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CHICAGO-Banks with Subchapter S status under the Internal Revenue Code are making themselves ripe for acquisitions, according to a recent analysis by Grant Thornton LLP. After 10 years as an S Corp, banks can use additional favorable tax rules because they will no longer need to apply the built-in gains tax, which could make them more attractive than C Corp banks for acquisition, Grant Thornton, a global accounting, tax and business advisory organization, said. “There are 498 S Corporation banks and thrifts that will hit the magic 10-year mark January 1, 2007,” said John Ziegelbauer, Grant Thornton’s managing partner of the financial institutions industry practice. “That’s more than one out of five of the current number of S Corporation banks and thrifts. The year after that, another 408 hit the 10-year mark. In addition, there are over 100 de novo banks and thrifts that made the S Corporation election at organization. Banks and bank holding companies interested in acquiring any of these S Corporations may be able to reach a better deal for both sides due to these favorable tax conditions.” “The S Corporation conversion has universal appeal to banks and thrifts across both geographies and asset sizes,” Dick Soukup, co-author of the analysis and a financial institutions industry assurance partner with Grant Thornton’s Chicago office, said. “It will be interesting to see how many S Corporation banks are acquired once their 10-year built-in gains tax recognition period is over.” NAFCU Chief Economist Tun Wai made another point as it relates to credit unions. “On the bank side, you become an acquisition target because you have capital,” he explained. “The reason why they have more capital is because they don’t pay taxes.So it’s not unusual or surprising to see that kind of result.” Credit unions have been comparing their tax-exemption to the banks’ Sub S charter option because banks continue to attack credit unions’ tax-exempt status while finding new ways to avoid paying taxes. “Politically speaking, it’s not a new argument for us,” NAFCU Director of Political Affairs Murray Chanow said. “It works well with some members of Congress. Some it doesn’t.”

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