The FRB, FDIC and OCC (collectively, the “Agencies”) issued a final version of an addendum (the “Addendum”) to their “Interagency Policy Statement on Income Tax Allocation in a Holding Company Structure” (the “Policy Statement”).  The Addendum directs insured depository institutions (“IDIs” and each an “IDI”) and their holding companies (the IDIs with their holding company are collectively referred to as a “Consolidated Group”) to review and revise their tax allocation agreements to ensure that the agreements expressly acknowledge that the holding company receives a tax refund from a taxing authority as agent for its subsidiary IDIs and other affiliates.  The Addendum also clarifies how the restrictions concerning transactions among affiliates under Section 23A and 23B of the Federal Reserve Act apply to tax allocation agreements. 

The Addendum supplements the Policy Statement, which was issued by the Agencies in 1998.  Since 1998, disputes have arisen between holding companies that are in bankruptcy and their affiliated failed IDIs with respect to the ownership of tax refunds, and the Agencies’ purpose in issuing the Addendum is to avoid future disputes regarding this issue.  Often such a dispute has arisen when the FDIC as receiver of a failed IDI seeks to obtain income tax refunds as a recovery for the receivership and is opposed by the creditors of the IDI’s parent holding company who argues that the tax refunds should be treated as an asset of the holding company’s bankruptcy estate.  The Addendum is substantially identical to a proposed version of the Addendum that was issued by the Agencies in December 2013.

Finally, in the Addendum, the Agencies provide a model paragraph (the “Model Paragraph”) that reflects the Agencies’ guidance in the Addendum, and Consolidated Groups are directed to amend their tax allocation agreement to include either the Model Paragraph or substantially similar language.

The text of the Model Paragraph is as follows:

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.”

Consolidated Groups are required to amend their respective tax allocation agreement to reflect the requirements of the Addendum by October 31, 2014.

IRS Circular 230 Disclosure: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. tax advice contained in this informational piece (including any attachments) is not intended or written to be used, and may not be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.