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5000 - Statements of Policy
{{12-31-98 p.5475}}
INTERAGENCY POLICY STATEMENT ON INCOME TAX ALLOCATION IN A HOLDING
COMPANY STRUCTURE
The Federal Deposit Insurance Corporation, the Board of Governors of
the Federal Reserve System, the Office of the Comptroller of the
Currency, and the Office of Thrift Supervision (the Agencies) are
issuing this policy statement to provide guidance to banking
organizations and savings associations regarding the allocation and
payment of taxes among a holding company and its subsidiaries. A
holding company and its depository institution subsidiaries will often
file a consolidated group income tax return. However, each depository
institution is viewed as, and reports as, a separate legal and
accounting entity for regulatory purposes. Accordingly, each depository
institution's applicable income taxes, reflecting either an expense or
benefit, should be recorded as if the institution had filed on a
separate entity basis. 1
Furthermore, the amount and timing of payments or refunds should be no
less favorable to the subsidiary than if it were a separate taxpayer.
Any practice that is not consistent with this policy statement may be
viewed as an unsafe and unsound practice prompting either informal or
formal corrective action.
Tax Sharing Agreements
A holding company and its subsidiary institutions are encouraged to
enter into a written, comprehensive tax allocation agreement tailored
to their specific circumstances. The agreement should be approved by
the respective boards of directors. Although each agreement will be
different, tax allocation agreements usually address certain issues
common to consolidated groups. Therefore, such an agreement should:
• Require a subsidiary depository institution to compute
its income taxes (both current and deferred) on a separate entity
basis;
• Discuss the amount and timing of the institution's
payments for current tax expense, including estimate tax payments;
• Discuss reimbursements to an institution when it has a
loss for tax purposes; and
• Prohibit the payment or other transfer of deferred
taxes by the institution to another member of the consolidated group.
Measurement of Current and Deferred Income Taxes
Generally accepted accounting principles, instructions for the
preparation of both the Thirft Financial Report and the Reports of
Condition and Income, and other guidance issued by the Agencies require
depository institutions to provide for their current tax liability or
benefit. Institutions also must provide for deferred income taxes
resulting from any temporary differences and tax carryforwards.
When the depository institution members of a consolidated group
prepare separate regulatory reports, each subsidiary institution should
record current and deferred taxes as if it files its tax returns on a
separate entity basis, regardless of the consolidated group's tax
paying or refund status. Certain adjustments for statutory tax
considerations that arise in a consolidated return, e.g., application
of graduated tax rates, may be made to the separate entity calculation
as long as they are made on a consistent and equitable basis among the
holding company affiliates.
In addition, when an organization's consolidated income tax
obligation arising from the alternative minimum tax (AMT) exceeds its
regular tax on a consolidated basis, the excess should be consistently
and equitably allocated among the members of the consolidated group.
The allocation method should be based upon the portion of tax
preferences, adjustments, and other items generated by each group
member which causes the AMT to be applicable at the consolidated
level.
{{12-31-98 p.5476}}
Tax Payments to the Parent Company
Tax payments from a subsidiary institution to the parent company
should not exceed the amount the institution has properly recorded as
its current tax expense on a separate entity basis. Furthermore, such
payments, including estimated tax payments, generally should not be
made before the institution would have been obligated to pay the taxing
authority had it filed as a separate entity. Payments made in advance
may be considered extensions of credit from the subsidiary to the
parent and may be subject to affiliate transaction rules, i.e.,
Sections 23A and
23B of the Federal Reserve Act.
A subsidiary institution should not pay its deferred tax liabilities
or the deferred portion of its applicable income taxes to the parent.
The deferred tax account is not a tax liability required to be paid in
the current reporting period. As a result, the payment of deferred
income taxes by an institution to its holding company is considered a
dividend subject to dividend
restrictions, 2
not the extinguishment of a liability. Furthermore, such payments may
constitute an unsafe and unsound banking practice.
Tax Refunds From the Parent Company
An institution incurring a loss for tax purposes should record a
current income tax benefit and receive a refund from its parent in an
amount no less than the amount the institution would have been entitled
to receive as a separate entity. The refund should be made to the
institution within a reasonable period following the date the
institution would have filed its own return, regardless of whether the
consolidated group is receiving a refund. If a refund is not made to
the institution within this period, the institution's primary federal
regulator may consider the receivable as either an extension of credit
or a dividend from the subsidiary to the parent. A parent company may
reimburse an institution more than the refund amount it is due on a
separate entity basis. Provided the institution will not later be
required to repay this excess amount to the parent, the additional
funds received should be reported as a capital contribution.
If the institution, as a separate entity, would not be entitled to a
current refund because it has no carryback benefits available on a
separate entity basis, its holding company may still be able to utilize
the institution's tax loss to reduce the consolidated group's current
tax liability. In this situation, the holding company may reimburse the
institution for the use of the tax loss. If the reimbursement will be
made on a timely basis, the institution should reflect the tax benefit
of the loss in the current portion of its applicable income taxes in
the period the loss is incurred. Otherwise, the institution should not
recognize the tax benefit in the current portion of its applicable
income taxes in the loss year. Rather, the tax loss represents a loss
carryforward, the benefit of which is recognized as a deferred tax
asset, net of any valuation allowance.
Regardless of the treatment of an institution's tax loss for
regulatory reporting and supervisory purposes, a parent company that
receives a tax refund from a taxing authority obtains these funds as
agent for the consolidated group on behalf of the group
members. 3
Accordingly, an organization's tax allocation agreement or other
corporate policies should not purport to characterize refunds
attributable to a subsidiary depository institution that the parent
receives from a taxing authority as the property of the parent.
Income Tax Forgiveness Transactions
A parent company may require a subsidiary institution to pay it less
than the full amount of the current income tax liability that the
institution calculated on a separate entity basis. Provided the parent
will not later require the institution to pay the remainder of the
current
{{12-31-98 p.5477}}tax liability, the amount of this
unremitted liability should be accounted for as having been paid with a
simultaneous capital contribution by the parent to the subsidiary.
In contrast, a parent cannot make a capital contribution to a
subsidiary institution by "forgiving" some or all of the
subsidiary's deferred tax liability. Transactions in which a parent
"forgives" any portion of a subsidiary institution's deferred
tax liability should not be reflected in the institution's regulatory
reports. These transactions lack economic substance because the parent
cannot legally relieve the subsidiary of a potential future obligation
to the taxing authorities. Although the subsidiaries have no direct
obligation to remit tax payments to the taxing authorities, these
authorities can collect some or all of a group liability from any of
the group members if tax payments are not made when due.
By order of the Board of Directors, November 5, 1998
[Source: 63
Fed. Reg. 64757, November 23, 1998]
1Throughout this policy statement, the terms "separate
entity" and "separate taxpayer" are used synonymously. When a
depository institution has subsidiaries of its own, the institution's
applicable income taxes on a separate entity basis include the taxes of
the subsidiaries of the institution that are included with
the institution in the consolidated group return. Go Back to Text
2These restrictions include the Prompt Corrective Action
provisions of section 38(d)(1) of the Federal Deposit Insurance Act
(12 U.S.C. 1831o(d)(1)) and
its implementing regulations: for insured state nonmember banks,
12 CFR part 325, subpart
B; for national banks, 12 CFR 6.6; for savings associations, 12 CFR
part 565; and for state member banks, 12 CFR 208.45. Go Back to Text
3See 26 CFR 1.1502--77(a). Go Back to Text
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