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S Corp Workshop

S Corp Workshop

May 2, 2018

Authored by: Bryan Cave Leighton Paisner

On Monday, May 14, 2018, we will be hosting, with our friends at Porter Keadle Moore, LLC and FIG Partners, an S Corp Workshop exploring issues affecting S Corp banks following adoption of the Jobs and Tax Cuts Act.

Operating as an S Corp has historically been an appealing choice for many financial institutions that have the flexibility to be taxed in a variety of ways. In light of the recent tax reform, however, an S Corp structure may not be as beneficial as it has traditionally been in the past. Whether you’re an existing S Corp considering converting, or just want to learn more about key decision points, join us as we take a deeper dive into the mechanics and calculations as well as discuss case studies on how using this election can help you thrive in today’s dynamic business environment.

Monday, May 14
7:30 am – 5:30 pm
Office of Bryan Cave Leighton Paisner
One Atlantic Center, 14th Floor
1201 W. Peachtree St., N.W.
Atlanta, GA 30309

Click here for Agenda.

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S Corp Banks Swing for the Fences, Settle for a Single

On July 21, 2014, the FDIC issued a Financial Institutions Letter (FIL) on the impact of the capital conservation buffer restrictions under Basel III on S Corporation banks.  The guidance essentially states that, even though Basel III restricts an S Corporation bank’s ability to pay tax distributions if it does not maintain the full capital conservation buffer, the FDIC will generally approve requests to pay tax distributions if no significant safety and soundness are present.  The succinct guidance probably raises more questions than answers.  Among those questions are the following.

  • Would a bank that does not meet the capital conservation buffer requirements ever really be 1 or 2 rated and experiencing no adverse trends?
  • Does the FDIC believe Obamacare and the related net investment income tax will be repealed?  What about state income taxes?  The factor limiting the dividend request to 40% may ignore what is actually required to allow shareholders to fund their tax liabilities.
  • What is an “aggressive growth strategy?” Is it the same as an intentional growth strategy?
  • If your institution is a national bank, a Fed member bank, or a bank holding company with more than $500 million in consolidated assets, will the Fed and the OCC follow suit and issue similar guidance?

At the end of the analysis, the guidance is probably similar to the current capital rule stating that 1 rated institutions may have a leverage ratio as low as 3.0% and still be considered “adequately capitalized.”  That rule has little practical impact in that it is awfully hard to find an institution with a 3.0% leverage ratio that is 1 rated.  Similarly, we believe any institution that meets the guidelines set forth in the FIL would almost certainly have no need to make this request.  Indeed, the FIL itself seems to acknowledge that fact.

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S-Corp Conference on May 21, 2013


Strategies to help maximize shareholder returns through an S-Corp structure.

Please make plans now to join your peers for a one-day conference focused on why a Subchapter S strategy may be perfect for your bank in our new economic and regulatory environment. Spend the day with industry experts discussing how Subchapter S status may help your institution navigate the new world of banking with deleveraged balance sheets and slower growth models. Whether your bank is an S-Corp or considering converting to an S-Corp, various strategies to help maximize shareholder returns through an S-Corp structure will be discussed. Don’t miss this one-of-a-kind conference designed specifically for community bankers! To register for this important conference, click here or contact Jodi@cbaofga.com.

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2013: A Window of Opportunity for S Corporation Asset Sales

In general, when an S corporation sells its assets, the gain on sale flows through to, and is reportable by, the shareholders and is not subject to a corporate level tax.  In the case of an S corporation that previously was a C corporation, however, such S corporation is subject to a corporate level tax on its “built-in gain” if the asset sale occurs during the “recognition period.”

Generally, an asset’s built-in gain is the amount of gain that would be recognized if the corporation sold such asset immediately before it converted to an S corporation and the recognition period is the first ten years following the conversion to an S corporation.  The recognition period was shortened to seven years for sales occurring during a taxpayer’s 2009 and 2010 tax years and to five years for sales occurring during a taxpayer’s 2011 tax year.  The recently enacted American Taxpayer Relief Act of 2012 extended this shortened five-year recognition period for any built-in gains recognized during either the 2012 or 2013 tax years.  For the 2014 and later tax years, the recognition period will again be ten years, unless legislation to the contrary is passed before then.  Thus, an S corporation that converted from a C corporation at least five years ago should consider the tax benefits of an asset sale occurring in 2013 to avoid the corporate level tax on built-in gain.

If you would like to discuss how this matter may affect your bank, please contact a member of Bryan Cave’s Financial Institutions or Tax Advice and Controversy client service groups.  We also encourage you to attend our 2013 S-Corp Conference.

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Refund Opportunity for Sub S Banks

7th Circuit Reverses Tax Court in Vainisi –

Subchapter S and Q Sub Banks Following Notice 97-5 with Respect to Expenses Relating to Tax Exempt Income
Should Consider Filing Refund Claims

On March 17, 2010, the U.S. Court of Appeals, Seventh Circuit, reversed the U.S. Tax Court’s decision in Vainisi v. Commissioner, 132 T.C. No. 1 (2009), which held that a sub-S corporation that is a bank (or in this case a bank holding company that owned a bank that had made a qualified S subsidiary or “Q-sub” election) is required, under the provisions of Section 291 of the Internal Revenue Code of 1986, as amended, (the “Code”), to increase the amount of its taxable income by 20-percent of the amount of the bank’s interest expense that is considered attributable to certain qualified tax exempt-obligations that are owned by the sub-S bank, despite the plain language of Code Section 1363(b)(4), which provides that “section 291 shall apply if the S corporation (or any predecessor) was a C corporation for any of the 3 immediately preceding taxable years.” The bank in the Vainisi case had been a Q-sub for longer than 3 years.

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TARP CPP Documents Posted for Sub S Institutions

On April 13, 2009, the Treasury Department published the standard agreements for Subchapter S institutions to participate in the TARP Capital Purchase Program.  As previously discussed, the TARP Capital Purchase Program for Sub S institutions consists of a subordinated debt instrument paying interest at a rate of 7.7% per annum until the fifth anniversary, and then at 13.8% per annum, plus an immediately exercised warrant for additional subordinated debt equal to 5% of the investment, paying interest at a rate of 13.8% per annum.  The investment has a 30 year term, and, like trust preferred securities, interest can be deferred for up to 20 consecutive quarterly periods.

Like the documents for public and private participants, the standard documents consist primarily of a letter agreement that incorporates the standard terms contained in a securities purchase agreement, as well as documents defining the investment instruments.

For some reason, the Securities Purchase Agreement defines the subordinated debt instrument to be the “Senior Notes,” presumably to be comparable to the “Senior Preferred” issued under the TARP Capital Purchase Program for public and private institutions.  However, these “Senior Notes” are subordinated to virtually all other indebtedness, whether outstanding at the time of the investment or subsequently incurred.  The TARP subordinated debt instruments are senior to any subordinated debt issued in connection with trust preferred securities.

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Summary of Tax Impact of Economic Stimulus Legislation

The American Recovery and Reinvestment Act of 2009 (the “Act”) contained a number of tax provisions that are likely to be of particular interest to and will directly impact most, if not all, of our bank and other financial institution clients.  One of the tax provisions, the provision increasing the period that a net operating loss (“NOL”) can be carried back from two (2) to up to five (5) years, saw the addition of a provision that will substantially limit the number of taxpayers eligible to take advantage of the expanded carryback period.  The new limitation makes it likely that only smaller financial institutions will be able to take advantage of the expanded carryback period allowed by the Act.  The Act also repealed (with limited transitional protection) the relief provided in Notice 2008-83 issued by the Internal Revenue Service (“IRS”) in the fall of 2008 that exempted certain losses on loans and foreclosure property incurred by banks from the NOL limitation rules applicable to built-in losses.

Increase in the Net Operating Loss Carryback Period

Original provisions coming out of the tax writing committees of the House and Senate included a provision extending the period in which 2008 and 2009 NOLs could be carried back from two (2) to up to five (5) years.  The provision also eliminated the 90% limitation on the use of AMT NOLs that were carried back from 2008 or 2009.  The limitations in the original provisions were that the expanded carryback period did not apply (i) if the bank or other financial institution received any money under the Troubled Assets Relief Program (TARP) (ii) to Fannie Mae, Freddie Mac, or (iii) any corporation that is a member of the same affiliated group for income tax purposes as a bank or other financial institution that received TARP funds.

The Act retains the expanded carryback period for NOLs, but only for those generated in 2008 (or, at the election of the taxpayer, taxable years beginning in 2008).  Further, only taxapayers that are “eligible small businesses” may take advantage of the expanded carryback period.  An “eligible small business” that elects may carryback a 2008 NOL for up to five (5) years.  An eligible small business is a taxpayer having less than $15,000,000 in average annual gross receipts for the three (3) years prior to the year in which the NOL occurs.  Thus, the usefulness to most financial institutions of the expanded NOL carryback provisions appears to have been severely limited by the change in eligibility requirements.

Repeal of IRS Notice 2008-83

The Act retains the provisions repealing IRS Notice 2008-83 originally included in the House bill and subsequently added to the Senate bill.  An explanation of these provisions is set forth below.

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Sub S Deadline for TARP 1.0 Capital on Friday

As a reminder, the deadline for Subchapter S institutions to apply for the TARP Capital Purchase Program is Friday, February 13, 2009.  (Review the terms for Subchapter S institutions.)

The application form is unchanged from the initial application, and is available from the Treasury or as a Word document.  The Treasury has also confirmed that Subchapter S institutions that applied prior to the announcement of the terms for Subchapter S institutions do not need to re-apply.

While there is significant uncertainty over the application of TARP 2.0 rules to the TARP Capital Purchase program, with over 2,000 applications in the hands of the banking regulators, there is likely to be significantly more clarity to the program before an institution has to make a final decision on whether to accept TARP Capital.  Filing  an application by the deadline preserves the institution’s flexibility to make a final decision, while declining to make an application effectively constitutes an irrevocable decision not to participate.  (See our big picture thoughts on whether to apply for TARP Capital.)

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Treasury Announces TARP Capital Terms for Subchapter S Institutions

On January 14, 2009, the Treasury published a Term Sheet for S Corporations and a Frequently Asked Questions for S Corporations.  In order to comply with the limitations on stock ownership for entities that elected to be taxed as S Corporations, the Treasury is planning to use subordinated debt as the investment vehicle.

The subordinated debt will pay interest at a rate of 7.7% per annum until the fifth anniversary, and then pay at a rate of 13.8% per annum.  This equates to after-tax effective rates of 5% and 9%, the same rates applied to public and private C corporations under the TARP Capital program.  Bank holding companies can defer interest for up to 20 quarters.

Like it did for private and public companies, the Treasury plans for the Federal Reserve to issue a special rule to permit the vehicle be treated as Tier 1 Capital for bank holding companies.  Stand-alone banks will only be able to treat the subordinated debt as Tier 2 capital (and only to the extent that all subordinated debt does not exceed 50% of Tier 1).

The subordinated debt will have a maturity of 30 years, and cannot be redeemed within the first three years unless a “Qualified Securities Offering” raises at least 25% of the amount of the investment.  All redemptions are subject to regulatory approval, and are at 100% of the issue price (plus any accrued and unpaid interest).

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