On June 13, 2014, the Board of Governors of the Federal Reserve System, the Office of the Comptroller of the Currency, and the Federal Deposit Insurance Corporation issued final supplemental guidance on income tax allocation agreements between bank holding companies and insured depository institutions. The guidance can be found here.

The purpose of the guidance is to clarify ownership of tax refunds in light of recent split decisions by courts regarding the ownership of tax refunds between bankrupt bank holding companies and failed insured depository institutions. Banks and bank holding companies often prepare their tax returns as part of a consolidated group. Under a tax allocation agreement, a bank holding company acts as an agent for its member bank. Nevertheless, several tax allocation agreements have been found to transfer ownership of the tax refund to the bank holding company notwithstanding language to the contrary in the agreement.

Recently, tax refunds have been subject to intense tug-of-wars between the FDIC in its capacity as receiver of a failed insured depository institution and the bank holding company. The FDIC as receiver seeks the income tax refunds as a recovery for the receivership, while the bank holding company seeks the income tax refunds as an asset of the bank holding company bankruptcy estate for distribution to creditors.

The guidance provides the following requirements going forward for tax allocation agreements:

  • It must clearly acknowledge that the bank holding company is acting as an agent for the bank.  
  • It must not contain any language to suggest a contrary intent.  
  • It must contain language (found in the guidance) suggested by the agencies essentially confirming the foregoing.

Other aspects of the guidance include a requirement that the tax allocation agreement comply with Section 23B of the Federal Reserve Act (terms must be favorable as similar transactions with a non-affiliated company).

The guidance does not apply to institutions that are not subject to corporate income taxes at the federal or state levels, e.g., S corporations.

Banks and bank holding companies are expected to revise their tax allocation agreements to effectuate the new guidance no later than October 31, 2014.

Accordingly, banks and bank holding companies should immediately review (and revise where appropriate) their tax allocation agreements to ensure that they comply with the new guidance.