The Second Circuit recently held that mandatory subordination under section 510(b) of the Bankruptcy Code must be interpreted narrowly in accordance with its underlying purpose. In re CIT Group Inc., 2012 WL 3854887, at *2 (2d Cir. Sept. 6, 2012). The underlying Bankruptcy Court (In re CIT Group Inc., 460 B.R. 633 (Bankr. S.D.N.Y. 2011)) had clarified the scope of section 510(b), which requires the subordination of a claim “arising from rescission of a purchase or sale of a security of the debtor or of an affiliate of the debtor, [or] for damages arising from the purchase or sale of such a security . . . .” The debtor and its former parent, in connection with the debtor’s pre-petition initial public offering, had entered into a tax sharing agreement whereby the debtor agreed to pay its former parent any tax benefits resulting from the debtor’s use of certain net operating losses (the “NOLs”). The Bankruptcy Court rejected the debtor’s attempt to subordinate the former parent’s claim, which arose from the debtor’s rejection of the tax sharing agreement, concluding that Congress had enacted section 510(b) to prevent equity claims in bankruptcy from being disguised as higher-priority creditor claims. The court reasoned that subordination is appropriate only if the claimant “‘(1) took on the risk and return expectations of a shareholder, rather than a creditor, or (2) seeks to recover a contribution to the equity pool presumably relied upon by creditors in deciding whether to extend credit to the debtor.’” Id. at 638 (citation omitted). Tax sharing agreements generally create only contractual debtor-creditor relationships. Even though the debtor’s ability to use the NOLs depends upon its future revenues, the former parent does not have an interest in the debtor’s future equity value, and thus has no expectation of sharing in the debtor’s profits without limitation. Thus, the court concluded, and the Second Circuit has now affirmed, subordination is not warranted.