When a bank reorganizes into a savings-and-loan holding-company structure by having shareholders exchange their bank shares for holding-company shares — a transaction treated as tax-free under federal IRC section 351 — does the bank, the new holding company, or the shareholders owe New York corporate or personal income tax on the exchange?

Subject

Whether the formation of Home & City Bancorp, Inc. as a savings and loan holding company, and the exchange of all outstanding Home & City Savings Bank shares for Bancorp shares, is a transaction that is not taxable for purposes of Articles 22 and 32 of the Tax Law.

Plain-English summary

Home & City Savings Bank, a New York stock savings bank, wanted to reorganize into a holding-company structure to gain operational flexibility and room to expand into new banking services. The plan: form a new holding company ("Holding"), then have every Bank shareholder exchange their Bank shares for Holding shares on a one-for-one basis (with cash instead of any fractional shares), so that after the transaction shareholders would own 100% of Holding and Holding would own 100% of the Bank. Shareholders who chose to formally dissent under the Banking Law's dissenters'-rights procedure would instead receive cash for their shares. The Bank's existing shareholder-liquidation account (dating back to its earlier mutual-to-stock conversion) and all its savings accounts would carry through unaffected, and employee stock options would simply be swapped for equivalent Holding options. The Bank simultaneously sought a federal private letter ruling confirming the exchange would be tax-free under IRC § 351(a) — no gain or loss to the shareholders exchanging Bank stock solely for Holding stock, no gain or loss to Holding on receiving the Bank stock, and pass-through basis and holding-period treatment for both sides.

The Department confirmed tax-free treatment tracks straight through to New York. For Article 32 (the bank franchise tax), because "entire net income" starts from federal taxable income and there's no New York modification carving out an IRC § 351 exchange, the exchange is tax-free for both the Bank and Holding — no entire net income is recognized by either. For Article 22 (personal income tax), because New York adjusted gross income is based on federal adjusted gross income with no modification affecting parties to a § 351 exchange, shareholders who receive solely Holding stock for their Bank stock realize no New York taxable income, mirroring the federal result. Shareholders who exercise dissenters' rights under Banking Law § 6022 and receive cash instead are treated the same way for New York purposes as they are treated federally (as a redemption distribution under IRC § 302). The Department found no other Tax Law provision that would tax the Bank, Holding, or the shareholders as a result of this transaction.

What this means for you

Banks restructuring into a holding-company form

A share-for-share exchange that qualifies as tax-free under federal IRC § 351(a) generally carries through to New York tax-free treatment for both the banking corporation and its shareholders, because neither Article 32 nor Article 22 contains a modification that would recharacterize a federally tax-free § 351 exchange as a New York taxable event.

Shareholders considering dissenters' rights in a bank reorganization

If you dissent and receive cash instead of holding-company stock, expect New York to tax that cash payment the same way it's characterized federally (typically as a redemption distribution under IRC § 302, not as gain on a stock sale) — the state doesn't create a separate, different tax treatment for dissenting shareholders.

Accountants and tax professionals advising on bank/thrift holding-company formations

New York's general conformity to federal income-tax starting points (entire net income from federal taxable income under Article 32; New York adjusted gross income from federal AGI under Article 22) means that, absent a specific New York modification, a federally tax-free reorganization stays tax-free at the state level too — check for any relevant modification before assuming automatic conformity, but here none existed.

Common questions

Q: Does a bank holding-company formation trigger New York corporate tax if it's tax-free federally under IRC § 351?
A: No, provided there's no applicable New York modification recharacterizing the transaction — here, neither Article 32 nor Article 22 had one.

Q: What happens to shareholders who dissent and take cash instead of holding-company stock?
A: They're taxed for New York purposes the same way they're treated federally for the cash payment (as a redemption distribution under IRC § 302), not under some separate New York rule.

Q: Can another bank or thrift restructuring into a holding company rely on this ruling?
A: No. This advisory opinion binds the Department only for the taxpayer and facts presented, and cannot be relied on by anyone else.

Citations and references

Statutes and regulations:

• Tax Law § 1451 (Article 32 franchise tax on banking corporations)
• Tax Law § 1453(a) (entire net income starts from federal taxable income; no § 351 modification)
• Tax Law § 611(a), § 612(a) (Article 22 New York taxable/adjusted gross income tied to federal figures; no § 351 modification)
• 26 U.S.C. § 351(a) (federal tax-free exchange for stock in exchange for control)
• Banking Law § 6022 (bank shareholder dissenters' rights)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1989.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a89_1c_1i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-89 (1) C
Corporation Tax
TSB-89 (1) I
Income Tax
January 17, 1989

Taxpayer Services Division
Technical Services Bureau

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. Z881014B

On October 14, 1988, a Petition for Advisory Opinion was received from Home
& City Savings Bank, 100 State Street, Albany, New York 12207.
The issue raised is whether the formation of Home & City Bancorp, Inc.,
(hereinafter "Holding") as a savings and loan holding company and the exchange
of all of the outstanding shares in Petitioner by its shareholders for shares in
Holding will constitute a transaction which is not taxable for purposes of
Articles 22 and 32 of the Tax Law.
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 Holding or Petitioner as a result
   of the transaction.
2. For purposes of Article 22, will income be taxed to the shareholders
   of Petitioner under section 611 and section 612 of Tax Law, other than 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 Holding, Petitioner or the shareholders of Petitioner.
   Petitioner is a stock savings bank organized under New York State law and
   has its principal office at 100 State Street, Albany, New York 12207. On February
   13, 1986, Petitioner converted from a New York State chartered mutual savings
   bank to a New York State chartered stock savings bank. Pursuant to the
   conversion, Petitioner maintains a liquidation account to recognize the
   proprietary interest of Petitioner's account holders at the time of the
   conversion.
   Petitioner has 2,875,000 shares of $1.00 par value common stock outstanding
   as of June 30, 1988. Petitioner also has certain stock options outstanding which
   are held by employees pursuant to an Incentive Stock Option Plan qualifying under
   section 422A of the Internal Revenue Code (hereinafter "IRC").
   Holding is a corporation to be organized under New York State law and
   section 408(a)(1)(B) of the National Housing Act, as a savings and loan holding
   company and will have its principal office at 100 State Street, Albany, New York
4. Holding shall be organized by Petitioner to engage in business as a
   savings and loan holding company after acquiring 100 percent of the stock of
   Petitioner in the transaction described below. Holding will be authorized to
   issue approximately 25,000,000 shares of $.10 par value common stock, of which
   100 shares shall be issued to Petitioner as organizational shares. An additional
   TP-9 (9/88)

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10,000,000 shares of preferred stock will be authorized, none of which will be
immediately issued and outstanding.
The Board of Directors of Petitioner believes that a savings and loan
holding company structure will allow the bank to broaden its range of banking
services and will provide Petitioner with greater operational flexibility and
opportunity for expansion and diversification. Accordingly, pursuant to a plan
of reorganization to be adopted, and subject to the approval of the parties at
interest and the appropriate state and federal regulatory agencies, the following
transaction is proposed:
(1)

Petitioner will transfer to Holding $8,000,000 for working capital
and expansion activities of Holding.

(2)

On the effective date of the transaction, each share of Petitioner
common stock held by the stockholders of Petitioner (hereinafter
"shareholders") will be transferred to Holding in exchange for one
share of Holding common stock, except to the extent dissenters'
rights apply under applicable federal and New York State law. No
fractional shares of Holding common stockwill be issued in the
transaction.
Instead, cash will be paid byHolding in lieu of
issuing fractional shares of Holding common stock.No other property
or assets will be transferred by the share holders to Holding.

(3)

Each shareholder will have the right, pursuant to New York State law
todissent from the proposed transaction.
However, under the
proposed plan of reorganization, Petitioner may, in its discretion
and subject to regulatory review, terminate the proposed
reorganization if the shareholders of 10 percent or more of the
issued and outstanding shares of Petitioner common stock exercise
their right to dissent from the transaction. Each dissenting
shareholder will be entitled to receive from Petitioner the fair
market value of his or her shares established under New York State
law.

(4)

The liquidation account of Petitioner will remain outstanding and
willnot be affected by the transaction.

(5)

The stock options held by employees of Petitioner under Petitioner's
Incentive Stock Option Plan shall be exchanged for identical options
for purchasing Holding common stock.

(6)

As a result of the transaction, the organizational shares of Holding
common stock held by Petitioner prior to the transaction will be
cancelled.

(7)

After the transaction, Petitioner will continue the same business it
operated prior to the transaction, and will continue to operate
under its present name and under the same New York State charter.
All savings accounts of Petitioner outstanding immediately prior to

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Income Tax
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the transaction will remain as savings accounts of Petitioner
immediately after the transaction.
(8)

None of the shares of stock in Petitioner to be transferred by the
$ha-reholders to Holding were received by the shareholders as part
of a plan of liquidation of another corporation.

(9)

After the transaction the shareholders shall own 100 percent of the
outstanding common stock of Holding and Holding will own 100 percent
of the outstanding stock of Petitioner.

Contemporaneously with the submission of this Petition, Petitioner has
submitted to the Internal Revenue Service an application for a private letter
ruling to the effect that:
(1) The transaction will constitute an exchange within the meaning of
section 351 of the IRC, and no gain or loss will be recognized by the
shareholders upon the transfer of their Petitioner common stock to Holding solely
in exchange for all of the Holding common stock, pursuant to section 351(a) of
the IRC.
(2) No gain or loss will be recognized by Holding upon the receipt of
Petitioner common stock solely in exchange for Holding common stock, pursuant to
section 1032(a) of the IRC.
(3) The basis to the shareholders of the Holding common stock to be
received in the transaction will, in each incident, be the same as the basis of
Petitioner common stock surrendered and exchanged therefore, pursuant to section
358(a)(1) of the IRC.
(4) The basis to Holding of Petitioner stock to bereceived in the
transaction will be the same as the basis of such stock in the hands of the
exchanging shareholders, pursuant to section 362(a) of the IRC.
(5) The holding period of the Holding stock to be received by the
shareholders will include the holding period of Petitioner stock exchanged
therefore, provided that Petitioner's stock is held as a capital asset on the
date of the exchange, pursuant to section 1223(1) of the IRC.
(6) The holding period of Petitioner's stock to be received by Holding in
the transaction will include the period during which such stock was held by the
shareholders, pursuant to section 1223(2) of the IRC.
(7) Dissenting shareholders who receive solely cash in exchange for their
shares of Petitioner stock will be treated as having received such payments as
distributions in redemption of their Petitioner stock subject to the provisions
and limitations of section 302 of the IRC.
(8) The proposed transaction will have no effect on Petitioner's prior

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conversion from a mutual to a stock savings bank.
(9) For the purposes of filing a consolidated return, Petitioner will be
considered a 100 percent owned subsidiary of Holding and any other owned
subsidiary of Holding will be deemed to be a member of the affiliated group of
which Holding is common parent, pursuant to section 1504(a) of the IRC. The
affiliated group of which Petitioner was the common parent corporation prior to
the proposed transaction will continue in existence with Holding as the new
common parent, pursuant section 1.1502-75(d)(2)(ii) of the Income Tax
Regulations.
Section 351(a) of the IRC states: "[n]o gain or loss shall be recognized
if property is transferred to a corporation by one or more persons solely in
exchange for stock or securities in such corporation and immediately after the
exchange such person or persons are in control (as defined in section 368(c)) of
the corporation."
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."
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 applicable to a
transaction where, for federal income tax purposes, the transaction constitutes
a tax-free exchange within the meaning of section 351 of the IRC. Therefore, for
purposes of section 1453 of the Tax Law, such transaction would be treated the
same as it is treated for federal income tax purposes.
Accordingly, since the transaction by which all of the outstanding shares
in Petitioner are exchanged by shareholders for shares in Holding, is a tax-free
transaction under section 351(a) of the IRC, such exchange is a tax-free
transaction for both Petitioner and Holding under Article 32 of the Tax Law.

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Question 2
Section 611(a) of the Tax Law provides: "It]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."
Section 612 of the Tax Law does not contain any modification that affects
the shareholders of the corporations that are each a party to a transaction, that
for federal purposes constitutes a tax-free transaction pursuant to section
351(a) of the IRC.
Accordingly, if for federal income tax purposes, no taxable income will be
realized by the shareholders as a result of an exchange of Petitioner stock for
Holding stock that is treated as a tax-free transaction pursuant to section
351(a) of the IRC, no taxable income will be realized by the shareholders for New
York State personal income tax purposes.
Where shareholders perfect their
dissenters' rights under section 6022 of the Banking Law, such transaction, for
New York State personal income tax purposes, will be accorded the same treatment
as the transaction receives for federal income tax purposes.
Question 3
There is no other provision of the Tax Law where income would be taxed to
Petitioner, Holding or the shareholders as a result of the tax-free transaction
as described herein.

DATED: January 17, 1989

FRANK J. PUCCIA
Director
Technical Services

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