ABA Supports Proposed Subchapter S, LLC Tax Bills

Tagged under: HR 2789, HR 3287, 2016

May 31, 2016

ABA last week submitted a statement for the record expressing support for two bills introduced by Rep. Kenny Marchant (R-Texas) that would provide banks more flexibility under the Internal Revenue Code.
The Capital Access for Small Business Banks Act (H.R. 2798) would help facilitate the additional raising of bank capital by expanding both the number of potential shareholders and the types of stock that can be issued by banks currently operating under Subchapter S of the IRC. The Community Bank Flexibility Act (H.R. 3287) would allow an institution organized as limited liability companies to be treated as a bank under Section 581 of the IRC for tax purposes, allowing it to achieve tax efficiencies by having the income of the corporation taxed only once at the shareholder level.

“Rep. Marchant’s legislation will provide additional important tax efficient alternatives for banks to raise capital,” ABA said. “The ABA supports these two changes to the IRC that will help promote strong banks, encourage growth and stronger, more economically vibrant communities.”

The American Bankers Association (ABA) is pleased to provide a written statement for the
record for the Ways and Means Tax Policy Subcommittee Member Day Hearing on Tax
Legislation held on May12, 2016.

The ABA is the united voice of America’s hometown bankers; small, mid-size, regional and
large banks that together employ more than 2 million people, hold more than $16 trillion in
assets, safeguard $12 trillion in deposits and extend more than $8 trillion in loans.
It is estimated that approximately one third of all banks in the United States operate under the
provisions of Subchapter S of the Internal Revenue Code (IRC). In addition, there are other
small banks that operate under Subchapter C of the IRC that cannot qualify for Subchapter S
status for a variety of reasons or choose not to use the provisions due to current restrictions in the
IRC. The vast majority of these banks specialize in serving smaller communities and small
businesses.

The ABA is supportive of tax policy proposals that assist in creating economic growth and
strong banks. To continue to serve communities and meet additional regulatory requirements,
banks need additional flexibility in the IRC to operate efficiently and effectively.
Representative Kenny Marchant (TX) has introduced two bills that will make needed changes to
the IRC that will help facilitate the additional raising of bank capital and the efficient operation
of community banks. The two bills are summarized below.

Capital Access for Small Business Banks Act – H.R. 2789
This legislation will allow banks that are currently operating under Subchapter S of the IRC to
expand the number of allowable shareholders from 100 to 500. In addition, the bill provides that
an S corporation bank could issue a class of qualified preferred stock, with a deduction for
dividends paid, without violating its status as an S corporation.

By expanding both the number of potential shareholders and the type of stock that can be issued,
additional opportunities will be available for banks to raise capital. This will result in an ability
to make more loans, grow business in the banks’ communities and strengthen the capital base for
community banks.

Community Bank Flexibility Act – H.R. 3287
This legislation will allow banks organized as limited liability companies (LLCs) to be treated as
a bank under Section 581 of the IRC for tax purposes. The LLC structure allows a corporation to
achieve tax efficiencies similar to S corporation status by having the income of the corporation
taxed only once, at the shareholder level. In addition, as a LLC for tax purposes, banks would
not face the same restrictions on the number of shareholders and types of stock that are present
where an entity is operating as a S corporation. The legislation also includes provisions for an
orderly transition for those banks that would elect to use the LLC tax status.

Similar to the reasons for supporting H.R. 2789, this bill will support a bank’s ability to operate
in a tax efficient manner and to raise the capital required to serve the needs of the community
with a strong capital base.
ABA Support

Rep. Marchant’s legislation will provide additional important tax efficient alternatives for banks
to raise capital. The ABA supports these two changes to the IRC that will help promote strong
banks, encourage growth and stronger, more economically vibrant communities. We urge
Congress to consider these important banking tax issues as it continues its deliberations on tax
policy.