Patrick J. Kennedy Jr. Quoted in American Banker Basel III Article

Kennedy Sutherland attorney, Patrick J. Kennedy Jr., was quoted in the April 25th American Banker article entitled, “S Corp Consolidation Could Be Side Effect of Basel III.” In the article Mr. Kennedy, who is the managing partner of Kennedy Sutherland and President of the Subchapter S Bank Association which are headquartered in San Antonio, Texas, joins others in expressing concern that Basel III could be the last straw for countless S corporation banks as they mull their futures.

Currently, banks would be required by Basel III to hold a certain level of capital; failure to do so could result in a prohibition against paying dividends to shareholders. Dividends are critical to those investors, who rely on the payments to cover tax obligations if the bank is profitable. For that reason, S Corp banks believe they face a greater burden under Basel III than C corporations, where the company is taxed for its profit. Concerns also exist that the proposed rules could force more S Corps to delay growth plans or opt to sell themselves.

Basel III will require banks to have a common equity Tier 1 capital ratio of 4.5% plus a 2.5% capital conservation buffer. Banks that fall below 7% can have their ability to deploy capital, like paying dividends or bonuses, limited. S Corp shareholders are responsible for paying their share of the company’s profits on their personal tax returns. Shareholders would have to pay those taxes out of pocket if a profitable S Corp is barred from paying dividends to cover their costs. That burden could discourage some people from investing in S Corps, industry experts say.

In the article, Mr. Kennedy states, “If the rule is implemented, more S Corps could choose to switch to a C Corp structure. But this could also cause more banks to consider selling. The C Corp structure isn’t an effective structure for a closely held bank since you are basically double taxed and you’re competing against credit unions that aren’t taxed at all.”

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