The Federal Deposit Insurance Corp. says the Internal Revenue Service made a mistake related to $253 million in disputed tax refunds that are at the center of a legal fight between the bank regulator and the bankruptcy estate of Colonial BancGroup Inc.
The FDIC, which is the receiver for Colonial Bank, has been sparring with the bank's parent since it took over the bank in 2009. The FDIC says an IRS auditor failed to disallow a "worthless stock" loss made by the holding company, an error that could hurt the bank regulator in its fight with Colonial's estate over ownership of the tax refund.
Judge Dwight H. Williams Jr. of the U.S. Bankruptcy in Montgomery, Ala., at a hearing Monday, lifted Colonial's automatic stay to allow the FDIC to contact the IRS about the "apparent error" in the tax return, said Colonial's bankruptcy lawyer, C. Edward Dobbs.
According to the FDIC, the IRS has said in similar bank failure situations that a deduction for a "worthless stock" loss isn't available when a bank receivership continued to hold substantial assets at the end of the tax year when the bank failed.
The FDIC's bid, which had disclosed information about Colonial's tax return, drew the ire of Colonial's lawyers because its tax returns are confidential under the law. Williams agreed and ordered the original FDIC motion, obtained by Dow Jones Newswires, be placed under seal.
Litigation over who owns the tax refunds is currently pending in U.S. District Court in Montgomery. The battle over the tax refunds is just one element of the long-running dispute. Colonial BancGroup is suing the FDIC to recover some $1.5 billion transferred to its banking subsidiary in the months before it was taken over.
In addition to the tax refunds, those assets include real-estate investment trust preferred securities worth $300 million, insurance assets and other holdings.
The FDIC was named receiver of Colonial Bank in the summer of 2009, after state regulators seized the Alabama bank. It then sold most of Colonial's holdings to North Carolina's BB&T Corp. (BBT). The two sides have since battled over assets the parent transferred to its struggling banking subsidiary in the months before it was seized.
Colonial, which has no revenue or business prospects, isn't seeking to reorganize. Instead, the Chapter 11 plan, which was approved earlier this year, created a litigation trust to pursue lawsuits on behalf of creditors.
The FDIC says the bankruptcy-related litigation has become a vehicle for hedge funds and other institutions that bought debt at a deep discount to pursue greater recoveries by targeting the FDIC.
Indeed, that strategy could serve as a blueprint for creditors of other bank-holding companies mired in Chapter 11 as the result of hundreds of bank closures by regulators in recent years. In a key ruling last fall, Williams rejected the FDIC's bid to hold the holding company accountable for failing to maintain capital levels at the bank. The FDIC, however, says Williams erred and appealed the ruling.
Colonial was founded more than 20 years ago by Bobby Lowder, perhaps best known as the Auburn University "kingmaker" whom ESPN once called the most powerful booster in college sports. Lowder built it into a regional banking power largely through mortgage-lending activities in the Southeast.
The bank suffered big losses as the housing market cratered, but its fate was sealed with the collapse of mortgage lender Taylor Bean & Whitaker, which filed for bankruptcy in August 2009.
Colonial, which had $25 billion in assets and $20 billion in deposits, was the biggest bank failure of 2009. The FDIC estimates Colonial's collapse will cost its insurance fund $3.8 billion, making it one of the most expensive bank failures in U.S. history.
