When a mutual savings bank converts to a stock-form savings bank in a transaction that's a tax-free federal reorganization, does the conversion end the bank's taxable year or otherwise trigger New York bank franchise tax consequences?

Plain-English summary

The Permanent Savings Bank, a New York State-chartered mutual savings bank in Niagara Falls, planned to convert to stock form: depositors would receive deposit accounts in the converted bank plus (for eligible account holders) interests in a liquidation account and subscription rights to buy stock units, while the bank's business, board, and operations continued unchanged. For federal tax purposes, the conversion qualifies as a tax-free "F" reorganization under IRC § 368(a)(1)(F) — a mere change in identity or form — with no gain or loss recognized to the bank or its depositors. The bank asked how this affects its New York Article 32 bank franchise tax treatment, including whether its taxable year would end on the conversion date.

The Department confirmed the tax-free federal treatment carries over directly to New York: § 1453's modifications to federal taxable income don't include any adjustment for an IRC § 368(a)(1)(F) reorganization, so the conversion is treated the same way for Article 32 purposes as it is federally. Under New York Banking Board regulations, the mutual institution's corporate existence, franchise, rights, debts, and obligations all continue uninterrupted in the converted stock-form institution — it doesn't cease to exist and restart. Because the bank never "ceases to exercise its franchise" within the meaning of § 1462(a), its taxable year does not end on the conversion date; instead, the pre-conversion and post-conversion periods are combined into one continuous taxable year for the converted bank.

What this means for you

Mutual savings banks and similar institutions considering a stock-form conversion

A properly structured mutual-to-stock conversion that qualifies as a tax-free federal reorganization creates no separate New York bank franchise tax event — no gain recognition, no forced year-end, no fresh filing obligations triggered purely by the change in form. The New York Banking Board's continuity-of-existence rule (§ 86.4(c)) is doing the work here: because the institution doesn't legally cease to exist, § 1462(a)'s "ceases to exercise its franchise" trigger for a final return never applies.

Accountants and tax professionals

The key mechanical point: § 1453(b)-(k)'s list of required modifications to federal taxable income has no entry for an IRC § 368(a)(1)(F) reorganization, so New York simply inherits whatever the federal characterization is. Combine that with the Banking Board's continuity rule, and the practical result is a single, unbroken taxable year spanning the conversion date — no need to file a short-period final return for the pre-conversion mutual entity.

Common questions

Q: Does the bank need to file a final return as of the conversion date?
A: No — because the bank continues to exercise its New York franchise without interruption, § 1462(a)'s "ceases to exercise its franchise" trigger for a final return doesn't apply; the taxable year continues through the converted bank.

Q: Do depositors/account holders owe New York tax on receiving new deposit accounts, liquidation account interests, or subscription rights?
A: The federal rulings summarized in the opinion find no gain or loss recognized to account holders on these steps, and New York's Article 32 analysis for the bank itself follows the same no-modification approach — though this opinion focuses on the bank's own franchise tax treatment rather than separately analyzing individual account holders under Article 22.

Q: Can another savings institution rely on this ruling for its own conversion?
A: No. This opinion binds the Department only for The Permanent Savings Bank's specific facts; other institutions should confirm their own conversion independently qualifies as a tax-free federal reorganization before assuming the same New York treatment.

Citations and references

Statutes and regulations:

• Tax Law § 1453(a) (entire net income); § 1455(a) (basic tax); § 1462(a) (return filing)
• IRC § 368(a)(1)(F) (reorganization)
• General Regulations of the Banking Board of the New York State Banking Department § 86.4(c)

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/corporation/a88_1c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-88 (1)C
Corporation Tax
January 21, 1988

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C871105A

On November 5, 1987, a Petition for Advisory Opinion was received from The Permanent
Savings Bank, 800 Main Street, Niagara Falls, New York 14302.
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 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 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 to the converted bank on the receipt of money in
   exchange for the units (comprised of one share of common stock and one warrant) (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 Petitioner prior to the conversion (section
   1223(2) of the IRC).
5. No gain or loss will be recognized by the deposit account holders upon the issuance to
   them of deposit accounts in the converted bank in the same dollar amount as their deposit accounts
   in Petitioner plus, in the case of eligible account holders, 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 upon the distribution to
   them of the nontransferable subscription rights to purchase units in the converted bank consisting
   of rights to acquire for a single specified price, one share of common stock and one stock purchase
   warrant (section 305(a) of the IRC and Rev. Rul. 56-572, 1956-2 C.B. 182).
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 units issued by converted bank to its shareholders will be the
   RODERICK G. W. CHU, COMMISSIONER
   TP-8 (3/83)

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

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Corporation Tax
January 21, 1988

purchase price thereof (section 1012 of the IRC). The holding period for the units acquired through
the exercise of subscription rights will commence upon the exercise of the subscription (section
1223(6) of the IRC).

8. The basis for the common stock and the warrants will be the portion of the purchase price
   of the units allocated to each according to the relative market values on the date the units are
   purchased. (Rev. Rul. 56-572, 1956-2 C.B. 182).
9. Assuming the nontransferable subscription rights to purchase units in the converted bank
   have no ascertainable market value, 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).
10. 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).
11. 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.
12. 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 state chartered savings bank organized in mutual form. Petitioner contemplates
    converting to a New York State chartered stock savings bank. The Board of Directors will continue
    the policies and business operations of Petitioner under the New York State stock charter on the

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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
(except as to 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,
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.
Ail 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) ... 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

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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."
Pursuant to section 1462(a) 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.
Herein, Petitioner's entire net income is computed by starting with federal taxable income
and making the modifications and adjustments required by section 1453 of the Tax Law. 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.
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. 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. Therefore, 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: January 21, 1988

s/FRANK J. PUCCIA
Director
Technical Services Bureau

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