Federal Reserve Chairman, Janet Yellen, declined to pursue a policy change that would solve a tax liability problem for Subchapter S shareholders should the bank’s capital levels fall below the Basel III capital conservation buffer. 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 can face tax liability even when they have not received a distribution. This puts Sub S banks subject to the buffer at a disadvantage to C corporation banks, which pay any taxes due directly out of the bank’s income. The Subchapter S Bank Association has sent letters and advocated for a solution to this along with many other banking associations. Yellen said in a response to a letter from several House members urging a solution that the Fed “continues to believe that the capital conservation buffer should be applied equally to all banking organizations.
