Basel III’s capital conservation buffer prevents banks from making distributions to shareholders when capital falls below a threshold, but because federal tax liability passes through a Sub S bank to individual shareholders, Sub S shareholders might face tax liability even when they had not received a distribution. C corporation banks subject to the capital buffer pay any taxes due directly out of the bank’s income. ABA said: “The rule will force identical S-Corp and C-Corp banks to accumulate capital at different rates, and likely will result in a powerful disincentive to invest in community banks that have elected Subchapter S status. This will be critically harmful to the growth and perhaps even viability of S-Corp community banks, and an invalidation of the purpose of Congress in creating the S-Corp category to stimulate investment in small businesses.”
ABA urged the regulators to allow Sub S banks to make distributions equal to the taxes due on the bank’s undistributed income, thus eliminating the disadvantage. It also posted a sample letter to help Sub S bankers write to the agencies themselves seeking action.
