Depository holding companies benefit from technical corrections act.

• Author: Hagge, Greg

The American Jobs Creation Act of 2004 (AJCA) enacted various provisions dealing with individual retirement accounts (IRAs) and banks. In summary, the AJCA allowed S corporation banks to have IRAs as shareholders if the bank shares were owned by the IRA on Oct. 22, 2004 (the date of the AJCA's enactment). Another AJCA provision allowed individuals to purchase the shares from their IRAs in conjunction with the making of an S election for the bank. The provision detailed the steps that needed to be accomplished and provided a waiver from the prohibited transaction rules for the transaction between the IRA and its individual beneficiary. This provision was also conditioned on the shares being held by the IRA on Oct. 22, 2004.

The AJCA provisions ignored the reality that a large number of banks, if not a majority of banks nationwide, are in fact structured as subsidiaries of holding companies. In the S corporation context, the S corporation is the holding company with the bank subsidiary operating under a qualified subchapter S subsidiary (QSub) election.

At the time of the AJCA's enactment, most commentators and tax professionals were of the opinion that the AJCA provisions as originally written applied only to banks and not to bank holding companies. The oversight in the AJCA could be explained by the last-minute additions of various AJCA provisions and the compressed congressional timeline that the AJCA's passage was operating under. No rational explanation exists for providing the benefits of the AJCA to a stand-alone bank while denying them to a bank operating as a subsidiary of a holding company, or operating as a QSub.

After major tax legislation is enacted there is often a technical corrections act to fix the unintended errors or omissions in the original legislation. Language was inserted in the early versions of the correcting legislation expanding the IRA-related provisions to depository holding companies by amending Secs. 1361(c) (2) (A) (vi) and 4975(d)(16). These provisions, along with other technical corrections, were attached to the Gulf Opportunity Zone Act of 2005. While enacted too late in 2005 to realistically allow for efficient and timely 2006 S corporation planning for calendar-year taxpayers, depository...