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Does a parent corporation or its subsidiary own the tax refund?

On Behalf of | Mar 30, 2020 | Corporate & Business Tax |

The U.S. Supreme Court has just overturned a long-term precedent in a case involving two companies in bankruptcy. One was a parent corporation and the other was a subsidiary. They had no agreement to allocate the taxes in any particular way. Who owns the $4 million tax refund?

In the past, courts had relied on a case called Bob Richards Chrysler-Plymouth Corp. That case found that, in the absence of a tax allocation agreement, a disputed tax refund belongs to the group that had the losses that brought about the refund. The Supreme Court has just ruled that Bob Richards is illegitimate.

The case involved two banks. United Western Bank entered receivership and was taken over by the Federal Deposit Insurance Corporation (FDIC). Not long afterwards, its parent bank, United Western Bancorp, Inc., was forced into bankruptcy. When the IRS issued a $4 million tax refund, the FDIC and the bankruptcy trustee each sought the money for the creditors.

The case, Rodriguez v. Federal Deposit Insurance Corp., made it to the 10th Circuit Court of Appeals, which ruled that the FDIC should receive the tax refund on behalf of the subsidiary bank instead of the bankruptcy trustee on behalf of the parent banking corporation.

There had actually been a tax allocation agreement, but the 10th Circuit ruled that the subsidiary bank should receive the money unless the allocation agreement was unambiguous, which it was not.

The U.S. Supreme Court, led by Justice Neil Gorsuch, ruled that the Bob Richards case was an illegitimate exercise of federal common lawmaking. It vacated the case and remanded it to the lower court for ruling not based on Bob Richards but on state law.

What this ruling does is remove the default proposition that, in the absence of a tax allocation agreement, the company that took the losses should get the refund. Now, there is apparently no default rule.

What this means for companies operating in consolidated groups is that they simply must have a tax allocation agreement that specifies not only tax payments but the allocation of any refunds. If members of the group face insolvency, a proper tax allocation agreement is likely to be the deciding factor in which member receives any tax refunds.

If you have questions about a consolidated tax return or allocating refunds, contact an experienced tax attorney.

We insist that your taxpayer rights are protected and your options are known.

Our services are confidential and are protected under the attorney-client privilege as allowed by law.