United States: Whose Refund Is It? The Sixth Circuit Weighs In, Finding Tax Sharing Agreement Between Bank And Holding Company Ambiguous On Ownership Of Refunds

Summary: In its recent AmFin decision, the Sixth Circuit joined a growing line of cases considering whether tax refunds paid to a bank holding company pursuant to a tax sharing agreement between the holding company and its subsidiary bank, but attributable to losses incurred by the bank, are the property of the holding company's bankruptcy estate or of the FDIC as receiver for the bank. The Sixth Circuit reversed a district court decision which had held that the tax refund belonged to the bankruptcy estate of the holding company. Finding that the tax sharing agreement was ambiguous, the Sixth Circuit remanded for the district court to consider extrinsic evidence of the parties' intent. In so holding, the Sixth Circuit appeared to take a different approach than that adopted by the Ninth Circuit in its recent decision in IndyMac and a line of lower court decisions, which had held in favor of the bankruptcy estate of the holding company parent. But this growing line of cases regarding the construction of tax sharing agreements in the bankruptcy/receivership context could come to an end if a recent regulatory change promulgated by the Federal Reserve and FDIC leads banks and their holding company parents to adopt tax sharing agreements that unambiguously provide that any tax refunds attributable to losses incurred by the banks are the banks' property.


In its recent AmFin decision, the Sixth Circuit joins the line of courts seeking to interpret tax sharing agreements deemed ambiguous in the bankruptcy context. But that growing line of cases could one day end if a recent regulatory change promulgated by the Federal Reserve and FDIC resolves those ambiguities in tax sharing agreements moving forward.
 
As we have discussed in prior Client Alerts, the Eleventh Circuit, the Ninth Circuit, and the Delaware bankruptcy court have all recently weighed in on the issue of whether tax refunds arising out of losses of an insolvent bank belong to the FDIC, as receiver for the bank, or to the bankruptcy estate of the bank's holding company parent to whom the IRS issued the refund. The Eleventh Circuit addressed this issue in BankUnited and NetBank, concluding in both cases that the refund belonged to the FDIC, as receiver for the bank. These decisions were an apparent departure from a long line of lower court decisions that had held in favor of holding companies' bankruptcy estates in such disputes. The Eleventh Circuit decisions were followed by the Delaware bankruptcy court's decision in Downey Financial Corp. and the Ninth Circuit's decision in IndyMac Bancorp, both of which held that the tax refund at issue belonged to the holding company's bankruptcy estate. Those cases suggested that the Eleventh Circuit decisions in BankUnited and NetBank might be limited to their facts and would not be followed by other courts. In its decision in FDIC v. AmFin Financial Corp., No. 13-3669, 2014 WL 3057097 (6th Cir. July 8, 2014), the Sixth Circuit has now weighed in on this issue, and the direction of the law on this issue is once again unclear.
 
AmFin Financial Corp. ("AFC") is the parent of a group of banks that included AmTrust Bank ("AmTrust"). AFC and its affiliates, including AmTrust, entered into a Tax Sharing Agreement ("TSA"). The TSA addressed the manner in which the affiliated companies would allocate the consolidated tax liability of the group and the manner in which certain tax attributes were to be treated among the group. With respect to tax refunds, the TSA provided only that, in the event a loss carryback refund application was filed, the parties to the TSA would redetermine their respective liabilities to account for the loss carryback and "promptly settle any amounts owing among them." Id. at *2.
 
In November 2009, AFC filed for bankruptcy, and the FDIC closed AmTrust and placed it into FDIC receivership. AFC later filed a consolidated tax return on behalf of the consolidated tax group which reported operating losses of $805 million, almost all of which were attributable to AmTrust's operations. That return resulted in a refund issued to AFC in the amount of $194 million. The FDIC maintained that $170 million of that refund belonged to AmTrust and filed a complaint in the United States District Court for the Northern District of Ohio seeking a declaratory judgment that the refund belonged to AmTrust. The district court granted judgment for AFC on the pleadings, concluding that the TSA unambiguously created only a debtor-creditor relationship between AFC and AmTrust with respect to the tax refunds and that the refund thus was the property of the AFC bankruptcy estate. The district court denied the FDIC's motion to amend its complaint to reflect extrinsic evidence regarding AFC and AmTrust's intent with respect to refunds under the TSA. 
 
The Sixth Circuit reversed and remanded. The Court of Appeals disagreed with the district court's conclusion that the TSA was unambiguous with respect to the ownership of tax refunds. It rejected AFC's reliance on the loss carryback refund provision in the TSA, holding that the provision spoke only to the allocation of liability among the members of the tax group, and not to the ownership of a refund. Citing the Eleventh Circuit's decision in BankUnited, the Court noted that "the TSA says nothing about tax refunds received by AFC on behalf of the group and includes no protections for the putative creditor, as one would expect if the parties intended a debtor-creditor relationship." Id. at *4. It concluded that

"persuasive case law supports our conclusion that the use of terms such as 'reimbursement' and 'payment' need not create a debtor-creditor relationship, especially when the TSA contains no provisions to protect the creditor subsidiary's interest in the refund while it remains under AFC's control."

Id.
 
Finding that the TSA was ambiguous, the Sixth Circuit went on to address the FDIC's contention that, since the TSA was silent on the issue of tax refunds, the Court should apply the principle enunciated in In re Bob Richards Chrysler-Plymouth Corp., 473 F.2d 262, 265 (9th Cir. 1973), and hold that the refund belonged to AmTrust. In Bob Richards, the Ninth Circuit had held that, absent any agreement to the contrary, a tax refund resulting from offsetting losses of one member of a consolidated filing group against the income of that same member in a subsequent year should inure to the benefit of that member. The Sixth Circuit, however, declined to apply the Bob Richards principle, holding that it was a federal common law rule and that federal common law should be applied only when there is a significant conflict between state law and some federal policy or interest.1 The Court found that there was no such conflict in AmFin because federal precedent has recognized that state law determines whether property should be included in or excluded from a bankruptcy estate. The Court thus concluded that Ohio law should determine who owns the tax refund. Rejecting AFC's objections based on Ohio law to the use of the extrinsic evidence proffered by the FDIC, the Court held that the district court had erred in granting AFC judgment on the pleadings and disallowing the FDIC's proffer of extrinsic evidence. The Sixth Circuit reversed and remanded the case to the district court for further proceedings consistent with the Court's opinion. It instructed the district court to consider extrinsic evidence concerning the parties' intent and Ohio agency and trust law.
 
While the Sixth Circuit did not finally decide the ownership of the tax refund, in finding the TSA ambiguous the Court followed the Eleventh Circuit's BankUnited approach, rejecting the notion that language in a tax sharing agreement providing an obligation to pay or reimburse unambiguously establishes a debtor-creditor relationship. Consistent with all the previous decisions on this issue, the Court also made clear that the parties to a tax sharing agreement are free to contractually determine the ownership of any refund received by the parent company on behalf of the consolidated tax group, and that the language of the agreement, if clear, will control. Whether other courts in the future will follow the Eleventh and Sixth Circuits with respect to the construction of tax sharing agreements or will adhere to the approach taken by the lower courts and the Ninth Circuit remains to be seen.
 
Another recent development, however, may diminish the importance of this apparent conflict among the courts. In June of this year, the Department of the Treasury, the Federal Reserve Board of Governors and the FDIC issued an Addendum to the Interagency Policy Statement on Income Tax Allocation in Holding Company Structure. That Addendum mandates that insured depository institutions that are part of a consolidated tax group include in any tax sharing agreement among the members of the consolidated group language providing that the parent company acts as an agent for the institution with respect to any tax refunds and that refunds attributable to the institution shall be held in trust by the holding company for the benefit of the institution. Assuming that bank holding companies and their bank subsidiaries include the required language in their tax sharing agreements, courts may find that language unambiguous and hold that any tax refunds attributable to losses of a bank are its property.

1 One of the three judges on the panel wrote a separate concurring opinion in which he indicated that he would apply Bob Richards where the TSA is ambiguous and the ambiguity cannot be resolved under state law.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions