The Nature of a Parent-Subsidiary Relationship Determines How to Allocate a Refund in a Tax Sharing Agreement
By: Samuel Cushner
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
Recently, in FDIC v. AmFin Financial Corp.,[i] the Sixth Circuit held that a tax sharing agreement between a bank holding company and its subsidiary was ambiguous as to the ownership of an income tax refund and that the district court erred in refusing to consider extrinsic evidence concerning the parties’ intent as to the ownership of the funds.[ii] In 2009, the bank holding company filed for chapter 11 bankruptcy protection.[iii] As a result, the Office of Thrift Supervision closed the bank holding company’s bank subsidiary and placed it into FDIC receivership.[iv] Later on, the bank holding company filed a consolidated 2008 federal tax return on behalf of itself and its affiliates showing a total net operating loss of $805 million, with the bank subsidiary’s losses accounting for $767 million of that total.[v] After the IRS issued a refund of approximately $195 million to the parent company, the FDIC claimed[vi] that over $170 million of that refund belonged to the bank subsidiary. Finding that the tax sharing agreement was unambiguous, the United States District Court for the Northern District of Ohio concluded that the tax sharing agreement created a debtor-creditor relationship with respect to tax refunds between the parent and its affiliates, including the subsidiary, and thus, the parent owned the refund.[vii] The Sixth Circuit reversed and remanded to the district court to determine whether the tax sharing agreement created either a debtor creditor relationship or a trust or agency relationship under Ohio law with respect to the tax refunds.