Your article of July 22, 2002 "Bankers Quietly Pursuing Option for State Charters to Change Tax Status" accurately points out that LLC income is not taxed at the entity level but is passed through and taxed to the company's shareholders. That is, the income is taxed only once whereas a regular, or "C" corporation, financial institution's income is taxed both at the corporate level and at the shareholder level.
The American Bankers Association spokesperson's statement in that article that the proposed change to allow state- chartered banks to organize as LLCs "does not reduce taxes at all" is not accurate. Indeed, elimination of the corporate level of tax, and the attendant savings, is a significant factor in the choice of entity decision. According to CUNA's Economics Department analysis of Call Report data and other information, elimination of the corporate level tax allows the shareholders of a Subchapter S banks to pay approximately 40% less income tax.
Congressional tax writers have had some sympathy for the banking industry's argument for expanding the Sub S tax rules to better accommodate banks based on the premise that they are not allowed to become limited liability companies. Allowing state-chartered banks to choose the LLC status would certainly reduce the income taxes paid by such entities.
Moreover, the reported comments of Comptroller of the Currency John D. Hawke are interesting when considered in connection with past industry efforts to "tax credit unions." Comptroller Hawke's observation that the FDIC was being used as a "pawn" by the bankers in attempting to expand the LLC rules gives strong support to the view that their successful lobbying efforts with respect to exempting eligible banks from corporate income taxation effectively removes taxation of not-for-profit credit unions from further discussion.
J. Leon Peace, Jr., Esq.
Tax Manager, CUNA
Credit Union National Association
Washington, DC 20004
