The AJCA aids financial institutions seeking S status.

• Author: Brooks, Lisa
• Position: American Jobs Creation Act of 2004

S corporation status first became available to financial institutions in 1997; ever since, over 2,000 banks and thrifts-almost 25% of all financial institutions--have converted from C to S status. Many others have considered it, but the various limits and restrictions have undoubtedly discouraged them. Although the American Jobs Creation Act of 2004 (AJCA) does not address all of the issues encountered by banks considering an S election, it does ease some of the more problematic requirements. Its new provisions for shareholders, IRKs and passive income may allow more banks to take advantage of the benefits S status offers.

Number of Shareholders

Prior to the AJCA, S corporations could not have more than 75 shareholders, although a husband and wife were counted as only one shareholder. Under Sec. 1361(b)(1)(A), as amended by AJCA Section 232(a), that number has increased to 100, effective for tax years beginning after 2004.

Perhaps most significant, an entire family--not just a husband and wife-can now elect to be treated as a single shareholder; see Sec. 1361(c)(1)(A), as amended by AJCA Section 231(a). For this purpose, a "family" includes a common ancestor, lineal descendants of that ancestor and the spouses (or former spouses) of the lineal descendants or common ancestor, for up to six generations; see Sec. 1361(c)(1)(B). Further, this applies whether the individual owns stock directly, or indirectly as a beneficiary of an electing small business trust or qualified subchapter S trust; see Sec. 1361 (c) (2) (B).As an added convenience, the election is made on a family (versus individual) basis under Sec. 1361(c)(1)(D), thus simplifying the process.

These changes are not only more flexible as to the total number of shareholders, which benefits banks considering S status, they are also more flexible as to the movement of shares between family members, which benefits shareholders directly.

Historically, S bank shareholders have been severely limited in their ability to bequeath, gift or sell shares to family members, for fear of inadvertently terminating the S election by creating new shareholders and exceeding the maximum allowable number. The new family election alleviates this concern; regardless of the number of individuals comprising a "family" its status as a single shareholder does not change.

IRAs

S shareholders are not only limited in number, but also in type. Historically, the only eligible shareholders under Sec. 1361(b) were U.S...