The Influence of Tax and Non-Tax Factors on Banks' Choice of Organizational Form

46 Pages Posted: 6 May 2002

See all articles by Leslie D. Hodder

Leslie D. Hodder

Indiana University - Kelley School of Business - Department of Accounting

Mary Lea McAnally

Texas A&M University - Department of Accounting

Connie D. Weaver

Texas A&M University - Department of Accounting

Date Written: March 14, 2001

Abstract

This paper identifies tax and non-tax factors that influence commercial banks conversion from taxable C-corporation to nontaxable S-corporation from 1997 to 1999. A 1996 tax-law change allowed banks to elect S-corporation status for the first time. We find that banks are more likely to convert when conversion saves dividend taxes, avoids alternative minimum taxes, and minimizes state income taxes. As well, banks are less likely to convert when conversion restricts access to equity capital, nullifies corporate tax loss carryforwards, and creates potential penalty taxes on unrealized gains existing at the conversion date. Moreover banks that would be required to write-off large deferred tax assets are less likely to convert because conversion decreases regulatory capital and exposes the bank to costly regulatory intervention. We also investigate the strategic choices banks made in anticipation of an S-election. We conclude that converting banks made anticipatory changes to their capital structure, deliberately sold appreciated assets, and strategically cut dividends to augment the net benefits from a planned election.

Keywords: organizational form, S-corporation, regulatory costs, strategic behavior, deferred tax

JEL Classification: G21, G32, M41, H25

Suggested Citation

Davis Hodder, Leslie D. and McAnally, Mary Lea and Weaver, Connie D., The Influence of Tax and Non-Tax Factors on Banks' Choice of Organizational Form (March 14, 2001). Available at SSRN: https://ssrn.com/abstract=308579 or http://dx.doi.org/10.2139/ssrn.308579

Leslie D. Davis Hodder

Indiana University - Kelley School of Business - Department of Accounting ( email )

1309 E. 10th Street
Bloomington, IN 47405
United States

Mary Lea McAnally (Contact Author)

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States
979-845-5017 (Phone)
979-845-0014 (Fax)

Connie D. Weaver

Texas A&M University - Department of Accounting ( email )

430 Wehner
College Station, TX 77843-4353
United States

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