July 25, 1983

In your letter of July 11, 1983, you requested rulings with respect to the Massachusetts co-operative bank excise and personal income tax consequences of the conversion of the __________ ("Bank") from a state-chartered co-operative bank in mutual form to a state-chartered co-operative bank in stock form.

For co-operative bank excise purposes, the Bank uses the accrual method of accounting and its taxable year ends April 30.

The Bank was formed as a mutual organization to engage in the co-operative bank business. It is a member of, and its deposit accounts are insured in full up to the legal maximum by, the Co-operative Central Bank. As a co-operative bank in mutual form, the Bank has no authorized capital stock. Instead, the proprietary interest in the Bank's reserves and undivided profits belongs to all of its account holders. Deposit accounts include withdrawable or repurchase shares, investment certificates, deposits or other savings accounts (not including repurchase agreements). An account holder in the Bank is entitled to interest on his account balance that is declared and paid by the Bank. In addition, each account holder has an intangible ownership interest in the net proceeds on liquidation of the Bank equal to the proportion which his deposit account balance bears to the aggregate deposit account balances of all Bank account holders. However, liquidation of the Bank requires approval by the Commissioner of Banks of the Commonwealth of Massachusetts ("Bank Commissioner"), who rarely, if ever, approves liquidation of a solvent co-operative bank. Only account holders are shareholders of the Bank, and each account holder has one vote. All of the interests of an account holder cease when he closes his account with the Bank.

In order to stimulate future growth and expansion of the Bank's deposit, lending and other activities through the raising of additional capital, the Board of Directors of the Bank has approved the conversion of the Bank into a Massachusetts-chartered co-operative bank in stock form ("Converted Bank") pursuant to a plan of conversion ("Plan"). The Plan is subject to amendment to assure compliance with the conversion regulations of the Bank Commissioner. (See 209 CMR § 33.00 et seq.) The conversion of the Bank into the Converted Bank is subject to the approval of the Bank Commissioner in accordance with his rules and regulations and the affirmative vote of more than two-thirds of the Bank's shareholders present and voting at a special meeting called for such purpose.

Under the Plan, the Bank will issue shares of $1.00 par value voting common stock. The aggregate purchase price at which all such shares will be offered and sold will be equal to the estimated pro forma market value of the Bank, based upon an independent appraisal. All such shares will be issued and sold at a uniform price per share. The common stock will first be offered to qualifying purchasers pursuant to nontransferable subscription rights. These rights will be offered without compensation therefor first to persons (including directors, officers and their associates) who held qualifying deposits accounts equal to $50 or more ("Qualifying Deposits") on March 31, 1983 ("Eligibility Record Date"). Any shares available after such persons ("Eligible Account Holders") have exercised their rights will thereafter be sold at the same offering price in a firm-commitment underwritten public offering.

After the Bank converts itself to the Converted Bank, all voting rights not attributable to the common stock will expire. A liquidation account will be established in an amount equal to the net worth of the Bank as set forth in its latest consolidated statement of financial condition contained in the final offering circular respecting the offering of the common stock. While the establishment of the liquidation account will not operate to restrict the Converted Bank's use of its net worth, each Eligible Account Holder who had a Qualifying Deposit on the Eligibility Record Date will have a contingent creditor interest in a portion of the liquidation account balance. This interest will constitute a right to receive an amount representing the Eligible Account Holder's interest in such net worth of the Bank before any liquidation distribution can be made with respect to the common stock. An interest in the liquidation account will never be increased. It will, however, be decreased as of any April 30 after the Eligibility Record Date to reflect withdrawals from the Eligible Account Holder's account that reduce the amount therein as of any such April 30 below the amount in such account as of the Eligibility Record Date or any other April 30.

The conversion will not interrupt the business of the Bank, and its business will continue as usual. Upon the conversion, each account holder will receive without payment a deposit account or accounts in the Converted Bank equivalent in amount, interest rate, maturity and terms (other than with respect to liquidation and voting rights) to his deposit account(s) in the Bank immediately prior to the conversion. All loans of the Bank will remain unchanged and will retain the same characteristics after the conversion. The Converted Bank will continue its membership in and its deposit accounts will continue to be insured in full up to the legal maximum by, the Co-operative Central Bank. The Converted Bank will also remain subject to the regulatory authority of the Bank Commissioner.

The Bank represents that the following federal income tax consequences will obtain as a result of the proposed transaction:

(1) The change in the form of operation of the Bank from a state-chartered co-operative bank in mutual form to a state-chartered co-operative bank in stock form will constitute a reorganization within the meaning of Section 368(a)(1)(F) of the Internal Revenue Code ("Code" or "IRC"). No gain or loss will be recognized by the Bank or the Converted Bank as a result of the conversion. The Bank and the Converted Bank will each be "a party to a reorganization" within the meaning of Section 368(b) of the Code. (See Rev. Rul. 80-105, 1980-2 C.B. 78).

(2) No gain or loss will be recognized by the Converted Bank on the receipt of money in exchange for shares of the common stock. (I.R.C. § 1032).

(3) The basis of the assets of the Bank in the hands of the Converted Bank will be the same as the basis of such assets in the hands of the Bank immediately prior to the conversion. (I.R.C. § 362(b)).

(4) The holding period of the assets of the Bank to be received by the Converted Bank will include the period during which the Bank held the assets before the conversion. (I.R.C. § 1223(2)).

(5) No gain or loss will be recognized by the Eligible Account Holders of the Bank on the constructive issuance to them of deposit accounts in the Converted Bank in the same dollar amount as their deposit accounts in the Bank plus interests in the liquidation account of the Converted Bank in constructive exchange for their deposit accounts in the Bank. (I.R.C. § 354(a)).

(6) No gain or loss will be recognized by the Eligible Account Holders of the Bank on the distribution to them of nontransferable subscription rights to purchase shares of the common stock. (I.R.C. § 305(a) and (d)(1)).

(7) No taxable income will be realized by the Eligible Account Holders of the Bank as a result of the exercise of the nontransferable subscription rights. (See Rev. Rul. 56-572, 1956-2 C.B. 182).

(8) The basis of the deposit accounts in the Converted Bank constructively received by the Bank's account holders will be the same as the basis of their deposit accounts in the Bank constructively surrendered in exchange therefor. The basis of the interests in the liquidation account of the Converted Bank to be received by the Eligible Account Holders of the Bank will be zero. (See I.R.C. § 358).

(9) The basis of the nontransferable subscription rights will be zero. (I.R.C. § 307(b)(1), Treas. Reg. § 1.307-1 and 2). The basis of the Conversion Stock will be the purchase price thereof. (I.R.C. § 1012). The holding period of the common stock will commence on the exercise of the subscription rights. (I.R.C. § 1223(6)).

Individual residents of Massachusetts are. subject to income taxation under General Laws Chapter 62 on their Massachusetts gross income less certain deductions and exemptions. An individual's Massachusetts gross income is federal gross income with certain modifications not relevant here. (G.L. c. 62, § 2(a)).

The Bank is subject to taxation under General Laws Chapter 63, Section 11.

Based upon the foregoing, it is ruled:

1. The Converted Bank will continue to be subject to General Laws Chapter 63, Section 11.

2. Under General Laws Chapter 63, Section 11, the Bank and the Converted Bank will be treated as the same co-operative bank and as if the conversion had not occurred; and

(a) the part of the current taxable year of the Bank before the conversion and the part of the current taxable year of the Converted Bank after the conversion will constitute a single taxable year of the Converted Bank;

(b) the Converted Bank will succeed to and take into account the net operating income of the Bank as of the date of the conversion;

(c) the Converted Bank's basis in its assets, holding periods, depreciation and amortization will be calculated as if the Bank and the Converted Bank were the same co-operative bank and as if the conversion had not occurred;

(d) the creation of the liquidation account on the records of the Converted Bank will have no effect upon either the Bank or the Converted Bank's net operating income;

(e) for the current taxable year, the Converted Bank can claim as a credit any estimated tax under Section 11 paid by the Bank prior to the conversion; and

(f) the deposits, real estate and mortgage loans of the Converted Bank will be calculated as if the Bank and the Converted Bank were the same co-operative bank and as if the conversion had not occurred.

3. No gross income, gain or loss will be realized by either the Bank or the Converted Bank as a result of the conversion.

4. No gross income, gain or loss will be realized by either the Bank or the Converted Bank on the receipt of money or other consideration in exchange for shares of common stock.

5. No gain or loss will be recognized by the Eligible Account Holders of the Bank on the constructive issuance to them of deposit accounts in the Converted Bank in the same dollar amount as their deposit accounts in the Bank plus interests in the liquidation account of the Converted Bank in constructive exchange for their deposit accounts in the Bank. No gain or loss will be recognized by the account holders of the Bank who are not Eligible Account Holders on the constructive issuance to them of deposit accounts in the Converted Bank in the same dollar amount as their deposit accounts in the Bank in constructive exchange for their deposit accounts in the Bank.

6. No gain or loss will be recognized by the Eligible Account Holders of the Bank on the distribution to them of nontransferable subscription rights to purchase shares of common stock.

7. No taxable income will be realized by the Eligible Account Holders of the Bank as a result of the exercise of the nontransferable subscription rights.

8. The basis of the deposit accounts in the Converted Bank constructively received by the Bank's account holders will be the same as the basis of their deposit accounts in the Bank constructively surrendered in exchange therefor. The basis of the interests in the liquidation account of the Converted Bank to be received by the Eligible Account Holders of the Bank will be zero.

9. The basis of the nontransferable subscription rights will be zero. The basis of the conversion stock will be the purchase price thereof. The holding period of the conversion stock will commence on the exercise of the subscription rights.

Very truly yours,

/s/Ira A. Jackson

Ira A. Jackson
Commissioner of Revenue

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LR 83-61