WASHINGTON - Though it draws few conclusions, the General Accounting Office has issued a report that gives a detailed, independent view of tax-law obstacles banks face when converting to S corporations for tax savings.
Such companies pay no corporate taxes, passing profits directly to shareholders, whose dividends are individually taxed. The Gramm-Leach-Bliley Act required the GAO to weigh five possible changes in the rules for S corporations, including increasing the maximum allowable number of shareholders to 150 from 75 and letting shares be held in Individual Retirement Accounts.
The GAO report, released Friday, concluded that the shareholder limit is a greater obstacle for banks than for other businesses. Of 2.5 million corporations that converted to S corporations in 1997, 91% had three or fewer shareholders, and fewer than 1% had more than 31 shareholders, the GAO said. Among banks, 40% had three or fewer shareholders, and 11% had 31 or more shareholders.
Allowing shares in S corporations to be held in Individual Retirement Accounts would decrease the cost of conversion for banks, the GAO said. Though bank regulators had no objection to letting S corporation bank shares be held in IRAs, the GAO said the Treasury Department opposes the move because it would create untaxed income for a potentially long period.