On April 22, 2021, the Federal Reserve Board, FDIC, and OCC (the “agencies”) issued a notice of proposed rulemaking that would require banks that file tax returns as part of a consolidated tax filing group to enter into income tax allocation agreements with their parent companies and other members of the consolidated group that join in the filing, and would set forth specific requirements for the contents of those agreements.  The proposal would apply to all insured depository institutions and OCC-chartered uninsured institutions that are not registered as Subchapter S corporations (collectively, “covered institutions”).

The proposal follows the agencies’ 1998 policy statement on the same topic, which the agencies updated in a 2014 policy statement.  These policy statements aimed to address the uncertainty regarding ownership of income tax refunds that may arise for insured depository institutions filing as part of a consolidated tax group, particularly to avoid disputes over such ownership in the event of bank failure.  Through the policy statements, the agencies “encouraged” insured depository institutions to enter into tax allocation agreements with their parent companies and other affiliates to clarify the ownership of refunds and provide the institution with no less favorable treatment than if it had filed its income tax return as a separate entity.  In issuing the proposal, the agencies noted that the because the policy statements are not enforceable, not all institutions have complied.  In some instances, the FDIC as receiver for a failed insured depository institution has been unable to claw back disputed tax refund payments from the institution’s parent company when the entities have not entered into a tax allocation agreement contemplated under the policy statements.  The agencies also observed that an institution’s inability to obtain compensation for its affiliates’ use of its tax assets could create safety and soundness concerns.

The proposal aims to address these issues by codifying a requirement that a covered institution enter into a written, comprehensive tax allocation agreement with its parent company and other affiliates if those entities file income taxes as a consolidated group.  The tax allocation agreement would need to be approved by the boards of directors of each covered institution in the consolidated group and its holding company, which the preamble indicates is intended to ensure the enforceability of the agreement.

The tax allocation agreement would be required to cover the allocation, timing, and payment of taxes by a consolidated group, including its treatment of deferred tax assets and liabilities.  Among other things, the agreement would be required to provide that:

  • the covered institution will not make tax payments to its affiliates in excess of what its current period tax obligation would be if calculated on a separate entity basis;
  • the covered institution will not make tax payments to its affiliates earlier than when the institution would have been obligated to pay the taxing authority if it filed on a separate entity basis;
  • the covered institution will promptly receive any tax refund attributable to the institution’s tax assets;
  • if the covered institution would have received a refund from the taxing authority had it filed on a separate entity basis, but there is no ability to obtain an actual refund because other members in the consolidated group had losses that offset the institution’s separate tax liability for the previous year, the institution will obtain no less than its stand-alone refund amount from the parent company on or before the date the institution would have filed its own return if it had filed on a separate entity basis; and
  • the covered institution will be compensated for the use of its tax assets at the time the relevant asset is used by the consolidated group.

Additionally, a tax allocation agreement would be required to contain specific language providing that refunds attributable to a covered institution’s tax assets are owned by the institution, and that if the relevant taxing authority issues such refunds to the institution’s parent company, the parent company will hold those funds in trust as an agent of the subsidiary and promptly remit the funds to the subsidiary.

While the proposal generally tracks the supervisory expectations set forth in the existing policy statements, its requirements would go farther in a few ways:

  • While the proposal would not affect the existing obligations of a covered institution subject to a consolidated tax agreement to prepare regulatory reports on a separate entity basis, it would dictate the manner of reporting certain tax assets with greater specificity than the policy statements do. First, it would require a covered institution to reflect in its stand-alone regulatory reporting balance sheet any net operating losses or tax credit carryforwards not yet absorbed by its consolidated tax group.  Second, the proposal would prohibit a covered institution from reporting its individual deferred tax assets for temporary differences separately from the asset or liability giving rise to such assets.
  • The proposal would require that a covered institution be compensated for the use of its tax assets to reduce the tax liability of the consolidated tax group.
  • The proposal would require that the tax allocation agreement provide that the covered institution and its successors have access to tax documents for its consolidated tax group, including consolidated tax returns and workpapers.
  • The proposal would apply not only to insured depository institutions, but also to OCC-regulated uninsured institutions, such as national trust companies, even though uninsured institutions are subject neither to FDIC receivership nor to sections 23A and 23B of the Federal Reserve Act.

The preamble to the proposal states that only a small number of institutions in consolidated groups lack tax allocation agreements that would already conform with the terms of the proposal, and so the agencies “expect most covered institutions to already be in compliance with the proposal.”

Comments on the proposal will be due sixty days following its publication in the Federal Register.