Last week's reversal of a tax court decision means Subchapter S bank owners will continue paying taxes as they have for years.

The Seventh Circuit Court of Appeals in Chicago ruled in favor of a consortium of S Corp banks that fought to maintain a long-standing interpretation that allowed the banks a 100% deduction on interest expense related to municipal bonds.

The Internal Revenue Service argued that the banks could deduct only 20% of their interest expense.

However, these banks, which are taxed under the rules of Subchapter S of the Internal Revenue Code, would not be directly on the hook for the money. This is because profits at S Corps, which can have no more than 100 shareholders each, are taxed at the shareholder level. Most Subchapter S banks have agreements to reimburse their owners for tax errors.

Jerome R. Vainisi and Doris L. Vainisi, the owners of First Forest Park Corp. in Illinois, fought the IRS over a 2006 audit that found its owners owed $10,000. Several trade groups supported their fight.

Debra Koenig, an attorney with Godfrey & Kahn SC in Milwaukee, represented the Vainisis. Koenig said in an interview Monday that the case is important because it affects roughly 31% of the nation's banks.

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