In 1998, the FDIC, the Board of Governors of the Federal Reserve System, the Office of Currency Controllers and the Office of Thrift Supervision issued guidelines on the allocation of income tax in a holding structure. The Guidelines specify, inter alia, that a tax allocation agreement should be established to specify that the holding company receiving a tax refund acts as an agent for the group on behalf of its members. The agreement should not characterise refunds attributable to a subsidiary depositary and which the parent undertaking receives from a tax service such as the ownership of the parent undertaking. Following the publication of the 1998 Guidelines, the courts reached different conclusions on whether tax allocation agreements establish a debtor-creditor relationship between a holding company and failing banks, which are insured deposit-take institutions (IDIs). Some courts have found that the tax refunds at issue were owned by the bankrupt holding company (not the IDI subsidiary) and that it was held by the holding company as a debtor of the IDI, meaning that a bank would have to comply with other creditors to claim its repayment. These results were generally the result of tax-sharing agreements that were unclear as to the distribution of refunds. In 2014, regulators responded by issuing additional guidelines inviting consolidated groups to review their tax allocation agreements to confirm that they clearly recognise that there is an agency relationship between the holding company and its subsidiaries with regard to tax refunds. Under the additional guidelines, agreements that do not could be subject to additional requirements under Section 23A of the Federal Reserve Act of 1913, which limits a member bank`s ability to finance its related businesses through a loan or similar transaction. The regulators made available to businesses the following example language: „The Supreme Court overturned the federal law created by the Federal Court, which had existed in many circles for more than 45 years, thus severely limiting the ability of federal courts to create federal law,“ she said. The Supreme Court limited the Federal Court`s common legislation to what is „necessary to protect single federal interests“ and found that this narrow ability to create the common law does not apply to the allocation of federal tax refunds, even if both parent and subsidiary companies were in state-created insolvency proceedings.
In addition to setting an important precedent for the limited ability of federal courts to establish federal customary law, the effect of this decision is that, in a tax allocation agreement, related businesses are free to decide which beneficiary of a tax refund between a group of companies files a consolidated return, even if the allocation is not consistent with the company responsible for the loss of income. and even if one or more of the related companies are in bankruptcy proceedings or mandatory administration of the FDIC. Where businesses are on the verge of bankruptcy, this contractual award may be decisive for the performance available to creditors of a particular related business and, in some cases, to lenders who may have received an assignment of tax refunds. „Holding companies that have not yet amended their tax-sharing agreements should consider revising them to include the standard language.