Corporation Law Change Could Mean Tax Bonanza

By O'Hara, Terence | American Banker, August 9, 1996 | Go to article overview

Corporation Law Change Could Mean Tax Bonanza


O'Hara, Terence, American Banker


The owners of hundreds and probably thousands of small, closely held banks could save millions in taxes by taking advantage of a soon-to-be available corporate structure, according to banking lawers and tax specialists.

By becoming S corporations, closely held banks may be able to ward off acquirers and attract more long-term investment.

"We've been working toward this day for six years," said Al Jones, chief executive of American Bank in Corpus Christi, Tex. "This could be a huge incentive to invest in community banks."

Patrick Kennedy Jr., a San Antonio lawyer who for years has championed such limited-liability forms of ownership for small banks, said the new law's "benefits are enormous."

The change is "quite a far-reaching and welcome thing for community banks," he said.

Owners in Texas, which has hundreds of small, closely held community banks, are expected to take quick advantage of the change.

The S corporation change is part of the Small Business Job Protection Act of 1996, commonly known for its provisions increasing the minimum wage. The legislation, awaiting the signature of President Clinton, allows banks and thrifts to use S corporation structures for the first time and liberalizes the definition of S corporations.

The S corporation structure was designed for small businesses with few shareholders as a way to shield owners personally from certain liabilities associated with running a business while keeping their individual tax status.

But depository institutions were always barred from using the ownership structure because they could, in theory, use the bad-debt-reserve accounting method. But bank proponents said the reserve method is never used - even for accounting for bad debts.

The new law will change that, as well as increase the maximimum number of shareholders allowable for an S corporation to 75 from 35. …

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