FRB, FDIC and OCC Propose Addendum to Income Tax Allocation Policy; Agencies Provide Standard Provision to be Included in Tax Allocation Agreements


The FRB, FDIC and OCC (the “Agencies”) jointly issued a Goodwin Procter proposed addendum (the “Proposed Addendum”) to the Interagency Policy Statement on Income Tax Allocation in a Holding Company Structure (the “Policy Statement”).  The Policy Statement is intended to make certain that insured depository institutions (“IDIs”) in a consolidated group (a group in which a bank holding company files consolidated tax returns for its IDIs, itself and its other affiliates) “maintain an appropriate relationship regarding the payment of taxes and treatment of tax refunds.”  As part of the Proposed Addendum the Agencies provide the text of a standard provision (the “Standard Provision”) that the Agencies indicate bank holding companies should include in their tax allocation agreements (in the same or substantially similar language).

The Agencies note that the intent of the Proposed Addendum is to “reduce confusion regarding ownership of any tax refunds.”  The Proposed Addendum would require IDIs and their holding companies to review their tax allocation agreements to confirm that, under the applicable agreements, the holding company receives any tax refunds as an agent for the applicable IDI.  The Proposed Addendum is intended to respond to dispute as to the ownership of tax refunds that have arisen among bank holding company groups in bankruptcy and failed IDIs.  The Proposed Addendum would also clarify the manner in which Sections 23A and 23B of the Federal Reserve Act apply to tax allocations.

The text of the Agencies’ proposed Standard Provision that the Agencies urge be included in tax allocation agreements is:

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.

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.

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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