On December 19, 2013, the Federal Reserve, OCC, and FDIC issued a Proposed Addendum to the Interagency Policy Statement on Income Tax Allocation in a Holding Company Structure. The agencies are currently soliciting comments, but we expect the Addendum to be adopted substantially as proposed.
Recent court proceedings have interpreted an income tax allocation agreement between a bank holding company and its failed bank to permit the holding company to retain the income tax refunds of the consolidated company. However, other courts have reached different results and awarded refunds to the FDIC in its role as receiver of the failed banks.
In reliance on the transactions with affiliates laws (Sections 23A and 23B of the Federal Reserve Act), the regulators are proposing to require bank holding companies and their subsidiary banks to amend their tax allocation agreements. The nature of the proposed required amendments is to explicitly allocate income tax refunds to the entities that actually earned the related income or incurred the related loss (which, in almost all cases will be the subsidiary banks).
Although the regulators have couched this proposal as a safety and soundness issue for banks, it seems clear that the true motivation is to ensure that income tax refunds attributable to failed banks are recoverable by the FDIC and not by those banks’ former holding companies (and, by implication, their shareholders or creditors). For that reason, we expect the agencies to formally adopt this Proposal in early 2014.
If your institution is currently party to a tax allocation agreement, it would be advisable to now review it and prepare to amend it, if necessary.