A group of senators is pressing the Treasury to decide how banks structured as limited-liability companies should be taxed.
The Internal Revenue Service does not recognize banks as LLCs, so the few banks that have received their state regulators' permission to use the structure are taxed as corporations.
The IRS and the Treasury have been reviewing the issue for well over a year, at the request of bank trade groups, regulators, and lawmakers. But last Wednesday a spokesman for the Treasury said it had set no timetable for a decision.
In a letter that day to Treasury Secretary John W. Snow, four senators - Orrin Hatch, R-Utah; Jim Bunning, R-Ky.; Michael Crapo, R-Idaho; and Blanche L. Lincoln, D-Ark. - called the tax regulations on limited-liability companies "outdated."
They said that two years ago the Federal Deposit Insurance Corp. changed its regulations to let bank LLCs get deposit insurance; that several states have passed laws permitting banks to use the structure; and that other states are considering doing so.
"In light of the current interest in this issue among states and banks, we respectfully request that the Treasury Department promptly complete its review of the applicable tax regulations and provide speedy guidance to the banking community as to the results of that review," the lawmakers wrote.
Senators have weighed in on the issue before.
In July 2004, Sen. Hatch and his colleagues John Breaux, D-La., and Gordon Smith, R-Ore., sent a similar letter urging the IRS to recognize banks as limited-liability companies.
"We believe this is an important issue for many small and community banks, particularly those that are in the start-up phase or have recently opened for business and are providing vital services in their neighborhoods," they wrote.
The tax advantage of limited-liability companies, as of subchapter S corporations, is that tax obligations fall on the shareholders, not the company.
But Mark Baran, a lawyer with Powell Goldstein LLP in Washington, said the limited-liability structure is less restrictive because there is no limit on the number of shareholders.
Illinois, Nevada, Oregon, and Utah are among the states that have passed laws letting banks be organized as limited-liability companies.
In Illinois, Providence Bank LLC of South Holland was formed in 2004 with the expectation that the tax rules would be changed and it could eventually benefit from the structure. Providence has $61 million of assets.
This year Mr. Baran helped the $87 million-asset America West Bank of Layton, Utah, convert for the same reason.
Mr. Baran said he hopes the senators' most recent letter will prompt the IRS to act, though he acknowledged that he is not optimistic.
"There does not appear to be an appetite to address this issue," he said. "I don't expect anything at this point."
