New Law Includes S Corporation Amendments
On December 21, President Bush signed into law the Gulf Opportunity Zone Act (H.R. 4440), which provides $8 billion in hurricane reconstruction and relief tax breaks for businesses and individuals. The new law also retroactively amended and clarified various S Corporation provisions contained in the American Jobs Creation Act of 2004.
Subchapter S Amendment Highlights Include:
* Eligible IRA shareholders may own institutions depository holding company stock. The American Jobs Creation Act limited eligible IRA shareholders only to those IRAs that own stock in a bank as defined in section 581 of the Internal Revenue Code. The new law now allows IRAs that own depository institution holding company stock to be eligible S Corporation shareholders of the respective depository institution holding company making the S Corporation election.
Powell Goldstein LLP Observation: Individual Retirement Account (IRA) owners whose shares consist of either bank or holding company stock should be aware of additional taxes that are due as a result of owning S Corporation stock as compared with stock of a regular C Corporation (i.e., a corporation that is not an S Corporation). As an S Corporation shareholder, these IRAs would be subject to unrelated business income taxation on the earnings of the S Corporation, as well as tax on any gain from the sale of S Corporation stock (which is taxed at ordinary, instead of capital gain, tax rates). Gains realized by an IRA from the sale of stock of a regular C Corporation is generally exempt from federal and state income taxation. In addition, due to a lack of clarity in the Internal Revenue Code and the lack of Treasury Regulations, some distributions made by an S corporation may be taxable. Moreover, IRAs may not set up to comply with the tax filing requirements that arise if the IRA owns stock of an S Corporation. The IRA would need to file an Unrelated Business Taxable Income tax return, a Federal 990T informational return, and appropriate state tax returns (if applicable), and pay any federal or state income tax due on the S Corporation earnings. Until further regulatory guidance is issued relating to the tax treatment of these IRAs, banks or bank holding companies with IRA shareholders who are interested in the S Corporation election for the 2006 tax year should be aware of these potential tax consequences.
* Family members include estates and foster children. The new law also clarified that the estates of spouses and other family members shall be treated as one shareholder for purposes of the 100 shareholder limit. Under the American Jobs Creation Act, only estates of husbands and wives were treated as part of the family member group. Also, the new law expands the family group to include any child who is lawfully placed for adoption and eligible foster children.
Powell Goldstein LLP Observation: Financial institutions encounter a number of practical and legal issues in connection with the family member election. On November 22, the Internal Revenue Service released Notice 2005-91, which provides preliminary guidance for taxpayers making the family member election. Until further guidance is issued, taxpayers may rely on this Notice.
* Passive income rules expanded. In an effort to provide application of the passive income exclusion rules to a broader range of banking entities (including savings institution holding companies), the new law replaced "bank holding company" with "depository institution holding company."
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