IRS Withdraws Proposed TEFRA Rule

Tagged under: TEFRA, taxation, IRS, Proposed Rule

Nov 14, 2011

Earlier this month,  the IRS finally withdrew its proposed rule relating to the TEFRA disallowance. The rule, which dates back to August 2006, would have forced Subchapter S banks to apply the 20% TEFRA disallowance not just for the first three years after the bank’s S election, but every year thereafter in which it had interest expense attributable to certain tax-exempt municipal securities. Withdrawal of the proposed rule represents the final chapter in what became a hotly-contested dispute between the Sub S bank community and the IRS—one that ultimately went as far as the U.S. Seventh Circuit Court of Appeals in Chicago.

In March 2010, the Seventh Circuit awarded the Subchapter S bank community a monumental victory in the TEFRA disallowance appeal styled Vainisi v. Commissioner of Internal Revenue. In 2010 alone, shareholders of Sub S banks realized an estimated $21 million in savings from this decision.

The Subchapter S Bank Association is proud to have organized and funded this critical appeal, which ultimately led to IRS’s withdrawal of the proposed rule. The victory represents a perfect example of the great things that can be accomplished when Sub S bankers from across the country unite to fight for a common cause.

The presence of a unified voice to speak out for the Sub S bank community is as important as ever. When the U.S. Treasury Department failed to create a plan under the TARP Capital Purchase Program for Sub S banks, the Subchapter S Bank Association stepped in and led the way. Again, when Treasury neglected to create a Small Business Lending Fund program for Sub S banks, the Subchapter S Bank Association was there.

For more information about these and other developing issues affecting the S corporation taxation of financial institutions, please feel free to contact Bruce Toppin at 210-228-4414.