When one savings bank buys another for cash through a merge-then-liquidate structure (a reverse triangular cash merger followed by upstream liquidation), do the banks or their shareholders owe New York corporate or personal income tax on the deal?

Plain-English summary

North Side Savings Bank wanted to acquire Richmond Hill Savings Bank ("Target") entirely for cash: $23.75 per share plus cash for outstanding stock options. To get there, North Side formed a temporary subsidiary ("Sub"), merged Sub into Target (with Target surviving and its shareholders cashed out except dissenters, who get statutory appraisal rights), and then, the same day, merged Target into North Side in a complete liquidation. North Side asked whether any of the several corporate entities or Richmond Hill's shareholders would owe New York tax as a result.

The Department said essentially none, beyond whatever federal tax already applies. Federally, the Sub-into-Target merger is disregarded and treated as North Side simply buying Target's stock for cash -- a "qualified stock purchase" under IRC § 338(d)(3) -- and the follow-on Target-into-North-Side merger is a tax-free liquidation of a subsidiary under IRC § 332. Neither Article 32 (the bank franchise tax, whose "entire net income" starts from federal taxable income) nor Article 22 (personal income tax, similarly tied to federal adjusted gross income) has any New York-specific modification for either of those federal categories. So the transaction is tax-neutral for North Side and Target under Article 32, and Richmond Hill's shareholders recognize the same capital gain or loss for New York purposes as they do federally when they receive their cash -- no extra New York layer either way.

What this means for you

Banks structuring cash acquisitions of other banks

A reverse-triangular-merger-then-liquidation cash buyout, common in bank M&A, doesn't create a separate New York tax cost on top of the federal tax consequences, as long as the transaction genuinely qualifies as a federal § 338(d)(3) stock purchase followed by a § 332 liquidation. New York simply rides on the federal characterization rather than imposing its own rules for this structure.

Accountants and tax professionals

Contrast this ruling with the same-batch TSB-A-88(14)C/(7)I (BSB Bancorp/Binghamton Savings Bank), where the transaction was structured as a genuine tax-free reorganization under IRC § 368(a)(1)(A) to create a bank holding company, rather than a cash purchase-and-liquidation under §§ 338/332. Both reach "no separate New York tax," but through different federal characterizations — worth confirming which structure your deal actually follows before assuming the same result.

Common questions

Q: Do Richmond Hill's shareholders owe New York tax on the cash they receive?
A: They recognize gain or loss for New York personal income tax purposes exactly as they do federally under IRC § 1001 — no additional New York-specific adjustment applies.

Q: Does forming the temporary merger subsidiary create any separate tax issue?
A: No — the subsidiary's brief existence and merger are disregarded for federal purposes (treated as a direct stock purchase), and New York follows that same treatment.

Q: Can another bank rely on this ruling for a similar cash-merger acquisition?
A: No. It binds the Department only for North Side Savings Bank on these specific facts and cannot be relied upon by other taxpayers structuring similar deals.

Citations and references

Statutes:

• Tax Law § 1451, § 1453(a) (Article 32 banking franchise tax; entire net income)
• Tax Law § 611(a), § 612(a) (Article 22 personal income tax)
• New York State Banking Law § 601, § 6022 (merger; dissenters' rights)
• IRC § 338(d)(3) (qualified stock purchase); IRC § 332 (tax-free subsidiary liquidation)
• 12 U.S.C. § 1828(c) (federal bank merger approval)
• Revenue Ruling 73-427, 1973-2 C.B. 301

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1988.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a88_15c_8i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-88 (15) C
Corporation Tax
TSB-A-88 (8) I
Income Tax
July 12, 1988

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. Z880323B

On March 23, 1988, a Petition for Advisory Opinion was received from North
Side Savings Bank, 185 West 231st Street, Bronx, New York 10463.
The issue raised is whether the liquidation of Richmond Hill Savings Bank
(hereinafter "Target") into Petitioner will constitute a tax-free transaction for
purposes of Articles 22 and 32 of the Tax Law. To facilitate such transaction,
Petitioner will incorporate North Side Interim Savings Bank (hereinafter "Sub")
as a wholly-owned subsidiary.
Specifically, the questions are:
1.

For purposes of Article 32, will "entire net income", as defined in section
1453 of the Tax Law, be recognized to Petitioner, Sub or Target as a result
of the proposed transaction.

2.

For purposes of Article 22, will income be taxed to the shareholders of
Petitioner under section 611 and section 612 of the Tax Law, other than to
those who perfect their dissenters' rights under section 6022 of the New
York State Banking Law.

3.

For purposes of any other provision of the Tax Law, will income be taxed
to petitioner, Sub, Target or the shareholders of Petitioner.

Petitioner is a New York chartered stock savings bank. Effective April 15,
1986, Petitioner converted from a New York chartered mutual savings bank to a New
York chartered stock savings bank in a transaction which qualified as a
reorganization pursuant to section 368(a)(1)(F) of the Internal Revenue Code
(hereinafter "IRC"). At that time, Petitioner established a liquidation account
in an amount equal to the net worth of Petitioner prior to conversion for the
benefit of its eligible account holders.
The liquidation account has been
maintained for those eligible account holders who have kept their savings
accounts at Petitioner.
Petitioner is primarily engaged in attracting savings deposits from the
general public and originating and investing in loans secured by first mortgage
liens on residential dwellings and income-producing commercial real estate. As
of December 31, 1987, Petitioner had outstanding 3,680,000 shares of common stock
which is publicly held.
Sub will be incorporated under the laws of New York State. Sub will be
created solely for the purpose of facilitating the consummation of the proposed
acquisition of Target by Petitioner. The only activity to be conducted by Sub
will be to enter into the Plan of Merger and to merge with and into Target.
Except for activities related to the merger, Sub will not engage in any
operations.
TP-8 (3/83)

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TSB-A-88 (15) C
Corporation Tax
TSB-A-88 (8) I
Income Tax
July 12, 1988

Sub will have an authorized capital structure of up to 1000 shares of
common stock, $1.00 par value, all of which will, prior to the proposed
transaction, be issued and outstanding and owned by Petitioner.
Target is a New York chartered stock savings bank. Effective July 21, 1986,
Target converted from a New York chartered mutual savings bank to a New York
chartered stock savings bank in a transaction which qualified as a reorganization
pursuant to Section 368(a)(1)(F) of the IRC. At that time, Target established a
liquidation account in an amount equal to the net worth of Target prior to
conversion for the benefit of its eligible account holders. The liquidation
account has been maintained for those eligible account holders who have kept
their savings accounts at Target.
The business of Target consists primarily of attracting savings deposits
from the general public and originating and investing in loans secured by first
mortgage liens on residential dwellings and income-producing commercial real
estate.
As of December 31, 1987, Target had outstanding 6,612,500 shares of common
stock and stock options representing 228,000 shares of common stock which were
granted pursuant to a 1986 stock option plan. Target's common stock is publicly
traded.
In order to expand the geographical area in which the business activities
of Petitioner are conducted and to otherwise complement Petitioner's business,
the following plan is proposed:
(1)

Sub will be incorporated as a wholly-owned subsidiary of Petitioner
solely in order to facilitate the acquisition by Petitioner of
Target.

(2)

Petitioner was given on January 23, 1988, the right to acquire
726,500 shares of Target common stock pursuant to a stock option
agreement to be entered into between the two parties.

(3)

Sub will be merged with and into Target pursuant to section 601 of
the New York State Banking Law and 12 U.S.C. § 1828(c). Target will
be the surviving corporation. Except with respect to stockholders
who validly perfect their dissenters' rights under state law, each
share of Target will be converted into the right to receive $23.75
in cash from Petitioner. The holders of stock options representing
228,000 shares of stock will also receive cash in exchange for their
stock options. Petitioner's right to acquire 726,500 shares of
Target common stock will be canceled.

(4)

Subsequent to, but on the same day of, the merger of Sub into
Target, Petitioner will adopt a plan of complete liquidation of
Target. Target will be liquidated in a single liquidating
distribution which will take the form of a merger of Target into
Petitioner pursuant to section 601 of the New York State Banking
Law. Target's assets will be transferred to, and its liabilities
will be assumed by, Petitioner.

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TSB-A-88 (15) C
Corporation Tax
TSB-A-88 (8) I
Income Tax
July 12, 1988

For federal income tax purposes, the following has been held:
(1)

The formation of Sub and its merger with and into Target will be
disregarded for federal income tax purposes, and the transaction
will be treated as a purchase by Petitioner of the outstanding
shares of Target (Rev. Rul. 73-427, 1973-2 C.B. 301). The purchase
will be treated as a qualified stock purchase within the meaning of
section 338(d)(3) of the IRC (section 338(h)(3)(A) of the IRC); see
section 1.338-4T(d) (Question 3 and Answer 3.)

(2)

For federal income tax purposes, the merger of Target into Petitioner
pursuant to applicable law will be treated as a distribution by
Targeting complete liquidation within the meaning of section 332 of
the IRC (section 1.332-2(d) of the Income Tax Regulations).

(3)

Provided that the requirements of section 332(b) of the IRC are met,
no gain or loss will be recognized by Petitioner on its receipt of
the assets of Target distributed in complete liquidation of Target
(section 332(a) of the IRC).

(4)

No gain or loss will be recognized by Target on the distribution of
its assets to Petitioner in complete liquidation (section 337(a) of
the IRC).

(5)

The basis of the assets of Target in the hands of Petitioner will be
the same as the basis of those assets in the hands of Target
immediately preceding the respective liquidations (section 334(b)(1)
of the IRC).

(6)

The holding period of the assets received by Petitioner in complete
liquidation of Target will include the period during which such
property was held by Target (section 1223(2) of the IRC).

(7)

The basis in the hands of Petitioner of the Target stock acquired in
the proposed merger of Sub into Target will be equal to the amount
of cash paid by Petitioner to the Target shareholders for their
stock (section 1012of the IRC; section 1.1012 of the Income Tax
Regulations).

(8)

As provided in section 1001 of the IRC, gain or loss will be
realized and recognized to each Target shareholder upon receipt of
cash as a result of the merger of Sub into Target, measured by the
difference between the amount of cash received and the Target
shareholders adjusted basis (as determined under section 1011 of the
IRC) in the stock surrendered. Provided section 341 of the IRC
(relating to collapsible corporations) is not applicable and the
stock of Target surrendered for cash qualifies as a capital asset in
the shareholders' hands, the gain or loss will be capital gain or
loss, subject to the provisions and limitations of Subchapter P of
Chapter 1 of the IRC.

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TSB-A-88 (15) C
Corporation Tax
TSB-A-88 (8) I
Income Tax
July 12, 1988

(9)

As provided in section 381(c)(2) of the IRC and section 1.381(c)(2)­
1 of the regulations, Petitioner will succeed to and take into
account the earnings and profits, or deficit in earnings and
profits, of Target as of the date of transfer.
Any deficit in
earnings and profits of Target will be used only to offset earnings
and profits accumulated after the date of transfer.

(10)

Pursuant to section 381(a) of the IRC and section 1.381(a)-1 of the
regulations, Petitioner will succeed to and take into account the
items of Target described in section 381(c) of the IRC. These items
will be taken into account by Petitioner subject to the provisions
and limitations of sections 381, 382, and 383 of the IRC.

(11)

Since section 381 of the IRC is applicable to the transaction, the
provisions of section 593(e) of the IRC will not apply to the
distribution of the assets of Target to Petitioner.

(12)

Pursuant to sections 381(c)(16) and 591 of the IRC, in the event the
effective date of the proposed transaction precedes the date
interest is paid or credited to the savings accounts of depositors
of Target, such interest paid or credited by Petitioner with respect
to savings accounts of Target will be deductible by Petitioner when
it is paid or credited, provided such amounts are withdrawable,
subject only to customary notice of intent to withdraw, even though
such interest is attributable to periods preceding the merger.

(13)

Except as otherwise provided by section 384 of the IRC, provided
Target has a net unrealized built-in gain, any income of such
corporation for any recognition period taxable year (to the extent
attributable to recognized built-in gains) shall not be offset by
any pre-acquisition loss of any other member of the affiliated
group.

Question 1
Section 1451 of the Tax Law imposes, annually, a franchise tax on every
banking corporation for the privilege of exercising its franchise or doing
business in New York State in a corporate or organized capacity.
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).., which the taxpayer is required
to report to the United States treasury department,.., subject to the
modifications and adjustments hereinafter provided."

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TSB-A-88 (15) C
Corporation Tax
TSB-A-88 (8) I
Income Tax
July 12, 1988

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).
Herein, Sub's merger with and into Target is disregarded for federal income
tax purposes and is treated as a qualified stock purchase by Petitioner of the
outstanding shares of Target within section 338(d)(3) of the IRC. For purposes
of section 1453 no modification or adjustment is required for such transaction.
The transaction would be treated the same as it is treated for federal income tax
purposes.
In addition, there is no modification or adjustment required when a
transaction constitutes a tax-free liquidation for federal income tax purposes
pursuant to section 332 of the IRC. Therefore, for purposes of section 1453 the
tax-free liquidation of Target would be treated the same as it is treated for
federal income tax purposes.
Question 2
Section 611(a) of the Tax Law provides: "[t]he New York taxable income of
a resident individual shall be his New York adjusted gross income less his New
York deduction and New York exemptions, as determined under this part."
Section 612(a) of the Tax Law provides: "[t]he New York adjusted gross
income of a resident individual means his federal adjusted gross income as
defined in the laws of the United States for the taxable year, with the
modifications specified in this section."
Pursuant to section 612, no modification is required when a transaction is
treated for federal income tax purposes as a qualified stock purchase by a
corporation within section 338(d)(3) of the IRC. Therefore, such transaction
would have the same affect on shareholders of the corporations for New York
personal income purposes as it has for federal income tax purposes.
In addition, section 612 of the Tax Law does not contain any modification
that affects the shareholders of corporations where a transaction constitutes a
tax-free liquidation for federal income tax purposes pursuant to section 332 of
the IRC.
Accordingly, for personal income tax purposes under Article 22, resident
shareholders of Petitioner are not required to make any modifications pursuant
to section 612 of the Tax Law as a result of the transaction described herein.
Any capital gains or losses recognized for federal income tax purposes will be
treated the same for New York personal income tax purposes.

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TSB-A-88 (15) C
Corporation Tax
TSB-A-88 (8) I
Income Tax
July 12, 1988

Question 3
There is no other provision of the Tax Law where income would be taxed to
Petitioner, Sub, Target or the shareholders of Petitioner as a result of the tax­
free transaction as described herein.

DATED: July 12, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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