Bush Tax Cut Bill Would Also Boost Number of S-Corp Banks

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If the $350-billion tax bill passed by the Senate last week becomes law, the number of banks electing S-corporation status could almost double, to nearly 4,000, according to industry experts.

An amendment to the bill would, among other things, increase the maximum number of shareholders in an S corporation to 100 from 75. The industry had hoped to raise that to 150, but Mark Baran, the senior tax counsel at the American Bankers Association, said other eligibility restrictions would be relaxed, encouraging more conversions.

For instance, extended family of up to six generations would be treated as a single share-holder. Under current law only a husband and wife can be considered one shareholder. The S-corporation provision was not included in the House version of the tax bill, but bankers are hopeful that it will emerge from the final bill being hashed out in a conference committee.

Paul Merski, the chief economist for the Independent Community Bankers of America, pointed out that two sponsors of the S-corporation amendment, Sen. Orin Hatch (R-UT) and Sen. John Breaux (D-LA) are on that committee. Merski predicted that the amendment will be in the final bill because it is in line with President Bush's tax agenda.

"Allowing more banks to convert to S corporations to eliminate double taxation income fits in more neatly with the goals of the administration and the Republican majority," he said.

Analysis by CUNA last week suggested that if either of the two Subchapter S bills before Congress becomes law as currently written, banks' Subchapter S tax breaks will exceed credit unions' benefits even sooner. "While we have no problem with banks getting additional tax breaks, we point out their hypocrisy as they try to eliminate credit unions' tax-exempt status," said Gary Kohn, CUNA's vice president of legislative affairs and senior legislative counsel.

CUNA noted that state-chartered banks would get another tax break if the Financial Services Regulatory Relief Act of 2003 (H.R. 1375) becomes law by having the option of converting to Limited Liability Corporations (LLCs). LLCs combine protection from individual liability like a corporation with the pass-through tax treatment of a partnership.

The Senate provision would raise the maximum level of passive income from certain investments to 60% from 25% and would let shareholders of a company that wants to form an S corporation purchase stock held in IRAs without incurring a penalty tax. S corps cannot include stock held in IRAs. Since 1997, 1,853 banks and thrifts have elected the status.

Washington Investment Co., a $250 million-asset, two-bank holding company in Otis, Colo., has been unable to become an S corporation because some of its shareholders have their stock in IRAs. CEO Jerry Bryant has been fighting to change the law. "We are amenable to paying taxes once," he said, "but when we are double taxed and our competitors"-credit unions-"are not taxed at all, it's just not fair."

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