On Thursday, January 15, 2009, the United States Tax Court announced its decision in the TEFRA disallowance case styled Vainisi v. Commissioner of Internal Revenue. Ruling in favor of the IRS, the Court declared that the 20% TEFRA disallowance does in fact continue to apply after three years to banks that have made qualified subchapter S subsidiary elections (meaning they are wholly-owned subsidiaries of holding companies and that their parent holding companies have elected to be taxed as S corporations). Interestingly though, Judge Foley’s opinion also appeared to suggest that for Subchapter S banks without holding companies, the 20% TEFRA disallowance might only apply for the initial three years after the bank’s S election. The petitioners in the case have not yet announced if they plan to appeal the decision.

A detailed article outlining the Vainisi opinion and analyzing the implications of the Court’s ruling will be included in the next issue of the Subchapter S Bank Report, which is scheduled for publication early next week. In the meantime, if you have any questions or comments regarding the TEFRA ruling, please feel free to contact us by telephone at (210) 228-9961 or by email at info@subsbanks.org.