Pub. 5 2014 Issue 3

www.wvbankers.org 14 West Virginia Banker Background In 1998, the Board of Governors of the Federal Reserve System, the Federal Deposit Insurance Corporation, the Office of the Comptroller of the Currency, Department of the Treasury (collectively the “Agencies”) jointly issued the Interagency Policy Statement on Income Tax Allocation in a Holding Company Structure (“Interagency Policy Statement”) to provide guidance to insured depository institutions (“IDI”), their holding companies, and other affiliates regarding the payment of taxes on a consolidated basis. The Interagency Policy Statement has two key provisions: (1) tax settlements between an insured depository institu- tion and its holding company should be conducted in a manner that is no less favorable to the IDI than if it were a sepa- rate taxpayer; and (2) a holding company receives a tax refund from a taxing author- ity as agent for the IDI. The primary goal was to protect the IDI’s ownership rights in tax refunds, while permitting a compa- ny to file consolidated tax returns. In June 2014, as a result of disputes between holding companies in bankruptcy and failed depository institutions regard- ing ownership of tax refunds, the Agencies issued an Addendum to the Interagency Policy Statement (the “Addendum”) to re- duce confusion regarding the ownership of tax refunds. Courts have come to different conclusions regarding the ownership of tax refunds between holding companies and IDIs based upon the court’s inter- pretation of language in tax allocation agreements. In some cases, the court has classified the relationship between a holding company and a subsidiary IDI as that of a debtor and its creditor. As a result, subsidiary IDIs have been treated as unsecured creditors for the refund, es- sentially eliminating their ability to recover the amount of the refund from the holding company during bankruptcy. Key Provisions of Addendum The Addendum requires that all consoli- dated companies amend their tax alloca- tion agreement to include the following (or substantially similar) language: “The [holding company] is an agent for the [IDI and its subsidiaries] (the “Insti- tution”) 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 New Interagency Guidance for Tax Allocation Agreements Joseph W. Hager and Arnett Foster Toothman PLLC