Cayuga Savings Bank asked whether reorganizing into a bank holding-company structure - becoming a wholly-owned subsidiary of a new holding company in a transaction the IRS ruled is a tax-free section 351 exchange - is likewise not a taxable transaction for New York purposes under Article 22 (personal income tax on shareholders) and Article 32 (bank franchise tax).

Plain-English summary

Cayuga Savings Bank ("Bank"), a New York-chartered stock savings bank that had converted from mutual form in 1986, wanted to reorganize into a bank holding-company structure. Under the plan, Bank organized Iroquois Bancorp, Inc. ("Holding") as a new New York holding company, and a "New Bank" was formed as Holding's wholly-owned subsidiary purely to effectuate the transaction. New Bank would then merge into Bank, with Bank surviving, and every outstanding share of Bank common stock, preferred stock, and stock options would be converted into an equivalent share or option of Holding, carrying identical rights and terms. When the deal closed, Holding would own all of Bank's stock, and Bank's own shareholders would instead hold stock in Holding.

The IRS had already ruled on the federal income tax consequences, treating the transaction as a classic section 351 exchange: Bank's shareholders were deemed to transfer their Bank stock to Holding solely in exchange for Holding stock, immediately controlling Holding afterward. Under that federal ruling, no gain or loss was recognized to Bank's shareholders or to Holding, basis and holding periods carried over, the affiliated group continued in existence with Holding as the new parent, and no section 382 ownership change was triggered.

The Department addressed two separate New York taxes. First, for the Article 32 bank franchise tax, section 1453(a) of the Tax Law defines a banking corporation's entire net income as the same amount it reports to the IRS as federal taxable income, subject to a specific list of New York modifications in sections 1453(b) through (k) and the companion regulations. None of those modifications addresses a section 351 tax-free exchange, so the transaction is treated the same way for Article 32 purposes as it is federally - tax-free to both Bank and Holding. Second, for Article 22 personal income tax, section 612(a) defines a resident's New York adjusted gross income as federal adjusted gross income with New York modifications, and section 612 likewise contains no modification affecting shareholders of corporations that are parties to a federal section 351 exchange. So if the shareholders realize no federal taxable income from the exchange, they realize none for New York personal income tax purposes either - and that same treatment extends to any shareholders who instead perfect dissenters' rights under Banking Law section 6022.

What this means for you

Bank and thrift holding companies considering a reorganization

If your institution is restructuring into (or under) a holding company in a transaction that qualifies for tax-free treatment under IRC section 351, this opinion confirms New York won't impose a different result at the entity level. Article 32's list of required modifications to federal entire net income doesn't include anything aimed at section 351 exchanges, so the reorganization itself doesn't generate New York franchise tax exposure for either the bank or the new holding company, as long as the modification lists in section 1453(b)-(k) genuinely don't apply to your facts.

Bank shareholders exchanging stock in the reorganization

If your bank stock is being converted into holding-company stock as part of a tax-free section 351 exchange, you shouldn't expect a New York personal income tax bill from the exchange itself if the IRS has confirmed there's no federal gain or loss. This holds true even if you exercise dissenters' rights under Banking Law section 6022 instead of going along with the exchange - the Department applies the same federal-conformity result to that group of shareholders as well.

Accountants and tax professionals advising financial institutions

When evaluating a bank or thrift holding-company reorganization, check whether the underlying transaction has already been (or can be) blessed federally under section 351. This opinion, consistent with the Department's earlier ruling in Home & City Savings Bank, TSB-A-89(1)C, shows that New York conformity to federal section 351 tax-free treatment reaches both the Article 32 franchise tax base of the reorganizing institutions and the Article 22 personal income tax treatment of their shareholders - you don't need to separately analyze each tax under New York law once the federal analysis is settled, since neither statute's modification list carves out an exception for this kind of exchange.

Common questions

Q: Does this ruling cover the bank franchise tax, shareholder-level income tax, or both?
A: Both. The Department addressed Article 32 (the bank franchise tax imposed on Bank and, going forward, Holding) and Article 22 (personal income tax on Bank's individual shareholders) separately, because each tax has its own statutory starting point - entire net income under section 1453 for franchise tax, and federal adjusted gross income under section 612 for personal income tax. In each case, the Department reached the same conclusion: since neither statute's list of required modifications addresses a federal section 351 exchange, New York simply follows the federal tax-free result.

Q: Why does the modification list in section 1453 (and section 612) matter so much to the outcome?
A: Both Article 32 and Article 22 start from a federal number - entire net income tied to federal taxable income for the franchise tax, and New York adjusted gross income tied to federal adjusted gross income for personal income tax - and then apply a specific, enumerated list of New York adjustments. Because a section 351 tax-free exchange isn't among the adjustments listed in section 1453(b)-(k) or built into section 612's modifications, there's no mechanism for New York to impose tax where the federal treatment is tax-free. The absence of a listed modification is what drives the conformity result.

Q: What happens to shareholders who exercise dissenters' rights instead of accepting the exchange?
A: The Department held that dissenting shareholders who perfect their rights under Banking Law section 6022 receive the same New York personal income tax treatment as shareholders who go through with the exchange - meaning their outcome likewise tracks whatever the federal income tax treatment turns out to be for that dissenting group, per the same conformity principle applied in Home & City Savings Bank.

Q: Is this opinion useful precedent for other bank or thrift reorganizations?
A: It's an advisory opinion binding only as to Cayuga Savings Bank and Iroquois Bancorp on the facts described, but its reasoning is a straightforward application of the general conformity approach: where neither Article 22 nor Article 32's modification provisions single out a particular federal transaction for different treatment, New York follows the federal result. Institutions with materially similar section 351 reorganizations can expect the same analytical approach, though the Department would still need to confirm the specific facts.

Q: Does the opinion say anything about the earlier 1986 mutual-to-stock conversion?
A: Only indirectly, by cross-reference to the underlying IRS ruling, which confirmed that the proposed holding-company reorganization would not affect the federal income tax consequences of Bank's prior 1986 conversion from a mutual to a stock savings bank. The Department's New York analysis focuses solely on the holding-company reorganization itself.

Citations and references

• IRC § 351(a) - no gain or loss where property is transferred to a corporation solely for stock and the transferor(s) control the corporation immediately after
• Rev. Rul. 67-448, 1967-2 CB 144 - treats the merger of a newly formed subsidiary into the target as a deemed exchange of target stock for parent stock
• IRC §§ 1032(a), 358(a)(1), 1223(1)-(2) - no gain/loss to the acquiring corporation, carryover basis, and tacked holding periods in a section 351 exchange
• IRC § 382(g), 382(l)(3) - confirms no ownership change is triggered by the deemed exchange
• Treas. Reg. §§ 1.1502-31T, 1.1502-33T - basis and earnings-and-profits adjustments for the new common parent of the consolidated group
• Tax Law § 1451 - imposes the Article 32 franchise tax on banking corporations doing business in New York
• Tax Law § 1453(a)-(k) - defines entire net income as federal taxable income subject to enumerated New York modifications
• Tax Law § 1455(a) - sets the basic Article 32 franchise tax rate at 9% of entire net income allocated to New York
• Franchise Tax on Banking Corporations Regulations §§ 18-2.3 to 18-2.5 - implement the section 1453 modifications
• Home & City Savings Bank, Adv Op Comm T&F, Jan. 17, 1989, TSB-A-89(1)C - prior opinion applying the same conformity analysis to both Article 32 and Article 22
• Tax Law § 611(a) - defines New York taxable income of a resident individual
• Tax Law § 612(a) - defines New York adjusted gross income as federal AGI with New York modifications
• Banking Law § 6022 - governs dissenters' rights for shareholders opposing the reorganization

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/income_ao_1990.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/income/a90_5i.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-90 (5) I
Income Tax
February 21, 1990

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. I891205A

On December 5, 1989, a Petition for Advisory Opinion was received from Cayuga Savings
Bank, 107-115 Genesee Street, Auburn, New York 13021.
The issue raised by Petitioner, Cayuga Savings Bank, is whether the reorganization of Cayuga
Savings Bank, to form a holding company and become a wholly-owned subsidiary of such holding
company in a transaction treated by the Internal Revenue Service as a section 351 exchange, will
constitute a transaction which is not taxable for purposes of Articles 22 and 32 of the Tax Law.
Cayuga Savings Bank, (hereinafter "Bank") was originally chartered as a New York State
mutual savings bank. On January 22, 1986, pursuant to approval by the appropriate regulatory
authorities and its voting members, Bank was converted to a New York State chartered stock savings
bank. Under the plan of conversion and pursuant to the regulations of the New York State banking
board, a liquidation account was established for the benefit of the account holders. As of March 31,
1989, Bank's authorized capital stock consisted of 3,000,000 shares of common stock, of which
941,323 shares were issued and outstanding, and 3,000,000 shares of non-voting preferred stock, of
which 40,000 shares were issued and outstanding. Options for the purchase of 41,250 shares of
Bank common stock were held by 10 key employees pursuant to Bank's 1988 Stock Option Plan.
Bank has one subsidiary with which it files consolidated federal income tax returns.
Pursuant to a plan of reorganization (hereinafter "Plan") adopted by Bank's board of directors,
Bank organized Iroquois Bancorp, Inc., (hereinafter "Holding") on March 21, 1989 as a New York
State corporation and holding company with Bank as its sole shareholder. New Bank, a New York
State stock savings bank, is being organized as a wholly owned subsidiary of Holding for the purpose
of effectuating the transaction described below.
Pursuant to the Plan, New Bank will be merged with and into Bank pursuant to applicable
federal and New York State law, with Bank as the surviving corporation. Bank will acquire all of
the assets and assume all of the liabilities of New Bank. On the effective date of the transaction,
each share of Bank common and preferred stock will be converted into and deemed exchanged for
one share of Holding common and preferred stock, respectively. Each outstanding stock option held
by Bank shareholders will be converted into and deemed exchanged for one stock option in Holding.
Each share of Holding common and preferred stock will have the identical rights and terms as the
Bank common and preferred stock exchanged therefor.
As a result of the transaction, the shares of common stock of New Bank held by Holding will
be converted by operation of law into shares of Bank common stock. The shares of Holding
TP-9 (9/88)

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Income Tax
February 21, 1990
common stock held by Bank prior to the transaction will be cancelled, and Holding will own all of
the shares of the converted Bank stock. The liquidation account of Bank will remain outstanding
and will be unaffected by the transaction.
The Internal Revenue Service has ruled as follows:
(1)

For federal income tax purposes, the formation of New Bank and its merger
with and into Bank will be disregarded and the transaction will be viewed as
a transfer by the transferor shareholders of Bank of all their Bank common
and non-voting preferred stock in exchange for Holding common and non­
voting preferred stock (Rev Rul 67-448, 1967-2 CB 144).

(2)

No gain or loss will be recognized by Bank's shareholders upon the deemed
transfer of their Bank common and non-voting preferred stock to Holding in
exchange for Holding's common and non-voting preferred stock (section 351
(a) of the Internal Revenue Code (hereinafter "IRC")).

(3)

No gain or loss will be recognized by Holding upon its deemed receipt of
common and non-voting preferred stock of Bank in exchange for Holding
common and non-voting preferred stock (section 1032(a) of the IRC).

(4)

The basis of the Holding common and non-voting preferred stock to be
received by Bank's shareholders in the transaction will be the same as the
basis of the Bank common and non-voting preferred stock deemed exchanged
therefor (section 358(a)(1) of the IRC).

(5)

The affiliated group of which Bank was the common parent continues in
existence with Holding as the new common parent (Rev Rul 82-152, 1982-1
CB 205).

(6)

The basis of the Bank common stock in the hands of Holding will be equal
to the net inside basis of the property of Bank immediately after the
transaction, adjusted as necessary in accordance with section 1.1502­
3iT(a)(2) of the Treasury Regulations (section 1.1502-31T of the Treasury
Regulations).

(7)

The earnings and profits of Holding, as new common parent of the affiliated
group, will be adjusted to reflect the earnings and profits of Bank (sections
1.1502-31T and 1.1502-33T of the Treasury Regulations).

(8)

The holding period of the Holding common and non-voting preferred stock
to be received by Bank's shareholders will include the holding period of Bank
stock deemed exchanged therefor, provided that Bank shareholders held such
stock as a capital asset on the date of the transaction (section 1223(1) of the
IRC).

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Income Tax
February 21, 1990
(9)

The holding period of Bank common and non-voting preferred stock deemed
received by Holding in the transaction will include the period during which
such stock was held by the shareholders of Bank (section 1223(2) of the
IRC).

(10)

The proposed transaction will not affect the federal income tax consequences
of Bank's prior conversion from a mutual to stock savings bank.

(11)

The deemed exchange of Bank stock for Holding stock will not result in a
change of ownership within the meaning of section 382(g), and therefore
section 382 will not apply to Bank as a result of the transaction (section
382(1)(3)).

Section 351(a) of the IRC states: "[no] 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."
Section 1451 of Article 32 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 Bank 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 Bank and Holding under Article 32 of the
Tax Law. See Home & City Savings Bank, Adv Op Comm T & F, 3anuary 17, 1989, TSB-A­
89(1)C.

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Section 611(a) of Article 22 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."
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 Bank 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. If 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. See Home & City Savings Bank, supra.

DATED: February 21, 1990

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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