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WASHINGTON-President George W. Bush’s tax package may receive most of the media coverage, but it’s not the only tax relief bill that has been placed before Congress. After months of stalling in the House, legislation to expand subchapter S tax provisions for closely held-those with fewer than 75 stockholders-banks and businesses has been introduced in the Senate by Senators Wayne Allard (R-Colo.), Craig Thomas (R-Wyo.), and Tim Johnson (D-S.D.). Like its sister bill in the House, The Small Business and Financial Institutions Tax Relief Act (S. 936/H.R. 1263) would expand the shareholder limit on subchapter S relief eligible businesses and financial institutions from 75 to 150 shareholders. The Senate bill also expands the types of subchapter S shareholders; permits issuance of preferred stock, provides passive income, bad debt, and qualified director stock relief for banks; permits 90% shareholder consent for subchapter S elections; and other benefits. This bill expands on legislation that Senator Allard introduced last congressional session. The House version of the bill, introduced by Congressman Scott McInnis (R-Colo.), was referred to the Ways and Means committee March 29 of this year, where it has sat since. The American Bankers Association (ABA), the Independent Community Bankers Association (ICBA), and America’s Community Bankers (ACB) have come out in strong support of the bill saying it would greatly benefit small businesses and banks. Although bankers’ groups have consistently opposed credit unions’ tax exempt status as an unfair competitive advantage, CUNA and NAFCU are backing this legislation. Bankers have indicated that if the legislation does survive the law making process, they still do not intend to give up their fight against the credit union tax exemption. According to CUNA estimates, the tax benefits banks can earn under the new legislation would surpass credit unions by the year 2007. Additionally, CUNA warned, being a “closely held” business or financial institution does not necessarily mean being a “small” one. ICBA economists explained exactly how heavy taxing of banks can become. Without subchapter S relief a bank can pay a 35% top tax rate on earned income, compounded by a 39.6% income tax when the money is disbursed to its stockholders, totaling 60.7%. Additionally, Uncle Sam may dip into the pot a third time with the estate tax, which can reach up to 55%. Subchapter S corporations only pay income tax at the shareholder level. [email protected]

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