On June 13, the federal banking agencies (the
"Agencies")1 issued final guidance on income
tax allocation agreements between bank holding companies and their
insured depository institution subsidiaries ("IDIs"). The
guidance is in the form of an Addendum to the 1988 Interagency
Policy Statement on Income Tax Allocation in a Holding Company
Structure (the "Interagency Policy Statement"), which
advises IDIs and their holding companies regarding the payment of
taxes on a consolidated basis.
The Addendum (available here) instructs IDIs and their holding
companies to review and revise their tax allocation agreements to
ensure that those agreements (1) expressly acknowledge that the
holding company receives a tax refund from a taxing authority as
agent for the IDI, and (2) are consistent with the requirements of
Sections 23A and 23B of the Federal Reserve Act. The Addendum
includes a sample paragraph that IDIs can insert in their tax
allocation agreements to satisfy the guidance. IDIs and holding
companies must implement the provisions of the Addendum as soon as
reasonably possible and not later than October 31, 2014.
Background
In 1998, the Agencies issued the Interagency Policy Statement to
provide guidance to IDIs and their holding companies and other
affiliates ("Consolidated Groups") regarding the payment
of taxes on a consolidated basis.2 One of the principal
goals of the Interagency Policy Statement is to permit Consolidated
Groups to file consolidated tax returns, while protecting the
ownership rights of IDIs in tax refunds. The Interagency Policy
Statement states that (1) tax settlements between an IDI and its
holding company should be conducted in a manner that is no less
favorable to the IDI than if it were a separate taxpayer; and (2) a
holding company receives a tax refund from a taxing authority as
agent for the IDI.
Since adoption of the Interagency Policy Statement, disputes have
arisen between holding companies in bankruptcy and failed IDIs
regarding the ownership of tax refunds generated by the IDIs. In
some of these cases, courts have found that tax refunds generated
by an IDI were the property of its holding company, based on the
language in the agreements which the courts interpreted as creating
a debtor-creditor relationship. The purpose of the Addendum is to
avoid those situations.
Provisions of the Addendum
The Addendum provides that tax allocation agreements must expressly
acknowledge an agency relationship between a holding company and
its subsidiary IDI in order to protect the IDI's ownership
rights in tax refunds. IDIs and their holding companies are
directed to review their tax allocation agreements and revise them
as necessary to ensure that they explicitly acknowledge that an
agency relationship exists between the holding company and its
subsidiary IDIs. The Addendum includes a sample paragraph that can
be inserted in a tax allocation agreement to satisfy this
obligation.3
The Addendum also clarifies how certain of the requirements of
Sections 23A and 23B of the Federal Reserve Act ("FRA")
apply to tax allocation agreements. The Addendum indicates that all
tax allocation agreements are subject to the requirements of
Section 23B of the FRA. In general, Section 23B requires affiliate
transactions to be made on terms and under circumstances that are
substantially the same, or at least as favorable to the IDI, as
comparable transactions involving nonaffiliated companies or, in
the absence of comparable transactions, on terms and circumstances
that would in good faith be offered to nonaffiliated companies. Tax
allocation agreements should require the holding company to
promptly forward any payment due the IDI under the tax allocation
agreement and to specify the timing of such payment.
Agreements that allow a holding company to hold and not promptly
transmit tax refunds received from a taxing authority to an IDI
would be inconsistent with the requirements of Section 23B and
subject to supervisory action. For tax allocation agreements that
do not clearly acknowledge that an agency relationship exists,
additional requirements may apply under Section 23A of the FRA. For
example, if under the agreement a loan by an IDI to its holding
company were to be created, the collateralization requirements of
Section 23A would apply.
IDIs and their holding companies should review the guidance in the
Addendum and make any necessary revisions to their tax allocation
agreements as soon as possible and in any event prior to October
31, 2014.
[1] The Agencies are the Board of Governors of the Federal
Reserve System, the Federal Deposit Insurance Corporation and the
Office of the Comptroller of the Currency.
[2] 63 Fed. Register 64757 (November 23, 1988).
[3] 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.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.