Connecticut State Department of Revenue Services

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Ruling 97-2

Corporation Business Tax
Operating Loss Carry-Overs

FACTS:

A state bank ("the Bank"), that is a full-service, FDIC-insured banking entity, transacting banking business, including fiduciary services, in Connecticut, will convert from a state bank to a national bank under procedures established by the United States Office of the Comptroller of the Currency.

To effectuate the conversion of the Bank into a national bank, the Bank must file applications and receive approval from the United States Office of the Comptroller of the Currency. Once approval is granted, the Bank will become a national bank by amending its articles of organization, adopting certain required corporate resolutions, and changing its name to refer to itself as a national bank. The "conversion" of the Bank to a national bank, it is represented, will be considered a tax-free reorganization under 26 U.S.C. §368(a)(1)(F). After the conversion, the Bank will change its name to reflect that it is a national bank.

After the Bank converts to a national bank and changes its name to refer to itself as a national bank, it will continue to be a full service, FDIC- insured, banking entity, transacting a general banking business, including fiduciary services, in Connecticut, and will carry on the same business that the Bank presently carries on and will operate out of the same branches, employ the same employees, and have the same officers and directors as it presently does. However, after the conversion there may be some adjustments made in the ordinary course of business and in response to prevailing economic conditions, or adjustment made for reasons unrelated to the conversion, such as opening new branches and/or changing its services to meet market demands. After the conversion of the Bank to a national bank, the Bank does not intend to exercise any limited additional powers accorded a national bank.

The Bank is a wholly-owned subsidiary of Corporation B ("B"). B is a subsidiary of Corporation C ("C"). C is a bank holding company under the federal Bank Holding Company Act of 1956. After the conversion of the Bank to a national bank, the Bank will continue to be a wholly-owned subsidiary of B and B will continue to be a subsidiary of C.

ISSUE:

Whether after the conversion of a state bank into a national bank, the operating loss carry-overs of the state bank, which could otherwise be deducted under the rules of Conn. Gen. Stat. §12-217(a) and Conn. Agencies Reg. §12-223a-2, will be reduced or eliminated.

DISCUSSION:

In determining whether the planned corporate restructuring will eliminate or reduce the operating loss carry-overs of the Bank which may be deducted by the Bank after it converts to a national bank, the Department looks to the following 6 factors:

1. Whether the transaction is a statutory merger or consolidation. Pursuant to the rules for conversion established by the Office of the Comptroller of the Currency, a new corporation is not created when a state bank converts to a national bank. Rather, the state bank's corporate entity is required to modify its existing corporate documents to reflect certain required corporate structural changes. The conversion of the Bank to a national bank, however, is represented to qualify as an type F tax-free reorganization for federal income tax purposes.

2. Whether the ownership of the bank prior to the conversion is the same after the conversion. Prior to the conversion, the Bank is a wholly-owned subsidiary of B, and after the conversion it will be a wholly-owned subsidiary of B.

3. Whether tax avoidance is not the primary purpose of the transaction. The primary purpose of the transaction is to change the Bank from a state bank to a national bank.

4. Whether after the transaction there is a continuity of business enterprise. The business of the Bank will continue to be operated in substantially the same form as before the conversion.

5. Whether the loss entity is maintained as a separate division, or its assets separately accounted for, such that the taxpayer can show that the non-surviving entity or its assets generated income following the transaction. The only business of the Bank after the conversion will be the Bank's business before the conversion, so there is not any need to segregate or separately account for income from the Bank's business.

6. Whether the losses which are carried over are used only to offset that income which is generated following the transaction. The only income which will be offset by the operating loss carry-overs will be income from the Bank's business.

Accordingly, the proposed conversion of the Bank to a national bank will not eliminate or reduce the operating loss carryovers which may be deductible by the Bank under the rules of Conn. Gen. Stat. §12-217(a) and Conn. Agencies Reg. §12-223a-2.

RULING:

If the tests under the 1939 Internal Revenue Code are met, then the conversion of a state bank into a national bank will not eliminate or reduce the amount of operating loss carry-overs which may be deducted by a bank after the conversion.

LEGAL DIVISION

July 7, 1997