How did Rhode Island treat a federally chartered bank's acquisition of failed credit-union assets, related DEPCO assistance, bank taxes, bulk-sale property, and parent nexus?

Plain-English summary

Rhode Island issued thirteen tax determinations for a federally chartered financial institution's acquisition of failed credit-union assets and related financing. The final rulings generally treated the asset purchase and several income items consistently with their stated transaction form or federal tax treatment, while imposing Rhode Island bank taxes and allowing a sales-tax bulk-sale exemption for tangible assets.

The Bank planned to acquire assets from financial institutions in receivership under the Providence County Superior Court and issue Bank deposits to the institutions' former depositors. DEPCO, receivers, the Bank's parent, FSLIC preferred stock, FDIC debentures, a credit-adjustment account, and Bank and parent nexus were also part of the transaction.

The official page says detailed facts in eight pages of March 19, 1992 correspondence and an April 10 Bank letter were incorporated by reference, but those documents are not reproduced. The public text supplies the following final results:

1. DEPCO assistance was treated as received by the credit unions immediately before the Bank's asset purchase, rather than as Bank or parent income or a capital contribution, if paid within one year of closing.
2. Assets repurchased by receivers or DEPCO within one year were treated as never purchased by the Bank, with associated liabilities treated as never assumed.
3. The Bank's asset basis equaled its acquisition cost: deposits issued plus other liabilities assumed.
4. The parent recognized no gain or loss on issuing preferred stock, warrants, and exercise shares to DEPCO for cash; the cash was not assistance, income, or a nonshareholder capital contribution to parent or Bank.
5. Income from redeeming the FSLIC preferred was recognized if recognized federally. Any capital gain was excluded from Rhode Island receipts but included in everywhere receipts for apportionment.
6. Cancellation-of-debt income on FDIC debentures followed federal treatment based on the difference between the $7 million face amount and the repurchase or retirement amount.
7. A foreign Bank could apportion under a three-factor formula pursuant to § 44-14-3(2) and Regulation BE 90-1, subject to the receipts-factor treatment in ruling 5.
8. The Bank was subject to Bank Excise Tax and Bank Deposits Tax.
9. Income and expenses from the Credit Adjustment Account followed federal treatment.
10. The Bank could apportion income under the provision and regulation printed in the order.
11. The Bank was subject to Bank Deposits Tax for the calendar year ending December 31, 1992 and later years; the 1992 payment was not due until June 15, 1993 under then-current law.
12. Tangible assets purchased in a bulk sale were not subject to Rhode Island sales or use tax.
13. The parent was not taxable under the Bank Excise or Bank Deposits Tax chapters unless it acquired its own Rhode Island presence or nexus.

The requested prior-period and stub-period issue was not separately resolved in the published final list: numbered ruling 7 instead addresses foreign-bank apportionment.

What this means for you

Banks acquiring receivership assets

Transaction timing and form mattered. The one-year conditions controlled both DEPCO assistance treatment and asset repurchases, while asset basis followed deposits issued plus liabilities assumed.

Bank tax and apportionment teams

The order imposed both Bank Excise and Bank Deposits Taxes and used a three-factor apportionment method, with special numerator and denominator treatment for the capital gain described in ruling 5.

Parent companies and deal counsel

The parent avoided Rhode Island bank taxes only while lacking its own Rhode Island nexus. The stock-and-warrant issuance itself did not create the income or capital-contribution treatment the Bank had asked to avoid.

Common questions

Was DEPCO assistance taxable to the Bank or parent? No, when paid within one year of closing; it was treated as received by the credit unions before the sale.

How was the purchased asset basis computed? Deposits issued by the Bank plus other liabilities it assumed.

Did Rhode Island follow federal treatment? Yes for the FSLIC preferred income issue, FDIC debenture cancellation income, and Credit Adjustment Account income and expenses, subject to the specific apportionment ruling.

Did the Bank owe Bank Deposits Tax? Yes, beginning with the calendar year ending December 31, 1992 under the order.

Were tangible assets in the acquisition subject to sales tax? Not if purchased under a bulk sale.

Was the parent taxable in Rhode Island? Not under chapters 44-14 or 44-15 unless it acquired its own Rhode Island nexus.

Source conflicts and citations

• Numbered ruling 8 calls Bank Deposits Tax “Chapter 44-18,” while the request and numbered rulings 11 and 13 identify Bank Deposits Tax as chapter 44-15. Both official-source statements remain verbatim below.
• Numbered ruling 7 cites § 44-14-3(2) for foreign-bank apportionment, consistent with the request, while numbered ruling 10 prints § 44-13-3(2). This summary does not silently correct the published conflict.
• R.I. Gen. Laws ch. 44-14 — Bank Excise Tax.
• R.I. Gen. Laws § 44-14-3(2) — foreign-bank apportionment cited in numbered ruling 7.
• R.I. Gen. Laws ch. 44-15 — Bank Deposits Tax cited in the request and numbered rulings 11 and 13.
• R.I. Gen. Laws ch. 44-18 — printed as Bank Deposits Tax in numbered ruling 8.
• R.I. Gen. Laws § 44-13-3(2) — apportionment citation printed in numbered ruling 10.
• Rhode Island Regulation BE 90-1 — three-factor bank apportionment regulation.

Source

• Landing page: Rhode Island Declaratory Rulings
• Declaratory order: Declaratory Order 1992-03

Original ruling text

Ruling Request No. 92-03

Ruling Request No. 92-03

Re: Request for Declaratory Ruling Relating to the Purchase of Assets of Certain Financial Institutions by a Federally Chartered Savings and Loan Association

Facts

A certain financial institution ("the bank") requests a declaratory ruling relating to the purchase of assets of certain financial institutions now in receivership under jurisdiction of the Superior Court of Providence County, Rhode Island, and related transactions.

The bank will acquire these assets from the receivers from such institutions under Rhode Island Law and, in return, will issue deposits in the bank to former depositors in such institutions.

The facts set forth in Sections I and II on pages one through eight of the correspondence dated March 19,1992 are hereby incorporated into and made part of this response by reference thereto. Also incorporated into and made part of the request for ruling is the letter of the bank dated April 10, 1992.

Rulings Requested

1. Neither the bank nor its parent will be treated as receiving income or a capital contribution as a result of DEPCO's payment pursuant to the Acquisition Agreement in connection with the acquisition of the Credit Unions' assets. The financial assistance from DEPCO will be treated as received by the Credit Unions immediately prior to the bank's purchase of the assets of the Credit Unions.

2. The repurchase by the Receivers or by DEPCO of any assets within one year after their purchase by the bank from the Credit Unions will be treated as an adjustment to the initial purchase. Such assets will be treated as never having been purchased by the bank, and the liabilities associated with or attached to such assets will be treated as not having been assumed by the bank.

3. The basis of the Credit Unions' assets, including the Note, in the hands of the bank will be equal to the bank's cost to acquire them. This cost will be equal to the principal amount of the accounts in the bank issued by the bank, plus the amount of any other liabilities assumed by the bank.

4. Its parent will recognize no gain or loss upon the issuance of its Preferred Stock and Warrants (and of Common Stock upon exercise of the Warrants) to DEPCO in exchange for cash. This cash will not be treated as the payment of assistance to either its parent or the bank, and therefore will not constitute the receipt of either income or a nonshareholder capital contribution by either its parent or the bank.

5. Neither its parent nor the bank will recognize taxable income as a result of the redemption of the outstanding FSLIC Preferred.

6. Neither its parent nor the bank shall recognize income from the cancellation of indebtedness as a result of its parent's repurchase, redemption, or retirement of the FDIC Debentures at any time after their issuance except to the maximum extent of the difference between:

> a. their $7 million face amount, and
>
> b. the amount for which they are repurchased, or retired.

The issuance of the FDIC Debentures in exchange for the FSLIC Preferred shall in no way affect the character or the treatment of the FSLIC Preferred as described above.

7. The bank is not taxable in Rhode Island for any prior period, including any stub period prior to the closing. The bank has the option of accounting for taxable income for the stub period either using separate accounting or prorating the entire income of the bank by the number of days operating in Rhode Island.

8. The bank will be subject to the Bank Excise Tax of Section 44-14.

9. Payment of an amount under the Credit Adjustment Account referred to in the Acquisition Agreement will not be treated as taxable income by the bank for Rhode Island tax purposes. The existence of the Credit Adjustment Account will have no effect on the calculations of the bank's Bad Debt Reserves.

10. The bank will be permitted to apportion its income to Rhode Island in accordance with Section 44-14-3 and Regulation BE 90-1.

11. The bank will not be subject to the Bank Deposits Tax (Section 44-15) for the 91-92 fiscal year (Return/payment due June 15, 1992) or later years.

12. The bank will not be subject to Rhode Island sales and use tax on any components of the described transaction.

13. Its parent will not be taxable in the State of Rhode Island.

Ruling

1. Neither the bank nor its parent will be treated as receiving income or a capital contribution as a result of DEPCO's payment pursuant to the Acquisition Agreement in connection with the acquisition of the Credit Unions' assets. The financial assistance from DEPCO will be treated as received by the Credit Unions immediately prior to the bank's purchase of the assets of the Credit Unions, provided that these payments are made within one (1) years of the closing date.

2. The repurchase by the Receivers or by DEPCO of any assets within one year after their purchase by the bank from the Credit Unions will be treated as an adjustment to the initial purchase. Such assets will be treated as never having been purchased by the bank, and the liabilities associated with or attached to such assets will be treated as not having been assumed by the bank.

3. The basis of the Credit Unions' assets, including the Note, in the hands of the bank will be equal to the bank's cost to acquire them. This cost will be equal to the principal amount of the accounts in the bank issued by the bank, plus the amount of any other liabilities assumed by the bank.

4. Its parent will recognize no gain or loss upon the issuance of its Preferred Stock and Warrants (and of Common Stock upon exercise of the Warrants) to DEPCO in exchange for cash. This cash will not be treated as the payment of assistance to either its parent or the bank, and therefore will not constitute the receipt of either income or a nonshareholder capital contribution by either its parent or the bank.

5. Rhode Island would require that the income be recognized if it is recognized for federal purposes. However, the capital gain from such a transaction would not be included in the numerator (R.I. receipts) and will be included in the denominator (everywhere receipts) of the receipts factor therefore reducing the overall apportionment to Rhode Island.

6. The recognition of income from cancellation of indebtedness as the difference between the $7 million dollar face amount and the amount for which they are repurchased, or retired will be determined in the same manner that it is treated for federal purposes.

7. Rhode Island does allow apportionment for foreign banks pursuant to RIGL 44-14-3(2), based upon a three (3) factor formula as set forth in Regulation BE 90-1. See Ruling No. 5 for treatment of receipts factor.

8. The bank will be subject to the Bank Excise Tax (Chapter 44-14) and the Bank Deposits Tax (Chapter 44-18).

9. Rhode Island will treat income and expenses relating to the Credit Adjustment Account in the same manner as it is treated for federal purposes.

10. The bank will be permitted to apportion its income to Rhode Island in accordance with RIGL 44-13-3(2) and Regulation BE 90-1.

11. The bank will be subject to the Bank Deposits Tax (Chapter 44-15) for calendar year ending 12/31/92 and thereafter. Under current law the bank would not be required to make a payment on its calendar year 1992 deposits tax liability until June 15, 1993.

12. The bank would not be subject to Rhode Island sales/use tax on the purchase of any tangible assets if purchased under a bulk sale.

13. Its parent would not be taxable in Rhode Island under Chapters 44-14 or 44-15 unless it acquired its own presence (nexus) within this state.

This ruling is based upon the facts submitted by the bank and shall be valid until the applicable statutory provisions are amended in a manner requiring a different result or until the underlying factual presentation changes.

**R. Gary Clark

Tax Administrator

April 13, 1992**