On June 19 2014 the Office of the Comptroller of the Currency, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (FDIC) (collectively, the 'agencies') published an addendum to their 1998 Interagency Policy Statement on Income Tax Allocation in a Holding Company Structure.(1) The addendum instructs insured depository institutions and their holding companies and other affiliates (collectively, a 'consolidated group') to review and revise their tax allocation agreements to ensure that the agreements expressly acknowledge that the holding company receives any tax refunds as an agent for the insured depository institution, and provides model language for that purpose.
Consolidated groups are required to amend their tax allocation agreements and otherwise comply with the addendum by October 31 2014. By that date, consolidated groups should ensure that their tax allocation agreements:
- include the model language in the addendum, or substantially similar language;
- require the holding company to transfer any refunds to the insured depository institution promptly on receipt; and
- contain no language contrary to the foregoing.
The 1998 Interagency Policy Statement on Income Tax Allocation in a Holding Company Structure was intended to protect insured depository institutions' ownership rights in tax refunds while permitting a consolidated group to file consolidated tax returns.(2) The policy statement provides that:
- tax settlements between an insured depository institution and its holding company should always be conducted in a manner that is no less favourable to the insured depository institution than if it were a separate taxpayer; and
- a holding company receives a tax refund from a taxing authority as agent for the insured depository institution.
The agencies contend that since the adoption of the policy statement, disputes have arisen when the FDIC, as receiver of a failed insured depository institution, sought to recover an income tax refund generated by the failed institution but held by its bankrupt holding company. In some cases, the courts held that the tax refund was an asset of the holding company's bankruptcy estate and the depository institution was a creditor of the holding company.(3) In those instances, the courts determined that the applicable tax allocation agreements created a debtor-creditor relationship rather than an agency relationship. Accordingly, the addendum seeks to ensure that tax allocation agreements are drafted in a manner that establishes an agency relationship, in an effort to avoid similar outcomes in the future.
New requirements and model language
The addendum instructs consolidated groups to review and revise their tax allocation agreements to ensure that the agreements:
- clearly acknowledge that an agency relationship exists between the holding company and its subsidiary insured depository institutions with respect to tax refunds; and
- contain no other language suggesting a contrary intent.
Consolidated groups can satisfy the first requirement by including in their tax allocation agreements a model paragraph included in the addendum, or substantially similar language. The model paragraph reads:
"The [holding company] is an agent for the [insured depository institution and its subsidiaries] (the "Institution") with respect to all matters related to consolidated tax returns and refund claims, and nothing in this agreement shall be construed to alter or modify this agency relationship. If the [holding company] receives a tax refund from a taxing authority, these funds are obtained as agent for the Institution. Any tax refund attributable to income earned, taxes paid, and losses incurred by the Institution is the property of and owned by the Institution, and shall be held in trust by the [holding company] for the benefit of the Institution. The [holding company] shall forward promptly the amounts held in trust to the Institution. Nothing in this agreement is intended to be or should be construed to provide the [holding company] with an ownership interest in a tax refund that is attributable to income earned, taxes paid, and losses incurred by the Institution. The [holding company] hereby agrees that this tax sharing agreement does not give it an ownership interest in a tax refund generated by the tax attributes of the Institution."
The addendum notes that tax allocation agreements that do not clearly acknowledge that an agency relationship exists (eg, through inclusion of the model paragraph) may constitute a loan or extension of credit from the bank to the holding company and, as such, may be subject to the collateralisation and other requirements of Section 23A of the Federal Reserve Act.(4)
The addendum also reminds consolidated groups that tax allocation agreements are subject to the market terms requirements of Section 23B of the Federal Reserve Act, which requires affiliate transactions to be made on terms and under circumstances that are substantially the same or at least as favourable to the insured depository institution, as comparable transactions involving non-affiliated companies or, in the absence of comparable transactions, on terms and circumstances that would be offered in good faith to non-affiliated companies.(5) The addendum cautions that tax allocation agreements that do not require holding companies to forward any refund due to the insured depository institution promptly, but rather allow the holding company to hold the tax refund, are inconsistent with Section 23B and subject to supervisory action.
Consolidated groups are required to amend their respective tax allocation agreements to implement fully the requirements of the addendum as soon as reasonably possible, but no later than October 31 2014.
For further information on this topic please contact William S Eckland or Amber M Tofilon at Sidley Austin LLP by telephone (+1 202 736 8000), fax (+1 202 736 8711) or email (firstname.lastname@example.org or email@example.com). The Sidley Austin LLP website can be accessed at www.sidley.com.
(1) Addendum to the Interagency Policy Statement on Income Tax Allocation in a Holding Company Structure, 79 Fed Reg 35228 (June 19 2014). The addendum is substantially identical to the agencies' proposed version issued on December 19 2013: 78 Fed Reg 76889.