- Agencies Issue Guidance on Tax Allocation Agreements
- June 25, 2014 | Authors: Scott A. Brown; Scott A. Brown; Joel E. Rappoport; Joel E. Rappoport; Kevin M. Toomey; Kevin M. Toomey
- Law Firm: Kilpatrick Townsend Stockton LLP - Atlanta Office
On June 13, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation and the Office of the Comptroller of the Currency issued written guidance, which included an addendum to the current interagency policy statement governing tax allocation agreements between holding companies and their insured depository institutions.
On June 19, the Federal Deposit Insurance Corporation issued Financial Institution Letter-30-2014 to notify banks of the adoption of the addendum and its applicability to financial institutions.
What does the guidance require?
Companies are required to review and revise their existing tax allocation agreements to ensure that the agreements: (1) clearly acknowledge that an agency relationship exists between the holding company and its subsidiary depository institutions with respect to tax refunds; and (2) do not contain other language to suggest a contrary intent.
The addendum includes a sample paragraph for companies to use in their tax allocations agreements to satisfy this requirement.
Why was the guidance issued?
The guidance was issued in response to the inconsistent treatment by courts of the ownership of tax refunds for holding companies in bankruptcy and failed banks. Some courts have held that tax refunds were the property of the holding company in bankruptcy (rather than the property of the subsidiary depository institution) as the depository institution’s debtor. The addendum ensures that the tax allocation agreement clarifies that an agency relationship (and not a debtor-creditor relationship) exists between the holding company and its subsidiary depository institution so that the tax refunds remain the property of the subsidiary depository institution. This is consistent with one of the principal goals of the policy statement, which is to protect the depository institution’s ownership rights in tax refunds while permitting the consolidated group to file tax returns.
What is the deadline for me to revise my tax allocation agreement?
The agencies expect institutions and their holding companies to implement fully the addendum to the policy statement as soon as possible, but in any event no later than October 31, 2014.
If I am not in jeopardy of failing or having my holding company enter into bankruptcy do I still need to make these changes?
Yes. While the changes were necessitated because of confusion in the courts in the context of bankruptcy proceedings or receivership for failed institutions, all banks that are a part of consolidated groups for the purposes of filing income taxes need to implement fully the provisions of the addendum.
Does this apply if my holding company is an S corporation?
No. The addendum and the policy statement do not apply to any entity if its holding company is not subject to corporate income tax at either the federal or state level.