Does Your Institution’s Income Tax Allocation Agreement Need an Update?

Income Tax AllocationFederal Banking Regulators Finalize Joint Supplemental Guidance on Income Tax Allocation Agreements

On June 13, 2014, federal banking regulators approved an addendum that supplements and clarifies the 1998 Interagency Policy Statement on Income Tax Allocation in a Holding Company Structure (Interagency Policy Statement). The addendum was issued to ensure that insured depository institutions (IDIs) in a consolidated group maintain an appropriate relationship regarding the payment of taxes and the treatment of tax refunds.  The guidance aims to reduce confusion regarding ownership of tax refunds.

Since the adoption of the 1998 Interagency Policy Statement, disputes have occurred between holding companies in bankruptcy and failed IDIs regarding the ownership of tax refunds generated by the institutions.  As a result, courts have come to differing conclusions regarding the ownership of tax refunds between holding companies and depository institutions based on their interpretations of language in the institutions’ tax allocation agreements.  In response to these disputes, federal banking regulators issued the guidance, which is identical to the proposal issued in December 2013.

The addendum to the Interagency Policy Statement is intended to ensure that tax allocation agreements explicitly acknowledge that an agency relationship exists between a holding company and its subsidiary institution with respect to tax refunds attributable to the institution.

Actionable Item:  This new guidance instructs IDIs and their holding companies to review their tax allocation agreements to ensure the agreements expressly acknowledge that the holding company receives any tax refunds as an agent. It also asks all banking organizations to insert specific language in their tax allocation agreements to further clarify tax refund ownership.

The guidance also includes a sample paragraph that could be used in tax allocation agreements to facilitate compliance.

Institutions and holding companies should implement the guidance as soon as reasonably possible, but no later than October 31, 2014.

For questions about or assistance with the Income Tax Allocation Agreement requirements, please contact the expert listed below at PYA, (800) 270-9629.

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WE ARE REQUIRED BY IRS CIRCULAR 230 TO INFORM YOU THAT THE FOLLOWING DISCUSSION WAS NOT INTENDED OR WRITTEN TO BE USED, AND IT CANNOT BE USED, NOR RELIED UPON, BY ANY TAXPAYER FOR THE PURPOSE OF AVOIDING ANY PENALTIES THAT MAY BE IMPOSED UNDER FEDERAL TAX LAW. THE ADVICE WAS WRITTEN TO SUPPORT THE PROMOTION OR MARKETING OF THE TRANSACTIONS OR MATTERS ADDRESSED IN THE DISCUSSION. EACH TAXPAYER SHOULD SEEK ADVICE BASED ON ITS PARTICULAR CIRCUMSTANCES FROM AN INDEPENDENT TAX ADVISOR.

 


Mike Shamblin

Mike Shamblin

Managing Principal of Audit & Assurance Services

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