In response to concerns of banks organized under Subchapter S of the tax code, the FDIC issued a Financial Institution Letter (FIL-40-2014) detailing how it will consider requests to pay dividends to shareholders to cover taxes on their pass-through share of the bank's earnings, when these dividends would otherwise not be permitted under the capital conservation buffer requirements in the Basel III rule.
The letter emphasized that decisions on dividend payments will be evaluated on a case-by-case basis with consideration of the following facts and circumstances:
- Is the S-corporation requesting a dividend of no more than 40 percent of net income?
- Does the requesting S-corporation believe the dividend payment is necessary to allow the shareholders of the bank to pay income taxes associated with their pass-through share of the institution’s earnings?
- Is the requesting S-corporation bank rated 1 or 2 under the Uniform Financial Institutions Rating System and not subject to a written supervisory directive?
Is the requesting S-corporation bank at least adequately capitalized, and would it remain adequately capitalized after the requested dividend? (If not, the dividend is not permitted pursuant to statutory PCA, 12 U.S.C. § 1831o(d)(1)(A).)