Three senators are urging the Treasury Department to let small banks adopt the tax-friendly limited liability company structure.
Orrin Hatch, R-Utah, John Breaux, D-La., and Gordon Smith, R-Ore., requested in a July 9 letter to the head of Treasury’s Office of Tax Policy that the office promptly review what they called “outdated” regulations that prevent banks from becoming LLCs.
“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.
Small banks find the LLC structure attractive because under it they would not have to pay corporate income tax — instead they would pass the tax obligation to their shareholders — and they would not be limited by the tight restrictions on S corporation banks.
To qualify as an S corporation a bank must have no more than 75 shareholders. Most start-up banks have hundreds of investors.
The senators’ letter came a year and a half after the Federal Deposit Insurance Corp. said it would give deposit insurance to banks that become LLCs. Since then several states, including Illinois, Oklahoma, and Louisiana, have changed their laws to allow banks to adopt the structure.
Banks need approval from the Office of Tax Policy to realize the tax benefits of an LLC. The senators, members of the Senate subcommittee on taxation and Internal Revenue Service oversight, wrote, “These FDIC and state legislative actions will be meaningless if the existing tax regulations are not reconsidered.”
The Office of Tax Policy, which reviews regulations for the IRS, has not officially taken up the issue. Mark Baran, senior tax counsel for the American Bankers Association, said he is hopeful the senators’ letter will prompt the office to put the topic on its agenda.
“The Treasury Department has not paid much attention to this issue, but this really raises the level of attention,” Mr. Baran said.
The senators timed their letter in hopes of getting the bank LLC issue added to the Office of Tax Policy’s Priority Guidance Plan, an outline of its top goals for the upcoming fiscal year. The new plan is expected in the next few weeks.
A Treasury spokeswoman said that the Office of Tax Policy was reviewing the letter. She said she did not know whether the LLC matter would be included in the guidance plan.
