[Congressional Record Volume 144, Number 114 (Wednesday, September 2, 1998)]
[Senate]
[Page S9889]
From the Congressional Record Online through the Government Publishing Office [www.gpo.gov]




                         RELIEF FOR SMALL BANKS

 Mr. ABRAHAM. Mr. President, I rise today to speak in support 
of S. 2346, legislation which seeks to amend the Internal Revenue Code 
of 1986 to expand S corporation eligibility for small banks. Expanding 
S corporation eligibility will greatly benefit small banks and, in this 
period of increased competition, help them as they strive to compete 
with credit unions and megabanks.
  At present, most banks are classified as C corporations, which 
subjects them to the double taxation of profits. Earnings at banks 
classified as C corporations are taxed first at corporate level and, 
after earnings on stockholders shares are distributed, again by 
shareholders. Converting to an S corporation is an attractive option 
for small banks because it eliminates the corporate level income tax 
and allows greater earnings, often between 30 and 40 percent, to be 
passed on to shareholders.
  Subchapter S of the Internal Revenue Code was first enacted in 1958 
to reduce the tax burden on small business corporations. Since then, 
the Subchapter S provisions have been modified several times, most 
recently in 1982 and 1996. The changes most recently instituted reflect 
Republican efforts to relieve the tax burden on small businesses.
  The relatively low number of small banks which have made the 
conversion, however, indicate that Congress needs to take additional 
steps to liberalize the requirements for conversion to Subchapter S. 
Many bankers tell me that the excessive regulatory burden placed on our 
banks often makes conversion to an S corporation an onerous process and 
discourages small banks from making the change. This must change.
  This legislation will amend current law to help facilitate the 
conversion to an S corporation. Among the reforms is an increase in the 
number of S corporation eligible shareholders from 75 to 150; the 
ability of S corporation shares to be held as Individual Retirement 
Accounts (IRAs); the provision that any stock that bank directors must 
hold under banking regulations shall not be a disqualifying second 
class of stock; and permission for banks to deduct bad debt charge offs 
over the same number of years that the accumulated bad debt reserve 
must be recaptured.
  These provisions, and others included in the legislation, will allow 
more banks to convert to S corporations. The result will be more 
efficient, more competitive small banks. And the consumer will be the 
ultimate beneficiary. I applaud Senator Allard for introducing this 
legislation. I believe it is a positive step that will help maintain a 
balanced playing field among the financial service industries and I 
urge the Senate Finance Committee to act on it quickly.

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