Academic journal article ABA Banking Journal

Subchapter S Hopefuls Find Help on the Hill

Academic journal article ABA Banking Journal

Subchapter S Hopefuls Find Help on the Hill

Article excerpt

Has your bank considered conversion to the tax-advantaged Subchapter S form, but found that it can't qualify? If so, recently introduced legislation could open the doors for your bank and its shareholders.

More than 1,000 institutions, mostly community banks, have chosen Subchapter S form since Congress first extended the option to banking companies, effective Jan. 1, 1997. Indeed, some of the flock of new banks that have been chartered since Congress changed the law have started their corporate lives as S companies.

Banks' ability to use Subchapter S has been an evolving thing ever since the law changed. For many years banks couldn't use this option, so the law and regulations for S companies didn't take special banking issues into account. The Internal Revenue Service, the banking agencies, and now Congress have had to nip and tuck to fit banks into the new format.

Helpful legislation has been introduced on both sides of Congress. The speculation is that the bills might be attached to other legislation. Even if they do not pass in this Congress, such bills, once the ice has been broken, are more likely to resurface.

In the Senate, 5. 2346, introduced by Sen. Wayne Allard (R.-Colo.), would allow companies with up to 150 shareholders to convert to Subchapter S corporations. Presently the limit is 75 shareholders. Some banks that had more than 75 shareholders that wanted to convert have had to shrink their shareholder base in some fashion, with some winding up in court when some shareholders believed the transaction didn't address their interests.

The bill would also bar IRS from applying Subchapter S limitations on "passive investment income" to Subchapter S banks. Passive investment income includes such factors as interest on investment securities. …

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