Avoiding Double Taxation: The Case of Commercial Banks

38 Pages Posted: 18 Jul 2005

See all articles by Ken B. Cyree

Ken B. Cyree

University of Mississippi - School of Business Administration

Scott E. Hein

Texas Tech University

Timothy W. Koch

University of South Carolina - Darla Moore School of Business

Date Written: July 2005

Abstract

Recently, there has been a marked increase in the number of banks choosing to operate as Subchapter-S Corporations. The apparent motivation is tax savings as Subchapter-S firms do not pay federal income taxes on income at the firm level, but transfer income to stockholders where it is taxed as individual income at personal tax rates. Given the apparent advantages of Sub-S status, there must be mitigating reasons for not choosing this organizational form. We empirically investigate factors affecting the choice of Subchapter-S status and key performance differences between Sub-S banks and those taxed as C-corporations. Empirical findings indicate that Sub-S banks are significantly smaller, pay higher dividends, have lower taxable income before Sub-S formation, higher profitability, lower capital and loan loss reserves, rely more on core deposits, and have higher agricultural but lower commercial and total loans. Sub-S banks are more likely to be rural and less likely to be de novo, or have publicly-traded stock.

Keywords: Commercial banks, S-corporations, income taxes, loan loss reserve, bank capital

JEL Classification: G20, G21, H20, H24, H25

Suggested Citation

Cyree, Ken B. and Hein, Scott E. and Koch, Timothy W., Avoiding Double Taxation: The Case of Commercial Banks (July 2005). Available at SSRN: https://ssrn.com/abstract=757446 or http://dx.doi.org/10.2139/ssrn.757446

Ken B. Cyree

University of Mississippi - School of Business Administration ( email )

PO Box 3986
Oxford, MS 38677
United States

Scott E. Hein (Contact Author)

Texas Tech University ( email )

PO Box 42101
Lubbock, TX TX 79409
United States

Timothy W. Koch

University of South Carolina - Darla Moore School of Business ( email )

1705 College St
Francis M. Hipp Building
Columbia, SC 29208
United States

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