 states, in part;
"The tax commission may grant a reasonable extension of time for filing returns
wherever good cause exists ....
Section 1453(m) states:
"If the period covered by a return under this article is other than the period covered
by the return to the United States treasury department, entire net income and
alternative entire net income shall be determined by multiplying the taxable income

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reported to such department (as adjusted pursuant to the provisions of this article) by the
number of calendar months or major parts thereof covered by the return under this article and
dividing by the number of calendar months or major parts thereof covered by the return to
such department. If it shall appear that such method of determining entire net income or
alternative entire net income does not properly reflect the taxpayer's income during the period
covered by the return under this article, the tax commission shall be authorized in its
discretion to determine such entire net income or alternative entire net income solely on the
basis of the taxpayer's income during the period covered by its return under this article."
Pursuant to section 1453 of Article 32, Petitioner's entire net income is computed by starting
with federal taxable income and making the modifications and adjustments required by such section.
Since there is no modification or adjustment for a reorganization under section 368(a)(1)(F) of the
IRC, such reorganization would, for purposes of section 1453 of Article 32, be treated the same as
it was treated for federal income tax purposes. However, pursuant to section 1462(a) of Article 32,
a taxpayer which ceases to be subject to tax is required to file a return on the date of cessation unless,
pursuant to section 1462(c), the taxpayer is granted an extension of time for filing such return. If the
date a taxpayer ceases to be subject to tax is not the last day of its taxable year for federal income
tax purposes, the taxpayer is required to file two short period returns for purposes of Article 32, even
though only one return is required for federal income tax purposes.
Accordingly, if Petitioner's change in form from a federally 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. Except that, for the federal taxable year Petitioner changes
from a federally chartered mutual savings bank to a New York State chartered mutual savings bank,
Petitioner will cease to be subject to tax, pursuant to Article 32, under its federal charter and will be
subject to tax under Article 32 when it begins to exercise its New York State franchise because of
its New York State charter. Therefore, two short period returns are required for New York State
franchise tax purposes even though only one return is required for federal income tax purposes. A
short period return is required for the period from the beginning of its federal taxable year up to the
day Petitioner ceases to be subject to tax under its federal charter and a short period return is required
for the period from the day Petitioner begins to exercise its New York State franchise to the end of
its federal taxable year.

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It should be noted that 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 New
York State franchise and the taxable year of Petitioner would not end on the effective date of the
conversion from a New York State mutual savings bank to a New York State stock-form savings
bank and, accordingly, the part of the taxable year of Petitioner before such conversion would be
included in the taxable year of the converted bank following such conversion.

DATED: August 28, 1987

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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