Agencies Issue Proposed Guidance on Tax Allocation Agreements Between Insured institutions and Their Holding Companies

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On December 19, banking agencies including the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation (FDIC) and the Office of the Comptroller of the Currency (collectively, the agencies) gave notice that they are seeking comment relating to supplemental guidance on income tax allocation agreements involving holding companies and insured depository institutions (IDIs). According to the agencies, “an aim of the proposed guidance is to reduce confusion” regarding ownership of any tax refunds. The federal banking regulators are proposing the guidance “in response to disputes between holding companies in bankruptcy and failed depository institutions regarding ownership of tax refunds. Courts have come to differing conclusions regarding the ownership of tax refunds between holding companies and depository institutions based on their interpretation of language in tax allocation agreements,” according to the agencies. It would appear that another aim of the agencies is to prevent future disputes in court by requiring that certain language deemed beneficial by courts to the insured institutions and to the FDIC be inserted in existing and future tax allocation agreements.

In 1998, federal banking regulators issued an interagency policy statement on income tax allocation. The proposed guidance  would supplement the 1998 policy statement by instructing insured depository institutions and their holding companies to review their tax allocation agreements to ensure the agreements expressly acknowledge that the holding company receives any tax refunds as an agent for the insured institution. In addition, all banking organizations would be asked to insert specific language in their tax allocation agreements to further clarify tax refund ownership. 

The agencies stated as follows: 

In reviewing their tax allocation agreements, Consolidated Groups should ensure the agreements (1) clearly acknowledge that an agency relationship exists between the holding company and its subsidiary IDIs with respect to tax refunds, and (2) do not contain other language to suggest a contrary intent. In addition, all Consolidated Groups should amend their tax allocation agreements to include the following paragraph or substantially similar language:  

The [holding company] is an agent for the [IDI and its subsidiaries] (the “Institution”) with respect to all matters related to consolidated tax returns and refund claims, and nothing in this agreement shall be construed to alter or modify this agency relationship. If the [holding company] receives a tax refund from a taxing authority, these funds are obtained as agent for the Institution. Any tax refund attributable to income earned, taxes paid, and losses incurred by the Institution is the property of and owned by the Institution, and shall be held in trust by the [holding company] for the benefit of the Institution. The [holding company] shall forward promptly the amounts held in trust to the Institution. Nothing in this agreement is intended to be or should be construed to provide the [holding company] with an ownership interest in a tax refund that is attributable to income earned, taxes paid, and losses incurred by the Institution. The [holding company] hereby agrees that this tax sharing agreement does not give it an ownership interest in a tax refund generated by the tax attributes of the Institution. 

The proposed addendum would also “clarify” how sections 23A and 23B of the Federal Reserve Act, which establish certain restrictions on and requirements for transactions between depository institutions and their affiliates, apply to tax allocation agreements. According to the proposed guidance: 

Tax allocation agreements should require the holding company to forward promptly any payment due the IDI under the tax allocation agreement and specify the timing of such payment. Agreements that allow a holding company to hold and not promptly transmit tax refunds received from the taxing authority and owed to an IDI are inconsistent with the requirements of section 23B and subject to supervisory action. However, an Agency’s determination of whether such provision, or the tax allocation agreement in total, is consistent with section 23B will be based on the facts and circumstances of the particular tax allocation agreement and any associated refund. 

The proposed guidance may be found here.

Topics:  Bank Holding Company, Commercial Bankruptcy, Corporate Taxes, FDIC, Income Taxes, Tax Refunds

Published In: Finance & Banking Updates, Tax Updates

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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