Income Tax Allocation Agreements

By Baker Newman Noyes June 16, 2014

On June 13, 2014 Federal banking regulators issued final supplemental guidance on income tax allocation agreements involving holding companies and insured depository institutions. An aim of the guidance is to reduce confusion regarding ownership of tax refunds.

The guidance supplements an interagency policy statement on income tax allocation issued by the regulators in 1998. That statement said that a holding company that receives a tax refund from a taxing authority obtains these funds as agent for its subsidiary insured depository institutions and other affiliates. The guidance supplements the policy statement by instructing insured depository institutions and their holding companies to review their tax allocation agreements to ensure the agreements expressly acknowledge that the holding company receives any tax refunds as an agent. In addition, all banking organizations are asked to insert specific language in their tax allocation agreements to further clarify tax refund ownership.

Institutions and holding companies should implement the guidance as soon as reasonably possible, which the regulators expect would not be later than October 31, 2014.

The guidance states the following:

In reviewing their tax allocation agreements, Consolidated Groups should ensure the agreements: (1) clearly acknowledge that an agency relationship exists between the holding company and its subsidiary IDIs (Insured Depository Institutions) with respect to tax refunds, and (2) do not contain other language to suggest a contrary intent. In addition, all Consolidated Groups should amend their tax allocation agreements to include the following paragraph or substantially similar language:

The [holding company] is an agent for the [IDI 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.

Going forward, the Agencies generally will deem tax allocation agreements that contain this or similar language to acknowledge that an agency relationship exists for purposes of the Interagency Policy Statement, this Addendum, and sections 23A and 23B of the Federal Reserve Act.

Since the guidance gives a good example of the recommended language, adopting this change should be relatively straight forward.

The full FDIC guidance can be found here.