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May 11, 2021

Banking Agencies Propose Rule Requiring Tax Allocation Agreements


On April 22, 2021, the Federal Deposit Insurance Corporation (FDIC), Board of Governors of the Federal Reserve System (Federal Reserve), and Office of the Comptroller of the Currency (OCC) (collectively, the banking agencies) requested public comment on a joint proposed rule (proposal) that would codify existing guidance by requiring depository institutions to enter into income tax allocation agreements with their holding companies.

The impetus for the proposal likely arises from the losses that the FDIC has experienced as receiver for failed depository institutions when there is a dispute between a holding company going through the bankruptcy process and its subsidiary depository institution going through the FDIC resolution process as to exactly which entity owns any tax refunds that may be due. In the absence of a tax allocation agreement, or if the language of the tax allocation agreement was deemed unclear, some courts have rewarded the tax refund to the holding company instead of the depository institution, thereby reducing the amount of recovery for the FDIC as receiver of the failed depository institution.

The proposal codifies the principles in an existing interagency policy statement issued in 1998 and amended in 2014, and adds other provisions as summarized below. A notable consequence of converting the interagency policy statement into a rule under the Administrative Procedures Act is that this rule, once finalized, would be binding and enforceable.

Under the proposal, depository institutions in a consolidated tax filing group would be required to enter into tax allocation agreements with their holding companies and other members of the consolidated group that join in the filing of a consolidated group tax return. In general, the proposal would establish a methodology for allocating tax payment obligations between a depository institution and its parent holding company and would address how the institution should be compensated for the use of its tax assets.

The proposal would require depository institutions to include certain provisions in all tax allocation agreements, including:

  • the timing and amounts of any payments for taxes due to taxing authorities; and
  • the acknowledgment of an agency relationship between depository institutions and their holding companies in a consolidated group with respect to tax refunds received.

In addition to codifying the principles of the existing interagency policy statement, the proposal also includes a number of other provisions that would:

  • require a depository institution that files tax returns as part of a consolidated group to reflect net operating losses or tax credit carryforwards on its stand-alone regulatory reporting balance sheet if those assets have not yet been absorbed by the consolidated group;
  • reaffirm that a depository institution cannot report its individual deferred tax assets for temporary differences separately from the asset or liability that gave rise to such assets;
  • require that a depository institution must be compensated when its tax assets are used to reduce the tax liability of the consolidated group (consistent with the view that a depository institution should receive tax refunds that are attributable to its tax attributes); and
  • require that a depository institution, or the FDIC as receiver for the depository institution, have access to consolidated tax returns for a consolidated group of which the depository institution is a member.

The banking agencies appear united in their desire to address the tax allocation issue to help the FDIC minimize losses to the Deposit Insurance Fund in acting as receiver for failed depository institutions. Therefore, it is highly unlikely that the banking agencies will not proceed to finalize the proposal once comments have been received.

That said, the banking agencies embedded a number of technical questions throughout the proposal, and it would behoove all depository institutions to review the proposal and provide comments or answer the questions posed by the banking agencies to the extent that the depository institution may be impacted by the proposal. As an example, the Federal Reserve noted that the proposal may reduce existing flexibility around the timing of compensation from holding companies to state member banks for the use of their tax attributes, and the FDIC observed that some discretion could be lost over the timing, magnitude, and direction of cash flows between members of the consolidated group. Such loss of discretion and reduction of flexibility could have a negative financial impact on a depository institution.

Comments must be received by July 9, 2021.

Once the proposal is adopted as a final rule, all affected depository institutions should ensure that existing tax allocation agreements are modified or replaced as needed to comply with the new rule, and any institution without a tax allocation agreement should look to put one in place. Institutions seeking advice on any proposed comment, or wishing to learn more about the proposal and its impact on existing tax allocation agreements, are encouraged to reach out to any of the authors of this Advisory or their usual Arnold & Porter contact.

© Arnold & Porter Kaye Scholer LLP 2021 All Rights Reserved. This Advisory is intended to be a general summary of the law and does not constitute legal advice. You should consult with counsel to determine applicable legal requirements in a specific fact situation.