TO THE OFFICER IN CHARGE OF SUPERVISION AT EACH FEDERAL RESERVE BANK
On October 29, 1996, the Federal Financial Institutions Examination
Council ("FFIEC") sent a bulletin to all insured banks and thrifts regarding the
impact of changes made to the Internal Revenue Code by the recently enacted
Small Business Job Protection Act of 1996. With these changes, some banking
and thrift organizations may be able to elect Subchapter S corporation status under
the Code and generally receive pass-through tax treatment for federal income tax
purposes if certain criteria are met. A copy of the bulletin is attached.
The bulletin states no formal application is required to be filed with the
federal bank and thrift regulatory agencies merely as a result of an election by a
bank, thrift, or parent holding company to become a Subchapter S corporation.
However, if an institution takes certain steps to meet the criteria to qualify for this
tax status, particularly the limitations on the number and types of shareholders,
these steps may require applications or notices to the agencies.
The bulletin also indicates that any distributions made by the Subchapter S banking organization to its shareholders, including distributions
intended to cover a shareholder's personal tax liability for the shareholder's
proportionate share of the taxable income of the institution, will continue to be
regarded as dividends for federal regulatory purposes.
Please send a copy of the attached bulletin to the bank holding
companies in your District. A sample transmittal letter is attached for your
convenience. Any questions regarding this bulletin should be directed to Molly S.
Wassom at (202) 452-2305, Pat A. Robinson, (202) 452-3005, or John M. Frech,
(202) 452-2275.
Director
FIL-91-96 October 29, 1996
Under changes made to the Internal Revenue Code by the recently enacted Small Business Job Protection Act of 1996, financial institutions, including banks, thrifts, and their parent holding companies, will be able to elect Subchapter S corporation status under the Code and generally receive pass-through tax treatment for federal income tax purposes if certain criteria are met. No formal application is required to be filed with the federal bank and thrift regulatory agencies merely as a result of the election by a bank, thrift or parent holding company to become a Subchapter S corporation. However, certain steps taken by an institution or its shareholders to meet the criteria to qualify for Subchapter S status, particularly the limitations on the number and types of shareholders, may require applications or notices to the agencies. These submissions may include filings under the Change in Bank Control Act, the Bank Merger Act, the Bank Holding Company Act, the Savings and Loan Holding Company Act, or statutes governing reductions or retirements of capital stock by banks and thrifts. In some instances, filings with the agencies under the federal securities laws also may be necessary. Financial institutions and their shareholders should understand that distributions by a Subchapter S corporation, including distributions intended to cover a shareholder's personal tax liability for the shareholder's proportionate share of the taxable income of the institution, are dividends for federal regulatory purposes, including the prompt corrective action statue and its implementing regulations. Therefore, such distributions to shareholders may be restricted in amount or prohibited in some instances. Finally, the agencies understand that the Internal Revenue Service has yet to resolve certain tax issues relating to the application of the Subchapter S election by financial institutions. Accordingly, institutions are encouraged to undertake a careful review of these issues prior to making a Subchapter S election, and should obtain appropriate legal, accounting, and tax advice. For further information, please contact your primary federal regulator.
Executive Secretary Distribution: Insured Banks, Insured Savings Associations, and Holding Companies
Suggested Transmittal Letter to Bank Holding Companies
[To the Chief Executive Officer of the
On October 29, 1996, the Federal Financial Institutions Examination Council
("FFIEC") sent a bulletin to all insured banks and thrifts regarding the impact of
recent changes made to the Internal Revenue Code by the recently enacted Small
Business Job Protection Act of 1996. With these changes, some banking and
thrift organizations may be able to elect Subchapter S corporation status under the
Code and generally receive pass-through tax treatment for federal income tax
purposes if certain criteria are met. A copy of the bulletin is attached.
The bulletin, states that no formal application is required to be filed with the
federal bank and thrift regulatory agencies merely as a result of an election by a
bank, thrift, or parent holding company to become a Subchapter S corporation.
However, if an institution takes certain steps to meet the criteria to qualify for this
tax status, particularly the limitations on the number and types of shareholders,
these steps may require applications or notices to the agencies.
The bulletin also indicates that any distributions made by the Subchapter S
banking organization to its shareholders, including distributions intended to cover a
shareholder's personal tax liability for the shareholder's proportionate share of the
taxable income of the institution, will continue to be regarded as dividends for
federal regulatory purposes.
If there are any questions regarding the attached bulletin, please
call..............(Reserve Bank staff member) at ........................, or Molly S.
Wassom, Assistant Director, Board of Governors, Division of Banking Supervision
and Regulation, (202) 452-2305, or Pat A. Robinson, Senior Attorney, Board of
Governors, Legal Division, (202) 452-3005.
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