If a mutual savings and loan converts to stock form and is simultaneously acquired by a new holding company in a transaction the IRS treats as tax-free, is the whole conversion and acquisition also tax-free for New York's Article 32 banking franchise tax?

Plain-English summary

The Homestead Savings (FA), a federally chartered mutual savings and loan association headquartered in Utica, has no authorized capital stock -- depositors instead hold liquidation and interest rights. Homestead plans to convert to stock form ("Stock Homestead") while simultaneously becoming a wholly owned subsidiary of Iroquois Bancorp, Inc., a New York savings-and-loan holding company. Under the plan, Bancorp will sell its own common stock to eligible depositors and the public, using the proceeds to purchase all of Stock Homestead's shares; depositors receive equivalent deposit accounts in Stock Homestead plus interests in a liquidation account preserving their priority. Homestead asked for the New York tax treatment of this conversion/acquisition.

The transaction is described as designed to be tax-free at both levels. Homestead simultaneously applied to the IRS for a private letter ruling that: the conversion qualifies as a reorganization under IRC section 368(a)(1)(F) (a mere change in identity/form) with no gain or loss recognized to Homestead or Stock Homestead; no gain or loss is recognized by Stock Homestead or Bancorp on the stock-for-cash exchanges under section 1032(a); asset basis, holding periods, and bad-debt reserves carry over unchanged; and the transaction doesn't interrupt Homestead's taxable year or diminish earnings and profits available for future dividends. Turning to New York: Article 32's franchise tax on banking corporations (section 1451) computes entire net income under section 1453 starting from federal taxable income, and none of the statute's modifications changes the treatment of a transaction that is tax-free federally under sections 368(a)(1)(F) and 1032(a). So, assuming the described federal tax-free treatment holds, the conversion and acquisition are likewise tax-free for New York Article 32 purposes.

What this means for you

Mutual savings institutions converting to stock form with a simultaneous holding-company acquisition

A conversion-plus-acquisition can be structured to be tax-free both federally and for New York Article 32 purposes, provided it genuinely qualifies as a federal section 368(a)(1)(F) reorganization (mere change of form) combined with a section 1032(a) stock-for-cash exchange -- New York doesn't impose an independent state-level test.

Savings and loan holding companies

As with the companion bank-reorganization rulings in this corpus (TSB-A-92(6)C, TSB-A-92(7)C), New York's Article 32 conformity to federal taxable income means a clean federal private letter ruling on the reorganization structure effectively resolves the state franchise-tax treatment too.

Accountants and tax professionals

Note the ruling's conditional phrasing ("if... is a tax-free reorganization... under sections 368(a)(1)(F) and 1032(a)... respectively") -- the New York conclusion is expressly contingent on the IRS actually confirming the described federal treatment, since the federal ruling request was still pending when this opinion issued.

Common questions

Q: Does a mutual-to-stock conversion need a separate New York tax-free-reorganization analysis?
A: No -- Article 32 entire net income tracks federal taxable income, so a transaction that is tax-free under the applicable federal reorganization provisions is tax-free for Article 32 too.

Q: Is New York's conclusion here final regardless of the outcome of the pending IRS ruling request?
A: No -- the conclusion is conditioned on the transaction actually qualifying as tax-free federally under IRC sections 368(a)(1)(F) and 1032(a).

Q: Do depositors recognize gain when their accounts convert to Stock Homestead deposit accounts?
A: The described federal ruling request contemplates no gain or loss to Eligible Account Holders under IRC section 354(a) on the exchange of their proprietary interests for equivalent deposit accounts plus liquidation-account interests.

Citations and references

Statutes and regulations:

• Tax Law section 1451 (Article 32 franchise tax on banking corporations)
• Tax Law section 1453(a)-(k) (entire net income and modifications)
• Tax Law section 1455(a) (basic tax rate)
• IRC section 368(a)(1)(F) (mere change of identity/form reorganization)
• IRC section 1032(a) (no gain/loss on stock-for-money exchange)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1991.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a91_10c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-91(10)C
Corporation Tax
April 4, 1991

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C910201B

On February 1, 1991, a Petition for Advisory Opinion was received from The Homestead
Savings (FA), 283 Genesee Street, Utica, New York 13501.
The issue raised by Petitioner, The Homestead Savings (FA), is what is the New York tax
treatment resulting from the conversion of Petitioner from a mutual savings and loan association to
a stock savings and loan association (hereinafter "Stock Homestead") and the concurrent acquisition
of all the capital stock of Homestead by Iroquois Bancorp, Inc. (hereinafter "Bancorp").
Petitioner is a federally chartered mutual savings and loan association. Petitioner files a
consolidated federal income tax return as the common parent of an affiliated group of corporations.
The principal executive offices of Petitioner are located in Utica, New York.
As a mutual savings and loan association, Petitioner has no authorized capital stock. In the
event of the liquidation of Petitioner, each savings depositor of Petitioner would have a right to share
pro rata (with respect to the amount of the balance in each depositor's account as a fraction of the
sum of all Petitioner's deposit accounts just prior to liquidation) in any liquidation proceeds
distributed. In addition, a savings depositor in Petitioner is entitled to interest pursuant to the terms
of his time account or which is declared and paid by Petitioner on his positive savings account
balance. The management and control of Petitioner is vested in its Board of Directors, who have
exclusive power regarding Petitioner's operations.
Bancorp is a New York corporation which engages in business as a savings and loan holding
company pursuant to section 408 of the National Housing Act (hereinafter the "Act"). Bancorp files
a consolidated federal income tax return as the common parent of an affiliated group of corporations.
The principal office of Bancorp is located in Auburn, New York.
The Boards of Directors of Bancorp and Petitioner consider it to be in the best interests of
their respective institutions, depositors, shareholders, creditors, and communities for Petitioner to
convert from a mutual to stock form of organization (hereinafter "Conversion"), and become a
wholly-owned subsidiary of Bancorp in its capacity as a savings and loan company (hereinafter
"Acquisition"). Upon completion of the Conversion, as described below, Bancorp will acquire Stock
Homestead by issuing shares of its voting common stock to persons purchasing said shares through
a subscription offering and to the general public in an underwritten public offering and using the
proceeds to purchase all of the capital stock of Stock Homestead.
The Conversion/Acquisition will be carried out pursuant to the terms and provisions of the
Plan of Conversion and Acquisition of Homestead (hereinafter the "Plan") that has been adopted
pursuant to section 563b.10(a) of the Office of Thrift Supervision (hereinafter "OTS") stock
TP-9 (9/88)

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TSB-A-91(10)C
Corporation Tax
April 4, 1991
conversion regulations and approved by the Board of Directors of Petitioner on November 12, 1990.
The corporate existence of Petitioner will not terminate as a result of the conversion to stock
form but, rather, Stock Homestead, following the Conversion, will be treated as the same entity as
Petitioner. Accordingly, on the effective date of the Conversion, by operation of law and without
any further action, all of the assets, franchises, debts, liabilities, obligations, and duties of Petitioner
will continue unchanged in Stock Homestead. Each holder of a deposit account in Petitioner
immediately prior to the Conversion will become the holder of a deposit account in Stock Homestead
equivalent in all respects (except as to liquidation rights) to the deposit account in Petitioner
immediately prior to the time of Conversion.
In addition, for purposes of granting account holders of Petitioner a priority in the event of
a complete liquidation of Petitioner after the Conversion, Stock Homestead will establish and
maintain a liquidation account, for the benefit, on a pro rata basis, of all deposit account holders of
Petitioner, whose deposit balances aggregate more than $50 (hereinafter the "Qualifying Deposit")
on June 30, 1990 (hereinafter "Eligibility Record Date") (hereinafter the "Eligible Account
Holders"). To the extent that any subsidiary of Petitioner maintains deposit accounts in Petitioner,
those accounts will not constitute Qualifying Deposits. The amount of the liquidation account shall
be equal to the net worth of Petitioner as of the date of its latest statement of financial condition as
set forth in the application to the OTS.
Following the Conversion of Petitioner to Stock Homestead, Stock Homestead's stock will
be sold to eligible persons, and then to the general public, with the net proceeds of the sale being
added to Petitioner's net worth. The Stock Homestead capital stock is then concurrently exchanged
for authorized but unissued shares of common stock of Bancorp (hereinafter "Conversion Stock").
From a practical standpoint, the concurrent transactions are collapsed into one transaction with the
direct offering of the Conversion Stock and all of the net conversion proceeds being retained by
Petitioner following the Conversion.
The aggregate purchase price at which all shares of the Conversion: Stock will be offered and
sold pursuant to the Plan will not be less than the incremental pro forma market value of Stock
Homestead as a wholly-owned subsidiary of Bancorp after giving effect to the issuance of the
Conversion Stock, as determined by an independent valuation. The aggregate purchase price will
also be within the valuation range stated in the approval or amended approval of the Plan by the
OTS.
In addition to the foregoing, the following representations are made with respect to the
proposed transaction:
(a) The fair market value of each withdrawable savings account plus an interest in the
liquidation account of Stock Homestead to be constructively received under the Plan will in each
instance be equal to the fair market value of each withdrawable savings account of Petitioner
surrendered in exchange therefor.

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Corporation Tax
April 4, 1991
(b) Stock Homestead and Bancorp each have no plan or intention to redeem or otherwise
acquire any of the Conversion Stock issued in the proposed transaction.
(c) Following the Conversion/Acquisition, Stock Homestead has no plan or intention to sell
or otherwise dispose of any of its assets, except in the ordinary course of business, and there is no
plan or intention for Stock Homestead or Bancorp to be merged with another corporation.
(d) Petitioner is not under the jurisdiction of a court in a Title 11 or similar case within the
meaning of section 368(a)(3)(A) of the Internal Revenue Code (hereinafter "IRC").
(e) No Eligible Account Holders of Petitioner as of the Eligibility Record Date under the Plan
will be excluded from participating in the liquidation account.
(f) Compensation to be paid to depositor/employees of Petitioner will be commensurate with
amounts paid to third parties bargaining at arm's length for similar services.
(g) The aggregate fair market value of the Qualifying Deposits held by Eligible Account
Holders as of the close of business on the Eligibility Record Date equalled or exceeded 99% of the
aggregate fair market value of all savings accounts (including those accounts of less than $50) in
Petitioner as of the close of business on such date.
(h) No shares of Bancorp voting common stock will be issued or purchased by
depositor/employees at a discount or as compensation in the Conversion/ Acquisition.
(i) No cash or property will be received by the Eligible Account Holders of Petitioner in lieu
of non-transferable subscription rights or an interest in the liquidation account of Stock Homestead.
(j) Petitioner computes its reserve for bad debts in accordance with section 593 of the IRC.
Following the Conversion, Stock Homestead, will likewise utilize a reserve for bad debts in
accordance with section 593 of the IRC.
(k) At the time of the Conversion/Acquisition, the fair market value of the assets of Petitioner
on a going concern basis will exceed the amount of its liabilities to be assumed plus the amount of
liabilities to which the transferred assets are subject.
(1) Petitioner, Stock Homestead, and Bancorp are corporations within the meaning of section
7701(a)(3) of the IRC.
(m) Bancorp is not an investment company as described in section 1.351-1(c) of the Treasury
regulations.
(n) The exercise price of the subscription rights received by Petitioner's Eligible Account
Holders to purchase Conversion Stock will be equal to the average of the closing prices of Bancorp
common stock (as reported by NASDAQ)during the thirty days preceding the seven days prior

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Corporation Tax
April 4, 1991
to the completion of the sale of Conversion Stock. If following the subscription offering and the
direct community offering, however, shares of Conversion Stock are offered for sale by underwriters
in a public offering, the price for each share of Conversion Stock will be the price at which
unsubscribed shares are initially offered for sale in the public offering, which price will be negotiated
between Bancorp and the underwriters. Pursuant to the Plan and OTS regulations, all shares of
Conversion Stock shall be issued and sold at a uniform price per share.
(o) Bancorp has no plan or intention to sell or otherwise dispose of stock of Stock Homestead
received by it in the proposed transaction.
(p) Petitioner's savings depositors will pay expenses of the Conversion solely attributable to
them, if any. Bancorp and Petitioner will each pay its own expenses of the Conversion/Acquisition
and will not pay expenses solely attributable to the savings depositors or to the Bancorp
shareholders.
(q) The Eligible Account Holders proprietary interests in Petitioner arise solely by virtue of
the fact that they are account holders in Petitioner.
(r) The proposed transaction does not involve a receivership, foreclosure, or similar
proceeding before a federal or state agency involving a financial institution to which sections 585
or 593 of the IRC apply.
(s) The Board as defined in section 368(a)(3)(D)(iii) of the IRC has not made the certification
described in section 368(a)(3)(D)(ii) of the IRC, nor will such certification be made prior to or
otherwise in connection with the proposed transaction.
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 change in form of operation of Petitioner from a mutual savings and loan association
to a stock savings and loan association will constitute a reorganization within the meaning of section
368(a)(1)(F) of the IRC, and no, gain or loss will be recognized to Petitioner or Stock Homestead
as a result of such conversion [Rev Rul 80-105, 1980-1 CB 78]. Petitioner and Stock Homestead
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 recognize by Stock Homestead on the receipt of money from
Bancorp in exchange for common stock of Stock Homestead [section 1032(a) of the IRC]. No gain
or loss will be recognized by Bancorp upon receipt of cash in exchange for its Conversion Stock
[section 1032(a) of the IRC].
(3) No gain or loss will be recognized by Eligible Account Holders upon the issuance to them
of deposit accounts in Stock Homestead in the same dollar amounts as their deposit accounts in
Petitioner, plus interest in the liquidation account of Stock Petitioner, in exchange for the deposit
accounts in Petitioner [section 354(a) of the IRC].

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TSB-A-91(10)C
Corporation Tax
April 4, 1991
(4) The assets of Petitioner will have the same basis in the hands of Stock Homestead as in
the hands of Petitioner immediately prior to the Conversion [section 362(b) of the IRC].
(5) The holding period of the assets of Petitioner to be received by Stock Homestead will
include the period during which the assets were held by Petitioner prior to the Conversion [section
1223(2) of the IRC].
(6) The basis of the deposit accounts in Stock Homestead received by Eligible Account
Holders will be the same as the basis of the proprietary interest surrendered in exchange therefor
[section 358(a)(1) of the IRC]. Consequently the basis of each Eligible Account Holder's interest
in the liquidation account will be zero [Rev Rul 71-233, 1971-1 CB 113]. The basis of the
nontransferable subscription rights will be zero [sections 1.307-1 and 1.3072 of the Treasury
Regulations]. The basis of the Conversion Stock acquired pursuant to the Plan will be the purchase
price thereof [section 1012 of the IRC], and the holding period for such Conversion Stock will
commence on the date following the date on which such stock is purchased. [Rev Rul 70-598, 1970­
2 CB 168].
(7) For purposes of section 381 of the IRC, Stock Homestead 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 Stock Homestead
as if there had been no reorganization [section 1.381(b)-l(a)(2) of the Treasury Regulations]. The
part of the taxable year of Petitioner before the Conversion and the part of the taxable year of Stock
Homestead after the Conversion will constitute a single taxable year. [Rev Rul 57-276, 1957-1 CB
126].
(8) Pursuant to section 381(c)(4) of the IRC and section 1.381(c)(4)l(a)(1)(ii) of the Treasury
Regulations, Stock Homestead will succeed to and take into account, immediately after the
Conversion, 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 Conversion. The bad debt reserves of Petitioner will not be required to be restored to the
gross income of either Petitioner or Stock Homestead as a result of the Conversion, and such bad
debt reserves will have the same character in the hands of Stock Homestead as they would have had
in the hands of Petitioner if the Conversion had not occurred.
(9) Regardless of the book entries made for the creation of the liquidation account, the
Conversion will not diminish the accumulated earnings and profits of Stock Homestead available
for the subsequent distribution of dividends, if any, within the meaning of section 316 of the IRC
[section 1.312-11(b) and (c) of the Treasury Regulations].
(10) The creation of the liquidation account on the records of Stock Homestead will have no
effect on its taxable income, deductions, or additions to reserves for bad debts under section 593 of
the IRC or distributions to shareholders under section 593(e) of the IRC.

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TSB-A-91(10)C
Corporation Tax
April 4, 1991
Section 1451 of Article 32 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 nine 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 Conversion is
treated as a reorganization pursuant to section 368(a)(1)(F) of the IRC and the Acquisition will result
in no recognition of gain or loss under section 1032(a) 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, if Petitioner's change in form from a federal mutual savings and loan
association to a stock savings and loan association and the concurrent acquisition of all of the capital
stock of Stock Homestead by Bancorp is a tax-free reorganization and acquisition under sections
368(a)(1)(F) and 1032(a) of the IRC, respectively, such reorganization and acquisition would be tax­
free for New York State franchise tax purposes under Article 32 of the Tax Law.

DATED: April 4, 1991

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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