Did a federally chartered savings association remain a 'bank' subject to Virginia bank franchise tax instead of corporate income tax?

Subject

Federal savings association was not subject to bank franchise tax

Plain-English summary

Virginia ruled that the taxpayer stopped qualifying as a bank for bank franchise tax purposes when it became a federal savings association. Virginia's definition covered banks and banking associations, but not savings associations.

The Department distinguished the federal statutory definitions of a bank and a savings association. Because the taxpayer was chartered as a federal savings association under statutes separate from those governing banks and banking associations, it no longer fell within Virginia's bank definition.

The institution therefore had to file a Virginia corporate income tax return for the part of 2008 during which it was a federal savings association. It also needed to contact the localities where it operated to determine any local taxes resulting from the new classification.

What this means for you

• Financial-institution tax treatment can change when the institution changes its charter or legal classification.
• A federal savings association was not treated as a bank under the Virginia definition applied in this ruling.
• The transition date can split a taxable year between different Virginia tax regimes.
• A state classification change can also create new local-tax obligations.

Common questions

Was the institution still subject to Virginia bank franchise tax after the charter change?

No. The Department said it was no longer a bank for that tax.

What state tax applied instead?

Virginia corporate income tax applied for the portion of 2008 when the taxpayer was a federal savings association.

Did the ruling decide every local tax consequence?

No. It directed the taxpayer to contact the relevant localities.

Citations and references

• Va. Code §§ 58.1-1201, 58.1-1202, and 58.1-1205.
• 12 U.S.C. §§ 1813(a), 1813(b), and 1461 et seq.

Source

• Landing page: Virginia Laws, Rules & Decisions
• Ruling: P.D. 10-56

Original ruling text

May 7, 2010

Re: Ruling Request: Bank Franchise Tax

Dear *:

This is in response to your letter in which you request a ruling concerning the bank franchise tax as it applies to * (the "Taxpayer"). I apologize for the delay in responding to your letter.

FACTS

The Taxpayer has been filing the bank franchise tax for a number of years. In 2008, the Taxpayer applied for, and was granted, a charter as a federal savings association by the Office of Thrift Supervision. The Department notified the Taxpayer that it was no longer liable for bank franchise tax and, thus, subject to Virginia income tax.

The Taxpayer believes that it continues to be subject to bank franchise tax as a "banking association" under federal law. The Taxpayer requests a ruling that it meets the definition of a "bank" for purposes of Virginia's bank franchise tax.

RULING

Virginia Code § 58.1-1202 requires every bank or trust company to pay an annual tax measured by its net capital as defined in Va. Code § 58.1-1205. The bank franchise tax is paid in lieu of Virginia's income tax and a number of other state and local taxes.

Under Va. Code § 58.1-1201, a bank includes a "bank or banking association organized by or under the authority of the laws of the United States . . . ." The Taxpayer asserts that, as a federal savings association, it is a banking association organized under the authority of federal statute.

Pursuant to the Federal Deposit Insurance Act, a bank is "any national bank and State bank, and any Federal branch and insured branch; and includes any former savings association. " [Emphasis added.] See 12 U.S.C. § 1813(a)(1)(A) and (B). Further, 12 U.S.C. § 1813(a)(2) defines a "State bank" to include a "bank, banking association, trust company, savings bank, industrial bank . . ." The fact that the federal definition includes banking associations but not savings associations denotes that there is a difference between the two. In this case, the Taxpayer is currently a federal savings association, not a bank under federal law.

In addition, savings associations are separately defined under 12 U.S.C. § 1813(b) and include federal savings associations. The definition goes on to state that federal savings associations are defined as a federal savings association or federal savings bank chartered under the Home Owners' Loan Act, as codified at 12 U.S.C. § 1461 et seq . Thus, the Taxpayer is governed by different statutes than banks and banking associations.

Virginia's definition of a bank includes banking associations, but not savings associations. As such, the Taxpayer is not a bank for purposes of Virginia's bank franchise tax. Because the Taxpayer ceased to be a bank in early 2008, it must file a Virginia income tax return for the portion of the 2008 taxable year that it was a federal savings association. In addition, the Taxpayer should contact the locality or localities in which it operates in order to determine the local taxes for which it may now be liable.

This ruling is based on the facts presented summarized above. Any change in facts or the introduction of new facts may lead to a different result.

The Code of Virginia sections cited are available on-line at www.tax.virginia.gov in the Tax Policy Library section of the Department's web site. If you have any questions regarding this ruling, you may contact * in the Office of Tax Policy, Appeals and Rulings, at ***.

Sincerely,

Janie E. Bowen

Tax Commissioner

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