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Federal agencies are requiring tax allocation agreements to explicitly acknowledge that a relationship exists between a bank and a holding company for tax purposes.

Tax strategies

Banks and Holding Companies to Update Tax Sharing Agreements

  • Amanda Garnett
  • 6/27/2014

Federal regulators recently released an updated policy to help further clarify the relationship between banks and their holding companies regarding the payment of taxes and treatment of tax refunds.

“C corporation banks and their holding companies need to amend their tax sharing agreements based on the updated policy by October 31; however, this change should not affect how they calculate or pay their taxes,” says Amanda Garnett, a financial institutions manager with CliftonLarsonAllen.

Since 1998, banks and holding companies that file consolidated income tax returns have been subject to the Interagency Policy Statement on Income Tax Allocation in a Holding Company Structure. This dictates that tax settlements between a bank and its holding company should be conducted in a manner that is no less favorable to the entities than if they were to file separate returns.

Despite this guidance, during the financial crisis, many disputes arose between holding companies in bankruptcy and failed banks regarding the ownership of tax refunds.

New requirements

On June 19, 2014, the Federal Reserve, the Federal Deposit Insurance Corporation, and the Office of the Comptroller of Currency issued an addendum to the 1998 interagency statement which requires tax allocation agreements to explicitly acknowledge that an agency relationship exists between a bank and a holding company regarding the payment of taxes and treatment of tax refunds.

The policy further acknowledges that when a holding company receives a tax refund from the IRS or a state agency, it is subject to Sections 23A and 23B of the Federal Reserve Act, which requires it to promptly send refunds to the bank. Failure to send refunds in a timely manner could be seen as an unsecured loan from the bank to its holding company and result in regulatory action.

How to comply

The agencies expect banks to implement the new policy as soon as reasonably possible, but no later than October 31, 2014. The addendum contains a sample paragraph that banks can incorporate into their tax sharing agreements to ensure they are in compliance with the new requirements.

How we can help

Banks and their holding companies should take this opportunity to review their existing tax sharing agreements with their legal counsel or tax professionals and make any necessary revisions for the new policy.

  • Amanda Garnett
  • Principal
  • CLA Peoria