The Department of Taxation and Finance has ruled that a bank holding company that previously qualified to be taxed under Article 9-A under the New York transitional provisions relating to the federal Gramm-Leach-Bliley Act may continue to be taxed under Article 9-A, even after it engages in a plan of reorganization that would otherwise result in the revocation of the “grandfather” election. Advisory Opinion, TSB-A-13(3)C (N.Y.S. Dep’t of Taxation & Fin., Feb. 28, 2013).

Background on the "Grandfather" election. In 2000, as a result of the enactment of the federal Gramm-Leach-Bliley Act, Article 32 was amended to allow certain corporate affiliates of banks to remain taxable under Article 9-A during a transitional period (currently, through tax years beginning before January 1, 2013). Gramm-Leach-Bliley, among other things, removed certain limitations on affiliations between banks, securities firms and insurance companies. It also resulted in the creation of a new type of entity called a “financial holding company” (“FHC”) that can own banks, securities firms and insurance companies.

In relevant part, the Tax Law was amended to allow a qualifying bank holding company to elect to file on a combined basis for a transitional period with any 65% or more owned or controlled “banking corporation” exercising its corporate franchise or doing business in the State, generally if the holding company elected to be an FHC for federal purposes. In addition, the statute prohibited the Department from requiring a bank holding company to file a combined Article 32 return during the transitional period with its 65% or more owned or controlled “banking corporation” that was newlyregistered under the federal Bank Holding Company Act and that elected to be an FHC. Tax Law § 1462(f)(2)(iv)(B). This is an exception to the general rule that a bank holding company, even though classified as an Article 9-A taxpayer, could be included in an Article 32 combined return. Tax Law § 1452(d).

Prior Advisory Opinion. In 2004, the Department issued an Advisory Opinion to the same taxpayer as in the new opinion. That earlier opinion involved a banking corporation subsidiary of the Royal Bank of Canada that contributed all of its assets (including stock in subsidiaries subject to Article 32) to Newco in exchange for 100% of Newco’s stock, in a transaction that qualified under IRC § 351. The Department ruled that Newco — a newly-formed entity that elected federal FHC status in 2003 — could elect to be subject to Article 9-A. It also ruled that Newco, as an electing FHC, although a “banking corporation” under Tax Law § 1452(a)(9), could not be required to file a combined Article 32 tax return with its Article 32 affiliates. RBC Holdings USA, Inc., Advisory Opinion, TSB-A-04(1)C (N.Y.S. Dep’t of Taxation & Fin., Feb. 26, 2004).

New Advisory Opinion. Newco (referred to in the new opinion as “Holdco”) had continued to be subject to Article 9-A since its formation in 2003, and had not been included in a combined Article 32 return with its affiliates. Under a reorganization plan that was carried out in its tax year ended October 2011, Holdco acquired certain assets from its affiliates whereby, according to the opinion, its business operations “may be deemed to have changed” (emphasis added) from its operations before the reorganization. Subsequently, in March 2012, Holdco sold its stock in a banking subsidiary, after which it was no longer a bank holding company. The question presented was whether Holdco, although owned by a bank, could continue to be “grandfathered” under Article 9-A, both in the year of the reorganization and in the subsequent year.

Having been organized and registered as a bank holding company and as an FHC in 2003, Holdco had continued to be “grandfathered” under Article 9-A. However, Tax Law § 1452(n), enacted in 2007, sets forth certain circumstances that result in the revocation of the Article 9-A election (for example, where the corporation ceases to be a New York taxpayer, or where it engages in transactions which cause it to be principally engaged in a business different from the business it conducted immediately prior to the transactions).

In the Advisory Opinion, the Department declined to rule on whether Holdco’s acquisition of assets would actually result in a revocation of the election, stating that it had insufficient facts to make that determination. Nonetheless, the Department concluded that, even if the election was revoked under § 1452(n), Holdco would continue to be subject to Article 9-A in the year of its reorganization because of its status as a bank holding company and as an FHC. As for the subsequent year when Holdco ceased being a bank holding company after it sold its banking subsidiary, the Department ruled that Holdco would continue to be taxable under Article 9-A. This was because, under the transitional provisions of Tax Law § 1452(m)(1), Holdco was properly subject to Article 9-A “in its last taxable year beginning before [January 1, 2011],” and therefore could continue to be taxed under that article.

Additional Insights

The Advisory Opinion reasonably addresses a potential concern regarding the impact of the deemed revocation conditions in the Tax Law applicable to “grandfathered” Article 9-A corporations. It should be noted that, as the Tax Law now stands, the generally pro-taxpayer transitional provisions discussed in the opinion expire for taxable years beginning after December 31, 2012, unless they are further extended by the Legislature.