TECHNICAL ASSISTANCE ADVISORY 92-004SUBJECT: West Virginia Income Tax Consequences of Corporate Plan of Reorganization This is in reply to your letter of June 8, 1992, requesting on behalf of your client issuance of a technical assistance advisory, under W. Va. Code §11-10-5r, based on the facts provided and issues raised in the request.FACTS Documents attached with your letter set forth in detail the material facts of the transaction which the subject of the request for advisory. Those facts are incorporated herein by reference. The essence of the transaction is that, pursuant to a Plan of Reorganization, Corporation A, a mutual company, will charter a new subsidiary ("Corporation B") into which it will transfer substantially all of its assets and liabilities in exchange for the initially issued and outstanding stock of Corporation B. Corporation A will then adopt a new charter and do business as a holding company. Contemporaneously with the transfer of assets and liabilities by Corporation A, the opportunity to purchase common stock of Corporation B will be offered to employee plans of Corporation B (including any non-tax qualified plans of Corporation B); to officers, directors and employees of Corporation A; and to the general public, including members of Corporation A, pursuant to priorities established by the Board of Directors. Upon transfer of assets and liabilities to Corporation B, persons who owned certain rights in Corporation A, or who owed certain obligations to Corporation A, will then own or hold equivalent rights in Corporation B.ISSUES Rulings on twelve questions were requested. We observe that all questions pertain to application of the West Virginia Personal Income Tax Act, W. Va. Code §11-21-1 et seq., or the West Virginia Corporation Net Income Tax Act, W. Va. Code §11-24-1 et seq., to your client or its shareholders. These questions are as follows: 1. Whether the Reorganization qualifies as a tax free exchange of assets and liabilities solely for stock. 2. Whether Corporation A [Savings Bank] will recognize gain or loss upon the transfer of substantially all of its assets and liabilities to [the Stock Bank] Corporation B solely in exchange for voting common stock of the Corporation B. 3. Whether Corporation A will recognize depreciation recapture income as a result of the transfers to the Corporation B. 4. Whether Corporation A will recognize investment credit recapture upon its transfer of assets and liabilities to Corporation B. 5. Whether Corporation A will recognize income with respect to its bad debt reserve established under Code Section 593 as a result of the transfer. 6. Whether Corporation A's basis in the common stock of Corporation B received in the Reorganization will be the same as the basis of the property transferred in exchange therefore, reduced by the sum of the liabilities assumed by Corporation B or to which assets transferred are taken subject. 7. Whether Corporation A's holding period for the common stock of Corporation B received in the Reorganization will include the period during which the property exchanged was held by Corporation A, provided that such property was a capital asset on the date of the exchange. 8. Whether Corporation B will recognize gain or loss upon its receipt of property from Corporation A in exchange for its common stock. 9. Whether Corporation B's basis in the property received from Corporation A will be the same as the basis of such property in the hands of Corporation A immediately prior to the Reorganization. 10. Whether Corporation B's holding period for the property received from Corporation A will include the period during which such property was held by Corporation A. 11. Whether Corporation A's depositors will recognize gain or loss by reason of the Reorganization. 12. Whether, after the Reorganization, each depositor in Corporation A will have a basis in his or her Corporation B deposit account equal to the fair market value, or account balance, of his or her Corporation A deposit account.DISCUSSION The West Virginia Personal Income Tax Act and the West Virginia Corporation Net Income Tax Act (collectively the "West Virginia income tax laws") adopt provisions of the laws of the United States relating to the determination of income for federal income tax purposes. W. Va. Code §§11-21-1 and 11-24-1. More particularly, the starting point for determining West Virginia personal income tax liability is an individual's federal adjusted gross income for the taxable year, W. Va. Code §11-21-12(a), as reportable on Federal Form 1040. The starting point for determining West Virginia corporation net income tax liability is a C corporation's federal taxable income for the taxable year, W.

Va. Code §11-24-6(a), as reportable on Federal Form 1120. Changes in federal law pertaining to the determination of income are not automatically adopted or incorporated into the West Virginia income tax laws. Historically the Legislature annually updates the meaning of certain terms used in the West Virginia income tax laws, bring them into conformity with their meaning for federal income tax purposes. Recently, changes in federal law made prior to January 1, 1992, pertaining to the definition of "federal adjusted gross income" were incorporated into the West Virginia Personal Income Tax Act for taxable years beginning after December

31, 1990. W. Va. Code §11-21-9, as amended by House Bill No. 4052 (1992). Changes in federal law made prior to January 1, 1992, pertaining to the definition of "federal taxable income" were recently incorporated into the West Virginia Corporation Net Income Tax Act for taxable years beginning after December 31, 1990. W.

Va. Code §11-24-3, as amended by House Bill No. 4053 (1992). Should the West Virginia Legislature determine that something should be treated in a different manner for West Virginia income tax purposes than for federal income tax purposes, the updating occurs but an increasing or decreasing modification to federal adjusted gross income, or to federal taxable income in the case of C corporations, is provided in W. Va. Code §11-21-12 (West Virginia adjusted gross income of resident individuals) or in §11-24-6 (adjustments in determining West Virginia taxable income of corporations). Whether there will be any adverse West Virginia income tax consequences associated with the proposed reorganization, and in particular with respect to the twelve questions presented for ruling, is governed by federal income tax law. None of the increasing or decreasing modification provided in W. Va. Code §11­21-12 (to federal adjusted gross income of individuals) or §11­24-6 (to federal taxable income of corporations) will result in different treatment for West Virginia income tax purposes. You are advised, however, that should any changes be made in federal income tax law during calendar year 1992 that are applicable to this reorganization, those changes will not be incorporated automatically into the West Virginia income tax laws. Such changes would be considered by the West Virginia Legislature when it meets next year and appropriate action taken. SUMMARY In summary: (1) Answers to the twelve questions presented for ruling are governed by federal income tax law. We assume that these same questions, or variations thereof, have been or will be submitted to the Internal Revenue Service. (2) No West Virginia modifications increasing or decreasing federal adjusted gross income or federal taxable income will cause a different result for West Virginia income tax purposes. The conclusions reached in this advisory are based on facts submitted and application of current law. You are advised that the conclusions reached in this advisory may no longer apply should (1) there be a change of material fact, (2) the material facts be significantly different from those provided for purposes of this advisory, or (3) there be a material change in the applicable law. In the event there is a material change, your client may apply for clarification of this advisory. This technical assistance advisory is issued pursuant to W.

Va. Code §11-10-5r. A sanitized version of this advisory, designated TAA 92-004, will be filed in the West Virginia Register maintained by the Secretary of State and otherwise made available to the public. Should you have any question about this advisory, please contact this office at your convenience. James H. Paige III, Secretary Department of Tax and Revenue Issued: June 25, 1992