Two pieces of legislation offered this week could fuel the already explosive growth in corporate reorganizations of small banks seeking tax breaks.
Sen. Wayne Allard, a Colorado Republican on the Banking Committee, introduced a bill Thursday that would make it easier for community banks to convert to tax-saving S corporations. Chairman Alfonse M. D'Amato and seven other Republicans on the committee are co-sponsors.
Rep. E. Clay Shaw Jr., a Florida Republican on the House Ways and Means Committee, introduced a similar bill Tuesday, aimed at small businesses, that also would benefit banks.
The proposals are the latest effort by lawmakers to appease the banking industry, which feels alienated by financial reform and credit union bills moving through Congress this year. Supporters also view them as a partial antidote to massive industry consolidation that threatens community institutions.
"We needed to make sure we didn't forget the small bankers," said Sen. Allard, who added that he drafted the bill after meeting with bankers from his home state. "I hope with this particular legislation, in this era of megamergers, we encourage small banks to continue as small banks."
Congress opened S corporation tax status to banking companies on Jan. 1, 1997. The structure, restricted to companies with 75 or fewer shareholders, avoids so-called "double taxation." The companies pay no income taxes; only the shareholders are taxed on the company profits. (The name comes from Subchapter S of the Internal Revenue Code, which outlines rules under which corporations can be treated as partnerships for tax purposes.)
Nearly 1,020 banks had switched to S corporations by March 31, according to the American Bankers Association, but remaining legal barriers have created pent-up demand.
Reaction from the industry was enthusiastic.
"Subchapter S banking is hot, and there are significant tax savings," said Mark R. Baran, an ABA senior tax counsel. "If these bills were to become law, Subchapter S banking would expand considerably."
Kenneth A. Guenther, executive vice president of the Independent Bankers Association of America, said the tax break in the Allard proposal "somewhat levels the playing field with credit unions, which don't pay any federal taxes."
Jerry Bryant, chairman of First National Bank of Yuma, Colo., praised a provision in the Allard proposal that would increase the stockholder limit to 150 from 75 and let individual retirement account investments be eligible shareholders.
"A lot of people want to own bank stock in their retirement portfolio, but when they do that keeps the entire company from converting to a Subchapter S," Mr. Bryant said. "It just doesn't seem right."
Other provisions in the Allard proposal include:
Exempting any investments that banks maintain for safety and soundness or liquidity purposes from limits on passive investment income by S corporations.
Increasing interest deductions (taken three years after conversion to an S corporation) on items such as bank deposit interest payments linked to tax-exempt obligations.
Rep. Shaw's bill would let S corporations offer preferred stock and use convertible debt, repeal passive investment income limits, count family members as a single shareholder, and permit nonresident aliens as shareholders.
Whether lawmakers will have time to finish these bills is unclear given that Congress has little time left in the 1998 session. And the lost government revenue from doubling the shareholder limit likely will trip budget flags.
Sen. Allard said his bill will go to the Finance Committee and, if approved, could be attached to fast-moving legislation. A likely target is a tax relief bill that the House and Senate are expected to consider in September, observers said.