Income Tax Allocation Agreements Need Updating by October 31
On Friday, June 13, the Federal Reserve Bank, FDIC and OCC ("Agencies") issued a joint release instructing insured depository institutions ("IDIs") in a tax consolidated group and their holding companies to review their tax allocation agreements. The release transmits the Agencies' final Addendum to the 1998 Interagency Policy Statement on Income Tax Allocation in a Holding Company Structure (the "Addendum"). Importantly, the Addendum does not apply to holding companies that have elected S status and are not subject to corporate income taxes at the federal or state level.
Background
The 1998 policy statement provides guidance to IDIs and their holding companies concerning the payment of taxes when they file consolidated income tax returns. The Addendum points to disputes that have arisen in recent years between holding companies in bankruptcy and failed IDIs over the ownership of income tax refunds.
New Requirements and Timing
In an effort to lessen the risk of these disputes and the resulting costs and delays, the Addendum instructs holding companies and subsidiary IDIs to review and revise their tax allocation agreements. Specifically, tax allocation agreements should expressly acknowledge that the holding company is the agent for IDIs included in any consolidated income tax filings and include specific language to clarify the ownership of tax refunds.
The Addendum warns that failure to acknowledge adequately the existence of an agency relationship between a holding company and its subsidiary IDIs may constitute a violation of sections 23A and 23B of the Federal Reserve Act (these sections deal with restrictions on transactions with affiliates) and result in supervisory action. According to the release, revisions to tax allocation agreements consistent with the Addendum should be made as soon as reasonably possible, but not later than October 31, 2014. (Somehow, it seems quite appropriate that requirements issued on a Friday the 13th should be implemented by Halloween!)
Sample Language
The Addendum states that all IDIs and holding company consolidated return groups should insert the following paragraph (or similar language) in their tax allocation agreements:
"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. 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."
According to the Addendum, the Agencies will deem tax allocation agreements that contain this or similar language as satisfying these new requirements.
Action Needed
IDIs and their holding companies filing consolidated federal and/or state income tax returns, including so-called "combined reports," should review the guidance contained in the Addendum and make revisions, as appropriate, to their tax allocation agreements as soon as reasonably possible, but no later than October 31, 2014. Keep in mind that tax allocation agreements are binding legal documents, so legal counsel should review any proposed revisions.
Should you need assistance reviewing your tax allocation agreements and proposing changes for review by legal counsel, please contact your local Eide Bailly tax professional.
