The tax exemptions granted to financial institutions like Subchapter S banks and credit unions cost billions of dollars to the government. The dissertation investigates the effect of tax exemption on competitiveness, performance and portfolio risk of credit unions and Subchapter S banks. The methodologies include difference in differences estimation, univariate and multivariate analysis. The first essay entitled “The tax exemption to Subchapter S banks: who gets the benefit?” investigates the effect of tax exemption to Subchapter S banks on stakeholders and on job creation. Specifically, we investigate the effect of adoption of Subchapter S status on the four stakeholders of the banks: the customers of the bank, the employees of the bank, the owners of the bank and the government. The results indicate that the tax exemptions to Subchapter S banks do not create new jobs, and that the owners of the bank are the sole beneficiary of the tax exemptions since there is a significant increase in bank’s return on equity after it adopts the Subchapter S status. The second essay entitled “A comparison of credit unions and Subchapter S banks: who shares higher tax benefits with customers?” examines whether credit unions are doing a better job of sharing the tax benefit with its customers. The results indicate that the credit union members do not receive the benefit in terms of lower loan rates, higher deposit rates or lower service charges. The findings also indicate that tax exemptions have been directed to support inefficient operations. The third essay entitled “Asset quality comparison between credit unions and Subchapter S banks” compares the asset quality of for-profit Subchapter S banks with not-for-profit credit unions. The results indicate that credit unions have better asset quality, but Subchapter S banks are superior in utilizing assets and generating higher net interest margin.

The Taxpayer Service Division contributes to the Internal Revenue Service mission of achieving the highest possible voluntary compliance with the Federal income tax law by answering questions and helping taxpayers in their return preparation efforts. These services are provided by Taxpayer Service Representatives and Taxpayer Service Specialists (TSS's). The TSS position was established in 1975 to upgrade the quality of assistance provided. TSS duties include being able to provide assistance with problems involving complex areas of the tax law. The purpose of the study was to disclose to what extent TSS's are called on to answer tax questions related to partnerships, corporations, and Subchapter S corporations and to disclose whether they have been trained and are able to answer the inquiries.