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New Addendum to the Interagency Policy on Tax Sharing Agreements

Federal banking regulators recently adopted an addendum to the “Interagency Policy Statement on Income Tax Allocation in a Holding Company Structure”, addressing income tax allocation agreements between bank holding companies and insured depository institutions (IDI). The purpose of this guidance is to clarify that an agency relationship exists between a bank holding company and its IDIs and to help reduce confusion regarding ownership of tax refunds.

The addendum instructs holding companies and their subsidiary IDIs to review and revise their tax allocation agreements to ensure that the agreements expressly acknowledge that the holding company receives a tax refund from a taxing authority as agent for the IDI, and do not contain other language to suggest a contrary intent. The agreements should also be consistent with certain of the requirements of sections 23A and 23B of the Federal Reserve Act (FRA). Specifically, section 23B of the FRA requires a holding company to promptly transmit tax refunds received from a taxing authority to its subsidiary IDI.

The Addendum included a sample paragraph that can be incorporated into a tax sharing agreement, which the Agencies generally would deem to fulfill the requirements of the addendum and sections 23A and 23B of the FRA:

“The [holding company] is an agent for the [IDI and its subsidiaries] (the “Institution”) 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 ownership interest in a tax refund that is attributable to income earned, taxes paid, and losses incurred by the Institution. The [holding company] hereby agrees that this tax sharing agreement does not give it an ownership interest in a tax refund generated by the tax attributes of the Institution.”

Institutions and holding companies should immediately review their tax allocation agreements and implement this policy statement as soon as reasonably possible, but no later than October 31, 2014.

This guidance does not apply to S corporations or any other institutions that are not subject to corporate income taxes.

If you have any questions or concerns on how the new addendum affects your financial institution, feel free to contact your AHP tax advisor at 888.754.8478.