On Tuesday, February 2, the Appellants in the TEFRA disallowance appeal, Jerome R. Vainisi, et al. v. Commissioner of Internal Revenue, filed their reply brief with the Seventh Circuit Court of Appeals. Reiterating their argument that Section 291 of the Internal Revenue Code applies to Subchapter S financial institutions only for the first three years after they elect Subchapter S, the Appellants refuted each of the arguments offered by the IRS in its January brief.

The Appellants appropriately clarify that Section 1363(b)(4) is an exception to the general rule that S corporations compute taxable income in the same manner as individuals. It is this exemption, argue the Vainisi Appellants, that causes the TEFRA disallowance to apply at all to Sub S banks and QSubs; absent Section 1363(b)(4) the TEFRA disallowance would apply only to C corporations.

The Vainisi Appellants also note that the Treasury Department has yet to finalize the regulation it proposed back in August of 2006, suggesting that its hesitation may be due in part to the numerous comments it received opposing Treasury’s position. The Association proudly voiced its opposition to the proposed regulation at that time and again thanks all of those Sub S bankers who did so as well.

Oral arguments are scheduled for February 23 at 10:00 a.m. CST. This suggests that a final decision may be forthcoming in late summer.

To view the brief in full, please click here.

The Subchapter S Bank Association once again would like to thank all of our members, associate members, as well as the Community Bankers Associations of Iowa, Illinois and Wisconsin, the Council of Community Banking Associations, The Independent Community Bankers of America, the Independent Bankers Association of Texas and the Wisconsin Bankers Association for supporting the Sub S TEFRA Defense Fund.