Will the reorganization of a mutual savings bank into a stock savings bank held by a mutual holding company, tax-free federally under IRC sections 368(a)(1)(F) and 351, also be tax-free for Article 32 (bank) and Article 22 (personal income) purposes?

Plain-English summary

Oswego City Savings Bank, a New York mutual savings bank, plans a reorganization into a stock savings bank controlled by a newly formed mutual holding company (depositors hold membership interests in the holding company; up to 49% of the stock bank may later be sold to minority shareholders). The transaction is structured to be tax-free federally under IRC section 368(a)(1)(F) (a mere change in form) and section 351 (transfer of the stock bank's stock to the holding company for membership interests). It asked whether the same tax-free treatment applies for Article 32 (the bank franchise tax) and Article 22 (personal income tax) -- for the bank, the holding company, the account holders and any new stockholders.

Yes, New York follows the federal treatment.

• Article 32. Entire net income starts from federal taxable income (section 1453(a)), subject only to the listed modifications -- and there is no modification for a transaction that is a tax-free exchange under sections 351 and 368(a)(1)(F). So the reorganization is tax-free under Article 32 for the bank, the stock bank and the mutual holding company.
• Article 22. New York taxable income follows federal adjusted gross income (sections 611(a), 612(a)), and no modification affects the account holders/stockholders of the reorganizing banks. So if no federal taxable income arises for resident or nonresident eligible account holders and new stockholders, none arises for New York personal income tax.

(The opinion expressly assumes the IRS rules the transaction tax-free.)

What this means for you

A federally tax-free bank reorganization is tax-free for the bank tax

Because Article 32 entire net income tracks federal taxable income and has no special modification, a section 368(a)(1)(F)/351 reorganization that is tax-free federally is tax-free under Article 32.

Account holders and new stockholders see no New York income

Article 22 follows the federal result; if depositors and new stockholders recognize no federal income in the reorganization, they recognize none for New York personal income tax -- residents and nonresidents alike.

The conclusion rides on the federal ruling

The opinion assumes the IRS rules the transaction qualifies under sections 368(a)(1)(F) and 351; New York's tax-free treatment follows from that federal qualification.

Common questions

Q: Is a mutual-to-stock bank conversion taxable under the New York bank tax?
A: Not if it is tax-free federally under sections 368(a)(1)(F) and 351 -- Article 32 has no modification that would tax it.

Q: Do depositors/account holders owe New York income tax on the conversion?
A: No, if they recognize no federal income; Article 22 follows the federal result for residents and nonresidents.

Q: What if the IRS does not rule it tax-free?
A: The opinion's conclusion is conditioned on federal tax-free qualification under sections 368(a)(1)(F) and 351.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 1451 (franchise tax on banking corporations); section 1455(a) (basic tax = 9% of entire net income)
- Tax Law section 1453(a) (Article 32 entire net income equals federal entire taxable income, subject to modifications -- none for tax-free reorganizations)
- Tax Law sections 611(a) and 612(a) (Article 22 New York taxable income follows federal adjusted gross income; no modification affecting these account holders)
- IRC section 368(a)(1)(F) (reorganization = mere change in identity, form, or place of organization)
- IRC section 351(a) (no gain or loss on transfer of property to a controlled corporation solely for its stock)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1995.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/multitax/a95_7c_1i.pdf

Original ruling text

New York State Department of Taxation and Finance

TSB-A-95 (7) C
Corporation Tax
TSB-A-95 (1) I
Income Tax
March 31, 1995

Taxpayer Services Division
Technical Services Bureau
STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C941220A

On December 20, 1994, a Petition for Advisory Opinion was received from
Oswego City Savings Bank, 214 West First St., Oswego, New York 13126.
The issue raised by Petitioner, Oswego City Savings Bank ("Bank"), is
whether the reorganization of Oswego City Savings Bank from a mutual savings bank
to a stock savings bank, that will be controlled by a newly-formed mutual holding
company in a transaction to be effected under sections 368(a)(1)(F) and 351 of
the Internal Revenue Code ("IRC") will be accorded the same treatment for
purposes of Articles 32 and 22 of the Tax Law as for Federal income tax purposes
with respect to the Bank, the holding company, the eligible account holders and
any new stockholders of the stock savings bank.
The Bank, a New York chartered mutual savings bank proposes to establish
a New York chartered mutual holding company (the "Mutual Holding Company") of the
Bank. The Bank is headquartered in Oswego, New York. The Bank's deposits are
insured by the Federal Deposit Insurance Corporation ("FDIC").
The Bank is
currently regulated by the New York State Banking Department ("Department") and
the FDIC. On May 31, 1994, the Bank had total assets of $133.2 million, total
deposits of $118.1 million and stockholders' equity of $13.7 million. Subsequent
to May 31, 1994, the Bank assumed $42.3 million in deposit liabilities and
acquired $288,000 in accounts from the Resolution Trust Corporation ("RTC"). As
part of the RTC purchase of assets and assumption of liabilities, the Bank
exercised its option to acquire two branch locations in Oswego and Fulton, New
York. The Bank has, and the Mutual Holding Company will have a December 31 fiscal
year end. All entities are or will use the accrual method of accounting and each
will be subject to the audit jurisdiction of the Buffalo District Director.
The Bank's primary lending activity is the origination of first mortgage
loans secured by one- to four-family residential properties. A significant
portion of one to four-family loans originated by the Bank are secured by non­
owner occupied homes which are primarily used to furnish housing to students
attending the SUNY College at Oswego. The Bank also originates adjustable rate
mortgage ("ARM") loans which serve to reduce interest rate risk. The Bank
generally retains in its portfolio all fixed rate and ARM loans that it
originates.
As a New York chartered mutual savings bank, the Bank has no capital stock.
Instead, depositors of the Bank possess the right (i) to share in the Bank's
current earnings (which is in the nature of the right to receive interest on
deposits) and (ii) upon liquidation of the Bank, to share in any surplus
remaining
after all of the Bank's liabilities have been satisfied. A depositor's rights
terminate when the depositor's account is closed.
The Bank has no subsidiaries.
TP-9 (9/88)

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TSB-A-95 (7) C
Corporation Tax
TSB-A-95 (1) I
Income Tax
March 31, 1995

On May 10, 1994, the board of directors of the Bank adopted a Plan of
Reorganization from Mutual Savings Bank to Mutual Holding Company and Stock
Issuance Plan ("Plan for Reorganization" or "Plan") which Plan was subsequently
amended. Pursuant to the Plan, the Bank will effect the "Reorganization" (as
defined below) as follows:
(i) The Bank will organize an interim stock savings bank ("Interim
One");
(ii) Interim One will organize an interim stock savings bank
("Interim Two") as a wholly-owned subsidiary; and
(iii) The Bank will exchange its charter for a stock savings bank
charter to become the Stock Bank ("Bank Conversion") and, at the
same time, Interim One will cancel its outstanding shares of common
stock and will exchange its charter for a New York mutual holding
company charter to become the Mutual Holding Company ("MHC
Conversion").
Simultaneously with the charter exchanges, Interim
Two will merge with and into Stock Bank. As part of the Plan of
Reorganization, all of the initially issued stock of Stock Bank will
be transferred to the Mutual Holding Company in exchange for
membership interests in the Mutual Holding Company in a transaction
intended to qualify under section 351 of the IRC.
At the conclusion of these steps the former members (i.e., the depositors)
of the Bank will own all of the Mutual Holding Company by virtue of their
membership interests in the Mutual Holding Company and the Mutual Holding Company
will own all the outstanding stock of Stock Bank. These transactions are referred
to herein collectively as the "Reorganization". The Reorganization and Plan are
subject to approval of the Department and the FDIC. The approval of the Board of
Governors of the Federal Reserve System is required for the Mutual Holding
Company to be a bank holding company.
Contemporaneously with the Reorganization, the opportunity to purchase up
to 49% of the common stock of the Stock Bank will be offered in a stock offering
("Offering") to depositors and borrowers of the Bank; the Bank's tax-qualified
employee stock benefit plans; and members of the community, pursuant to
priorities established by the board of directors of the Bank. Any remaining
shares may be offered to the public at the sole discretion of the board of
directors. These persons are collectively referred to herein as the minority
shareholders. The common stock will be sold in the Offering on a best efforts
basis by a registered broker-dealer. The common stock issued in the Offering will
be sold at a total price equal to the estimated pro forma market value of such
common stock, based upon an independent valuation. The aggregate amount of
outstanding common stock owned or controlled by persons other than the Mutual
Holding company at the close of the proposed Offering will be less than 50% of
the Stock Bank's total outstanding common stock. As of the date of the
Reorganization, the common stock issued to the Mutual Holding Company and
minority shareholders by the Stock Bank will be the only issued and outstanding
shares of capital stock of the Stock Bank. The Offering will not be made if
market conditions dictate against such offering or regulatory approvals cannot
be obtained.

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Corporation Tax
TSB-A-95 (1) I
Income Tax
March 31, 1995

Following the completion of the Reorganization, all depositors who had
membership or liquidation rights with respect to the Bank will continue to have
such rights solely with respect to the Mutual Holding Company so long as they
continue to hold deposit accounts with the Stock Bank. In addition, all persons
who become depositors of the Stock Bank subsequent to the Reorganization will
have such membership and liquidation rights with respect to the Mutual Holding
Company.
Following the approval of the Plan of Reorganization by the Department and
the FDIC, a special meeting of depositors of the Bank to approve the Plan of
Reorganization will be scheduled in accordance with New York banking laws. An
affirmative vote of not less than 752 of the aggregate dollar amount of the book
value of deposits represented at such meeting either in person or by proxy is
required for approval of the Plan of Reorganization.
Following the Reorganization, Stock Bank will have the power to issue
shares of capital stock (including common and preferred stock) to persons other
than the Mutual Holding Company. So long as the Mutual Holding Company is in
existence, however, it must own a majority of the voting stock of Stock Bank.
Stock Bank may issue any amount of non-voting stock to persons other than the
Mutual Holding Company.
No such non-voting stock will be issued as of the date
of the Reorganization. In the future the Mutual Holding Company may elect to
convert to stock form, but currently has no plan to do so.
The principal reasons for the Reorganization are to (i) enable depositors,
employees and directors of the Bank to have an equity ownership interest in the
Bank; (ii) reorganize the Bank into a corporate structure that enables it to
access capital sources not available to mutual savings banks; (iii) facilitate
acquisitions and the diversification of the Bank's activities.
The Reorganization is being effected pursuant to Article VI-C -Mutual
Holding Companies, section 290 et. seq. of the New York State Banking Law
("Banking Law"). Section 292.1(a)(ii) of the Banking Law states that the plan of
reorganization may authorize the formation of a mutual holding company by: "the
organization by the mutual savings bank of a mutual holding company and the
organization by such mutual holding company of a stock savings bank subsidiary
which merges with the mutual savings bank".
The Reorganization is also subject to the approval of the FDIC. To the
extent that the Banking Law and federal law, as administered by the FDIC, are
inconsistent, the Reorganization will be effected pursuant to federal law.
With respect to the exchange of the Bank's charter for a stock bank charter
pursuant to the Bank Conversion:
1. The fair market value of the Stock Bank stock constructively received by the
members of the Bank in exchange for their equity interest in the Bank will be
approximately equal to the fair market value of the equity interest in the Bank
constructively surrendered in the exchange. (Rev Proc 86-42)

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Corporation Tax
TSB-A-95 (1) I
Income Tax
March 31, 1995

2. There is no plan or intention by the members of the Bank, to sell, exchange,
   or otherwise dispose of any of the shares of Stock Bank stock constructively
   received in the transaction, other than as described herein (i.e., the transfer
   to Mutual Holding Company). Following the transaction, the Stock Bank may sell
   up to 49% of its authorized but unissued shares to depositors and borrowers of
   the Stock Bank, and to members of the general public. (Rev Proc 86-42)
3. Immediately following the consummation of the transaction, the members of the
   Bank will own all of the outstanding Stock Bank stock and will own such stock
   solely by reason of their ownership of all of the equity interests in Bank
   immediately prior to the transaction. (Rev Proc 86-42)
4. Stock Bank has no plan or intention to issue additional shares of its stock
   following the transaction, except as set forth in the Plan. Pursuant to the Plan,
   Stock Bank has applied for approval from the Department to issue additional
   shares of common stock to depositors, borrowers, and members of the general
   public ("Minority Shareholders") in a public Offering. At any time, the Stock
   Bank's Board of Directors may elect not to consummate the Offering if it
   determines conditions are not favorable. If the Stock Bank issues additional
   shares in the Offering to Minority Shareholders, the additional shares issued
   will not exceed 49% of the total number of shares authorized and outstanding.
   (Rev Proc 86-42)
   5.
   Immediately following consummation of the transaction, Stock Bank will
   possess the same assets and liabilities, except for assets used to pay expenses
   incurred in connection with the transaction, as those possessed by Bank
   immediately prior to the transaction. Dissenters will not have dissenters rights
   in connection with the Bank Conversion. Also there will be no property
   distributed to any shareholder in connection with this transaction and no
   distributions other than the regular distributions (i.e., interest credited to
   accounts). Additional cash, as raised in the Offering, may be held by the Stock
   Bank immediately following consummation of this transaction. (Rev Proc 86-42)
5. At the time of the transaction, Bank will not have outstanding any warrants,
   options, convertible securities, or any other type of right pursuant to which any
   person could acquire stock of Bank.
6. Stock Bank has no plan or intention to reacquire any of its stock issued in
   the transaction.
7. Stock Bank has no plan or intention tosell or otherwise dispose of any of the
   assets of Bank acquired in the transaction, except for dispositions made in the
   ordinary course of business.
8. The liabilities of Bank assumed by Stock Bank plus the liabilities, if any,
   to which the transferred assets are subject were incurred by Bank in the ordinary
   course of its business and are associated with the assets transferred.

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Corporation Tax
TSB-A-95 (1) I
Income Tax
March 31, 1995

10. Following the transaction, Stock Bank will continue the historic business
    of Bank or use a significant portion of Bank's historic business assets in a
    business.
11. The shareholders will pay their respective expenses, if any, incurred in
    connection with the transaction.
12. Bank 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 IRC. With respect to the
    transfer of Stock Bank stock to Mutual Holding Company for membership interests
    (the "351 Transaction"):
13. No stock or securities will be issued for services rendered to or for the
    benefit of the Mutual Holding Company in connection with the 351 Transaction, and
    no stock or securities will be issued for indebtedness of the Mutual Holding
    Company that is not evidenced by a security, or for interest on indebtedness of
    the Mutual Holding Company which accrued on or after the beginning of the holding
    period for the debt.
    14.
    None of the assets to be transferred were received by the Stock Bank
    shareholders as part of a plan of liquidation of another corporation.
    15.
    The property to be transferred to the Mutual Holding Company will not
    include accounts receivable, loans receivable, or commissions. Solely stock of
    Stock Bank will be transferred.
    16.
    None of the stock to be transferred is "section 306 stock" within the
    meaning of section 306(c) of the IRC.
14. The Stock Bank shareholders did not incur any acquisition indebtedness with
    respect to stock of Stock Bank that is part of the property being transferred to
    the Mutual Holding Company.
15. The transfer is not the result of the solicitation by a promoter, broker,
    or investment firm.
16. The Stock Bank shareholders will not retain any right or continuing interest
    in the property being transferred to the Mutual Holding Company.
17. The adjusted basis and the fair market value of the assets to be transferred
    to Mutual Holding Company by Stock Bank shareholders will, in each instance,
    equal or exceed the sum of the liabilities to be assumed by Mutual Holding
    Company plus the liabilities to which the transferred assets are subject.
18. The Mutual Holding Company will assume no liabilities of the Stock Bank
    shareholders in connection with the 351 Transaction. (Rev Proc 83-59)

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Corporation Tax
TSB-A-95 (1) I
Income Tax
March 31, 1995

22. There is no indebtedness between the Mutual Holding Company and Stock Bank
    shareholders, and there will be no indebtedness created as a result of the 351
    Transaction.
23. The transfers and exchanges will occur pursuant to the Plan which was agreed
    upon before the 351 Transaction and under which the rights of the parties are
    defined.
    24.

All exchanges will occur on approximately the same date.

25. There is no plan or intention on the part of the Mutual Holding Company to
    redeem or otherwise reacquire any stock or securities to be issued in the 351
    Transaction.
26. Taking into account any issuance of additional shares of Mutual Holding
    Company's equity, any issuance of stock for services, the exercise of any stock
    rights, warrants or subscriptions; a public offering of stock; and the sale,
    exchange, transfer by gift, or other disposition of any equity of the Mutual
    Holding Company to be received in the 351 Transaction, the Stock Bank
    shareholders will be in "control" of Mutual Holding Company within the meaning
    of section 368(c) of the IRC.
27. The Stock Bank shareholders will receive only membership interests of Mutual
    Holding Company approximately equal to the fair market value of the property
    transferred to Mutual Holding Company.
28. Mutual Holding Company will remain in existence and retain and use the
    property transferred to it in a trade or business.
29. There is no plan or intention by Mutual Holding Company to dispose of the
    transferred property other than in the normal course of business operations.
30. Each of the parties to the 351 Transaction will pay its own expenses, if
    any, incurred in connection with the proposed transaction.
31. Mutual Holding Company will not be an investment company within the meaning
    of section 351(e)(1) of the IRC and section 1.351-1(c)(1)(ii) of the Treasury
    Regulations.
32. The Stock Bank shareholders are 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 IRC)
    and the equity interests in Mutual Holding Company received in the Exchange will
    not be used to satisfy any indebtedness.
33. Mutual Holding Company will not be a "personal service corporation" within
    the meaning of section 269A of the IRC.
34. The Bank is not a "loss corporation" within the meaning of section 382(k)
    of the IRC.

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TSB-A-95 (7) C
Corporation Tax
TSB-A-95 (1) I
Income Tax
March 31, 1995

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 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 368(a)(1)(F) of the IRC provides that the term "reorganization"
means a mere change in identity, form, or place of organization of one
corporation, however effected.
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 transaction constitutes
a tax-free exchange within the meaning of sections 351 and 368(a)(1)(F) 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.
This advisory opinion assumes that for Federal income tax purposes, the
Internal Revenue Service rules that:
A. With respect to the Bank Conversion:
1. Neither the 351 Transaction nor the offering of up to 49% of Stock
Bank's stock to the public as described herein will prevent the Bank's
exchange of its charter to that of a stock savings bank from qualifying as
a reorganization within the meaning of section 368(a)(1)(F) of the IRC;
2. The Bank members exchange of their membership interests in the Bank
(i.e., liquidation rights) or stock in the Stock Bank which they will
constructively receive in the Bank Conversion, will satisfy the continuity
of interest requirement of section l.368-l(b) of the Treasury Regulations
and this result will not be changed by the exchange of such stock for
membership interests in the Mutual Holding Company; and

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Corporation Tax
TSB-A-95 (1) I
Income Tax
March 31, 1995

B. With respect to the 351 Transaction:
3. The transfer of the Stock Bank stock constructively received in the
Bank Conversion by the Stock Bank shareholders to Mutual Holding Company
in exchange for membership interest will be considered a transfer of
property solely in exchange for stock within the meaning of section 351 of
the IRC.
Accordingly, since the transaction by which Petitioner will reorganize as
a stock savings bank and which will be controlled by a newly-formed New York
mutual holding company will be a tax-free transaction under sections 368(a)(1)(F)
and 351(a) of the IRC, such reorganization of Petitioner as a Stock Bank and the
establishment of Mutual Holding Company will be tax-free transaction for
Petitioner, Stock Bank and Mutual Holding Company under Article 32 of the Tax
Law.
Section 611(a) of Article 22 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."
Section 612 of the Tax Law does not contain any modification that affects
the shareholders or stockholders of the banks or corporations that are each a
party to a transaction, that for Federal income tax 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 New York State resident individuals who are eligible account holders
and new stockholders of Stock Bank as a result of the transaction whereby
Petitioner will reorganize as a stock savings bank which will be controlled by
a newly-formed New York mutual holding company as a tax-fee transaction under
sections 368(a)(1)(F) and 351(a) of the IRC, no taxable income will be realized
by such eligible account holders and new stockholders of Stock Bank for New York
State personal income tax purposes under Article 22 of the Tax Law. Also, with
respect to nonresident individuals of New York State, no taxable income will be
realized by eligible account holders and new stockholders of Stock Bank for New
York State personal income tax purposes under Article 22 of the Tax Law.

DATED: March 31, 1995

s/PAUL B. COBURN
Deputy Director
Taxpayer Services Division

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