Does a bank subsidiary's section 1452(d) election to stay under Article 9-A survive (1) the acquisition of its parent bank by another bank, and (2) an expansion of the subsidiary's line of business?

Plain-English summary

Apple Bank for Savings asked about the Article 9-A status of a subsidiary, Associates (formerly ESB Associates, an insurance agency it inherited when it merged Eastern Savings Bank into itself in 1986). ESB had been an Article 9-A taxpayer for its 1984 year and timely made the one-time section 1452(d) election -- a grandfather option letting certain corporations newly swept into the "banking corporation" definition keep being taxed under Article 9-A rather than the Article 32 bank franchise tax. The questions: did the election survive (1) the acquisition of Associates' parent bank, and (2) a planned expansion of Associates' business into securities investments?

The election survives both. Following Robert J. Buckley (where an FDIC takeover and sale of the bank parent's stock did not affect the election), the 1986 acquisition of Eastern by Apple Bank did not affect ESB's election. As for the change of business: in deciding whether a section 1452(d) election is revoked, the Department does not look at the electing corporation's activities -- except that if the corporation changes its activities so much that it can no longer be properly classified as an Article 9-A taxpayer, the election would be revoked.

What this means for you

The section 1452(d) election is sticky and survives ownership changes

Once made, the election continues until the taxpayer revokes it by filing an Article 32 return (20 NYCRR 16-2.5(j)(3)). A change in who owns the electing company -- here, the acquisition of its parent bank by another bank -- does not affect it.

Expanding or changing the business does not revoke it (within limits)

The Department does not re-examine the electing corporation's activities. Only if the company changes its business so fundamentally that it can no longer be classified as an Article 9-A taxpayer would the election be revoked. Moving from running an insurance agency to making securities investments did not, on these facts, cross that line.

Common questions

Q: Does acquiring the parent bank revoke the subsidiary's 1452(d) election?
A: No. Following Buckley, a change of ownership of the parent does not affect the subsidiary's election.

Q: Can the company change what it does and keep the election?
A: Yes, unless the change is so great that the company can no longer properly be classified as an Article 9-A taxpayer.

Q: How is the election revoked?
A: Only by the taxpayer filing a return under Article 32; it otherwise continues indefinitely.

Citations and references

Statutes, regulations, and authorities:
- Tax Law section 1452(a)(9) (banking corporation; corporation 65% or more owned by a savings bank or savings bank holding company)
- Tax Law section 1452(d) (one-time grandfather election to continue under Article 9-A; continues until revoked)
- 20 NYCRR 16-2.5(j)(3) (election made by filing an Article 9-A return; revoked by filing an Article 32 return)
- Robert J. Buckley, TSB-A-94(8)C (FDIC takeover and sale of bank parent's stock did not affect the election)
- Companion: Barclays Business Credit, TSB-A-96(26)C (same election survives a merger where the electing company is the survivor)

Source

• Landing page: https://www.tax.ny.gov/pubs_and_bulls/advisory_opinions/corporation_ao_1996.htm
• Opinion: https://www.tax.ny.gov/pdf/advisory_opinions/corporation/a96_7c.pdf

Original ruling text

New York State Department of Taxation and Finance

Taxpayer Services Division
Technical Services Bureau

TSB-A-96 (7) C
Corporation Tax
March 25, 1996

STATE OF NEW YORK
COMMISSIONER OF TAXATION AND FINANCE
ADVISORY OPINION

PETITION NO. C951201B

On December 1, 1995, a Petition for Advisory Opinion was received from Apple Bank for
Savings, 277 Park Avenue, 40th Floor, New York, New York 10172.
The issues raised by Petitioner, Apple Bank for Savings, are whether the Article 9-A status
of a bank subsidiary, taxed under Article 9-A of the Tax Law pursuant to the grandfather provision
set forth in section 1452(d) of Article 32 of the Tax Law and clarified in section 16-2.5(j)(3) of the
Franchise Tax on Banking Corporations Regulations, is revoked (1) upon the acquisition of its parent
bank by another bank, or (2) by an expansion of the line of business of such subsidiary.
Petitioner presents the following facts. On December 31, 1986, Petitioner, a New York State
chartered savings bank, acquired Eastern Savings Bank ("Eastern") through a tax-free merger. At
the time of the merger, both Petitioner and Eastern were subject to tax under Article 32 of the Tax
Law. Petitioner continues to be taxable under Article 32.
Prior to the acquisition, Eastern had a wholly owned subsidiary corporation, ESB Associates,
Inc. ("ESB"). After the acquisition of Eastern by Petitioner, ESB was renamed "Apple Associates
of New York Inc." ("Associates"). Associates retained the same employer identification number that
ESB had and no material changes were made to Associates.
Since its inception, ESB had been solely involved in an insurance agency business. After the
acquisition of Eastern by Petitioner, Associates continued to operate the insurance agency business.
However, on September 29, 1989, Petitioner reorganized into a bank holding company structure.
(It has since reorganized into its current savings bank form.) As a condition of the reorganization,
the Federal Reserve Bank of New York required that Associates cease all new insurance business
as of September 29, 1989. For two years, Associates was only permitted to renew existing insurance
policies. After the expiration of the two-year period, Associates had to cease all renewals. Since
then, Associates has ceased all insurance operations, and its only income is commissions in the form
of overrides from pre-existing insurance policies and interest from a bank account.
Currently, Petitioner is planning to have Associates expand its line of business to include
investments in securities. To that end, Petitioner has requested an amendment to Associates' New
York charter, and is awaiting a response from New York State. Petitioner intends to fund Associates
to enable Associates to begin its investment activities.
Petitioner states that ESB was subject to tax under Article 9-A of the Tax
Law for its taxable year ending during 1984. Petitioner also states that ESB timely
made the election, pursuant to section 1452(d) of the Tax Law, to continue to be taxable

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Corporation Tax
March 25, 1996

under Article 9-A of the Tax Law, and that ESB and, subsequently, Associates have continued to file
their tax returns under Article 9-A for all taxable years.
Section 1452(a) of Article 32 of the Tax Law defines a "banking corporation". Chapter 298
of the Laws of 1985 amended section 1452(a)(9) of the Tax Law by expanding the definition of a
banking corporation to include, among other entities, a corporation 65 percent or more of whose
voting stock is owned or controlled, directly or indirectly, by a savings bank or a savings bank
holding company. In order to be a banking corporation, the corporation must be principally engaged
in a business which might be lawfully conducted by a corporation subject to Article 3 of the Banking
Law or by a national banking association or which is so closely related to banking or managing or
controlling banks as to be a proper incident thereto, as set forth in section 4(c)(8) of the Federal Bank
Holding Company Act of 1956, as amended. Chapter 298 of the Laws of 1985 also added a
grandfather clause, set forth in section 1452(d) of the Tax Law, that permitted certain corporations
to make a one-time election to continue to be taxed under Article 9-A of the Tax Law.
Section t452(d) of the Tax Law provides that, notwithstanding the provisions of Article 32,
all corporations of classes now or heretofore taxable under Article 9-A shall continue to be taxable
under Article 9-A except, among other entities, banking corporations described in section 1452(a)(9)
of the Tax Law. However, section 1452(d) provides further that a corporation described in section
1452(a)(9) of the Tax Law which was subject to the tax imposed by Article 9-A for its taxable year
ending during 1984 may make a one-time election to continue to be taxable under Article 9-A. The
election is made by the corporation on or before the due date for filing its return (determined with
regard to extensions) for its taxable year ending during 1985. The election shall continue to be in
effect until revoked by the taxpayer. In no event shall the election or revocation be for a part of a
taxable year.
Section !6-2.5(j) (3) of the Franchise Tax on Banking Corporations Regulations provides that
the election is made by the filing of a tax return pursuant to Article 9-A of the Tax Law and the
revocation is made by the filing of a tax return pursuant to Article 32 of the Tax Law.
In Robert J. Buckley, Adv Op Comm T & F, May 26, 1994, TSB-A-94(8)C, it was held that
where a corporation made the election, pursuant to section 1452(d) of the Tax Law, to be taxed under
Article 9-A of the Tax Law, the subsequent takeover of the bank parent by the FDIC and the
subsequent sale of the bank parent's stock did not affect the corporation's election.
In this case, pursuant to section 1452(d) of the Tax Law, ESB timely made the election to be
taxed under Article 9-A of the Tax Law. ESB and, subsequently, Associates have continued to file
tax returns under Article 9-A of the Tax Law. Pursuant to section 1452(d) of the Tax Law, section
16-2.5(j) (3) of the Franchise Tax on Banking Corporations Regulations and Buckley, supra, the
subsequent takeover of Eastern by Petitioner in 1986 did not affect ESB's election to be taxable
under Article 9-A of the Tax Law.

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Corporation Tax
March 25, 1996

Further, for purposes of determining whether the election made under section 1452(d) of the
Tax Law is revoked, the activities of the corporation making the election are not considered, except
that, if the corporation changes its activities to the extent that it can not be properly classified as a
corporation taxable under Article 9-A of the Tax Law, the election made under section 1452(d) of
the Tax Law would be revoked.

DATED: March 25, 1996

NOTE:

/s/
DORIS S. BAUMAN
Director
Technical Services Bureau

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