PA Bank Shares Tax: Big News for Banks Involved in Mergers


Today, the Commonwealth Court decided the Lebanon Valley Farmers Bank case1. The case produces a big problem for banks that have, in the past six years, been involved in a merger between a bank that is a bank shares taxpayer and another bank that is not a bank shares taxpayer. We encourage our clients and friends who are in the banking industry to register for our August 23 teleseminar that will cover this issue.

The Lebanon Valley case involves the Pennsylvania bank shares tax. The bank shares tax is based on a six-year average of a bank's equity. For a bank involved in a merger, the statute includes a combination provision that combines the pre-merger equity of the merged banks. But under the First Union case (which we won five years ago2) - if a bank that is a bank shares taxpayer merges with a bank that is not a bank shares taxpayer, the historical equity values are not combined. Instead, for pre-merger years, the equity of only the surviving bank is used in the six-year average.

The Lebanon Valley case has been brought by a bank that is a bank shares taxpayer that was involved in a merger with another in-state bank that was also a bank shares taxpayer. Lebanon Valley wanted to exclude the equity value of the bank that did not survive the merger. Lebanon Valley argued that the merger of two in-state banks is treated less favorably than the merger of an out-of-state bank with an in-state bank, and that the different treatment violated the uniformity clause of the state constitution.

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