Case No. 18-1269 | 10th Cir.
Preview by Sean Lowry, Online Editor*
A parent corporation and its subsidiaries may elect to file a single, consolidated federal income tax return to the Internal Revenue Service (“IRS”). The benefits of filing a consolidated return include lower tax administration costs and the ability to maximize tax benefits across the consolidated group in the current tax year. The parent files the consolidated return and any IRS refunds are made “directly to and in the name of” the parent corporation. 26 C.F.R. § 1.1502-77(c), (d)(5). When making this procedural election, the group members typically enter into a tax allocation agreement (“TAA”), either explicitly or implicitly, to allocate tax liabilities and benefits between themselves.
Courts generally agree that the members of a consolidated group can allocate tax liability or benefits as they wish under the explicit terms of a TAA, and that an agreement can be implied as a matter of state law. Absent a clear agreement, though, the circuits are split on how a refund to a consolidated group arising from losses from one subsidiary should be legally allocated between the parent and that subsidiary. The Fifth, Ninth, and Tenth Circuits apply the common law rule that emerged from In re Bob Richards Chrysler-Plymouth Corp., Inc., 473 F.2d 262 (9th Cir. 1973). Under the Bob Richards rule, a parent is under a duty to transfer the entirety of the refund to the subsidiary that caused the underlying loss, unless the parties have entered into an agreement unambiguously stating otherwise. In contrast, the Second, Third, Sixth, and Eleventh Circuits do not apply the Bob Richards rule and instead use state law to fill in any gaps in the TAA.
In Rodriguez, the members of a consolidated group in the banking industry entered into an explicit TAA, whereby each member bank’s share of a refund would be the amount the subsidiary would have received by filing a separate return but no more than the refund received by the parent holding company. In 2008, the parent filed a refund claim of $4 million, which was entirely attributable to the losses of one subsidiary bank. Federal regulators closed down the subsidiary, and the Federal Deposit Insurance Corporation (“FDIC”) was appointed as receiver. The parent later filed for bankruptcy. Then, the IRS issued the $4 million refund. The FDIC filed a claim alleging that it, as receiver for the subsidiary, was the owner of the refund. The trustee for the parent’s bankruptcy estate, Rodriguez, filed a competing claim for the refund.
After wins for each side at the bankruptcy and district court levels, the Tenth Circuit ruled in favor of the FDIC. The Tenth Circuit found that the text of the TAA was ambiguous as to the legal ownership of any tax refunds. However, the court concluded that awarding the refund to the subsidiary bank would better effectuate the intent of the parties because a clause in the TAA said that any ambiguity should be resolved “in favor of any insured depository institution.” In re United W. Bancorp, Inc., 914 F.3d 1262, 1274 (10th Cir. 2019).
Petitioner argues that the Tenth Circuit misinterpreted the relationship between the parent and subsidiary. Instead, it argues, the TAA established a debtor-creditor relationship between the parent and subsidiary, respectively, and that any refund paid to the parent would be its property and the FDIC would have an unsecured, nonpriority claim for its share of the refund. (This was the conclusion of the bankruptcy court.) Petitioner also argues that the Tenth Circuit’s analysis effectively follows the Bob Richards rule and the Court should use the instant case as a vehicle for striking down the judge-made doctrine. Respondent, FDIC, with the support of the U.S. Solicitor General, argues that Petitioner misconstrues the Tenth Circuit’s analysis, and maintains that it engaged in sound analysis of state contract law and did not rely on the Bob Richards rule. Respondent’s brief does not defend the Bob Richards rule, but instead argues that the facts of the instant case do not require resolution of the circuit split.
The Court’s ruling in Rodriguez could affect how tax agreements between corporate affiliates are drafted.
*Sean Lowry is a 3LE (Class of 2021) and Analyst in Public Finance at the Congressional Research Service (CRS). The views expressed are those of the author and are not necessarily those of the Library of Congress or CRS.