WASHINGTON A bank subsidiary should be able to claim tax refunds resulting from the institution's losses even if its tax returns are filed by the holding company, the federal bank regulators said in guidance issued Friday.
The guidance is meant to clear up confusion over who owns rights to the tax refunds, which had sparked legal battles between holding company creditors and the Federal Deposit Insurance Corp. Some courts had read tax agreements as favoring the holding company and in turn its bankruptcy estate while others had favored the FDIC as receiver for the parent's failed subsidiary.
The new guidelines an addendum to a 1998 statement of policy aim to "ensure that [depository institutions] in a consolidated group maintain an appropriate relationship regarding the payment of taxes and treatment of tax refunds," the agencies said. (The guidance was issued by the FDIC, Federal Reserve Board and Office of the Comptroller of the Currency.)
Holding companies are generally allowed to file tax returns on behalf of their entire organization, including their bank subsidiaries. However, regulators have held that tax refunds attributed to the bank's income and losses should be the property of the bank.
But some courts have disagreed. They have sided with bankruptcy estates arguing that written agreements between a holding company and subsidiary drafted before the bank failed and the holding company went bankrupt grant those refunds to the estate to divide among the company's creditors. In a recent case, the Ninth Circuit Court of Appeals in California upheld a lower-court ruling determining that $55 million in tax refunds belong to the estate of IndyMac's parent, not to the FDIC as receiver of the failed thrift.
The new guidance requires tax allocation agreements to make clear that a holding company is the "agent" for the bank "with respect to all matters related to consolidated tax returns and refund claims."
The agencies, which are requiring companies to implement the new guidance by Oct. 31, included a sample paragraph to include in the agreements. The recommended language specifies that tax refunds resulting from "income earned, taxes paid, and losses incurred by" the bank are "the property of and owned by the institution."
The holding company "shall forward promptly the amounts held in trust to the institution," the new language reads.