Are you among the multitude of banks that have faced the question “Does our tax refund belong to the bank or holding company?” Well, on Friday, June 13, Federal regulators issued final supplemental guidance on income tax allocation agreements involving holding companies and insured depository institutions. The issuance represents regulators’ efforts to eliminate confusion and bring closure to the debate around the ownership of tax refunds.
In 1998, the federal banking agencies issued the Interagency Policy Statement on Income Tax Allocation in a Holding Company Structure. Under the policy statement, members of a consolidated group could prepare and file federal and state income tax returns, so long as the act of filing as a group did not prejudice the interests of any one of the insured depository institutions (IDIs). Typically, the group would be comprised of one or more IDIs or banks, along with their holding company and affiliates.
Since the 1998 issuance, the lack of clear documentation in tax allocation agreements has led to disagreements about whether a tax refund belongs to the holding company or the bank.
Some courts have upheld the bank's right to a refund. They have argued that the agreement required the holding company to serve as an agent for the bank, when the holding company received a tax refund attributable to the bank. On the other hand, some courts have interpreted that the agreement created a debtor-creditor relationship between the holding company and its subsidiary bank, treating the bank as an unsecured creditor.
The guidance handed down in June requires that certain language be added to all tax allocation agreements, expressly acknowledging an agency relationship. It establishes with certainty that a bank – not its holding company – is entitled to any tax refund paid in connection with a return filed by a consolidated group, and that would have been paid to the bank if it had filed on a stand-alone basis. Secondly, the guidance outlines in writing that failure to include such language may place a bank in violation of sections 23A and 23B.
The continued focus on this issue of documenting tax allocation ownership is yet one more reason why it is imperative for banks and affiliates to document roles and responsibilities within every multi-party agreement, clearly and in writing.
Every institution should review its tax allocation agreement and, if necessary, amend the agreement no later than October 31, 2014. Your HORNE Banking team is here to help you make sure you have the information you need.