Tax Allocation in a Holding Company Structure

Federal bank regulators recently issued additional guidance on inter-company income tax allocation agreements between holding companies and their depository institution subsidiaries. The addendum, which was open for public comment in late December and early January, was written to address court’s struggles in deciding how to allocate refunds once banks fail. Of particular concern for the regulators was that some refunds generated by a failed bank were the property of its holding company, based on a reading of the express language of the tax allocation agreement as creating a debtor-creditor relationship.

The addendum was intended to ensure that that insured depository institutions (IDI) in a consolidated group maintain appropriate relationships regarding the payment of taxes and treatment of tax refunds. The addendum would clarify the 1988 interagency policy statement that dealt with holding companies filing consolidated tax returns and required that: (i) Holding company tax settlements with their depository institutions be conducted as though the depository institution were a separate taxpayer and (ii) Holding companies receiving refunds from taxing authorities hold such funds as agent for the depository institutions and nonbank subsidiaries they controlled.

The Addendum also clarified that tax allocation agreements are subject to the requirements of Section 23B of the Federal Reserve Act (FRA); agreements that do not clearly acknowledge the agency relationship could be subject to additional requirements under Section 23A of the FRA. “Tax allocation agreements should require the holding company to forward promptly any payment due the [insured depository institution] under the tax allocation agreement and specify the timing of such payment,” the Addendum stated.

The regulators provided sample language for tax allocation agreements. Going forward, the agencies said they will deem agreements “that contain this or similar language to acknowledge that an agency relationship exists” for purposes of the policy statement, Addendum, and Sections 23A and 23B of the FRA. : The Agencies expect institutions
and holding companies to implement fully the Addendum to the Interagency Policy Statement as soon as reasonably possible, which the Agencies expect would not be later than October 31, 2014. Meaning that holding companies and insured depository institutions have less than four months to review and edit their tax allocation agreements to adhere to the addendum.

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