The federal bank regulators recently issued additional guidance on intercompany income tax allocation agreements between holding companies and their depository institution subsidiaries. Intended to clarify the ownership of tax refunds, the new guidance is in the form of an addendum to a 1998 interagency policy statement. The policy statement dealt with holding companies filing consolidated tax returns and required that:

• Holding company tax settlements with their depository institutions be conducted as though the depository institution were a separate taxpayer
• Holding companies receiving refunds from taxing authorities hold such funds as agent for the depository institutions and nonbank subsidiaries they controlled

Under the consolidated federal income tax regulations, holding companies are appointed as agents with respect to all matters affecting the tax liability of the group and its members, including the receipt of any tax refunds. Since 1998, failed bank receiverships from time to time have had to litigate the ownership of tax refund monies as between holding companies in bankruptcy and depository institutions in receivership. The courts have reached different conclusions based on the exact language of tax allocation agreements. Some decisions have interpreted language in such agreements as creating a debtor-creditor relationship between the parent holding company and the depository institution and have held that the refunds belonged to the holding company.

Under the new guidance, depository institutions and their holding companies should review their existing tax allocation agreements and, if necessary, amend them to expressly acknowledge that the holding company receives any tax refunds solely in an agency capacity and to delete any language that suggests otherwise. A model clause to that effect is included in the guidance for clarification of that purely agency relationship. Given the new guidance, tax allocation agreements should require that holding companies promptly forward any tax refund payments due to their depository institutions and should specify the timing of such payments.

The agencies have also considered how Sections 23A and 23B of the Federal Reserve Act, which govern transactions between depository institutions and their affiliates, apply to tax allocation agreements. According to the new guidance:

• Any tax allocation agreement that does not clearly acknowledge that an agency relationship exists may be subject to additional requirements under Section 23A.
• Any tax allocation agreement that permits a holding company to retain and not promptly transmit tax refund payments received from a taxing authority and owed to a depository institution is incompatible with Section 23B.