FDIC Federal Register Citations

[Federal Register: November 23, 1998 (Volume 63, Number 225)]

[Notices]

[Page 64757-64759]

From the Federal Register Online via GPO Access [wais.access.gpo.gov]

[DOCID:fr23no98-162]

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DEPARTMENT OF THE TREASURY

Office of the Comptroller of the Currency

[Docket No. 98-17]

FEDERAL RESERVE SYSTEM

[Docket No. R-1022]

FEDERAL DEPOSIT INSURANCE CORPORATION

DEPARTMENT OF THE TREASURY

Office of Thrift Supervision

[Docket No. 98-93]

Interagency Policy Statement on Income Tax Allocation in a

Holding Company Structure

AGENCIES: Office of the Comptroller of the Currency, Treasury; Board of

Governors of the Federal Reserve System; Federal Deposit Insurance

Corporation; and Office of Thrift Supervision, Treasury.

ACTION: Notice of interagency policy statement.

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SUMMARY: The Office of the Comptroller of the Currency (OCC), the Board

of Governors of the Federal Reserve System (Board), the Federal Deposit

Insurance Corporation (FDIC), and the Office of Thrift Supervision

(OTS) (collectively, the Agencies) are adopting a uniform interagency

policy statement regarding intercompany tax allocation agreements for

banking organizations and savings associations (institutions) that file

an income tax return as members of a consolidated group. The intent of

this interagency policy statement is to provide guidance to

institutions regarding the allocation and payment of taxes among a

holding company and its depository institution subsidiaries. In

general, intercorporate tax settlements between an institution and its

parent company should be conducted in a manner that is no less

favorable to the institution than if it were a separate taxpayer. This

policy statement is the result of the Agencies' ongoing effort to

implement section 303 of the Riegle Community Development and

Regulatory Improvement Act of 1994 (CDRI Act), which requires the

Agencies to work jointly to make uniform their regulations and

guidelines implementing common statutory or supervisory policies.

DATES: This interagency policy statement is effective November 23,

1998.

FOR FURTHER INFORMATION CONTACT: OCC: Gene Green, Deputy Chief

Accountant, (202/874-4933), or Tom Rees, Senior Accountant, (202/874-

5411), Office of the Chief Accountant, Core Policy Division, Office of

the Comptroller of the Currency, 250 E Street, SW, Washington, DC

20219.

Board: Charles Holm, Manager, (202/452-3502), or Arthur Lindo,

Supervisory Financial Analyst, (202/452-2695), Division of Banking

Supervision and Regulation, Board of Governors of the Federal Reserve

System, 20th and C Streets, NW, Washington, DC 20551. For the hearing

impaired only, Telecommunication Device for the Deaf (TDD), Diane

Jenkins (202/452-3544).

FDIC: For supervisory issues, Robert F. Storch, Chief, (202/898-

8906), or Carol L. Liquori, Examination Specialist, (202/898-7289),

Accounting Section, Division of Supervision; for legal issues, Jamey

Basham, Counsel, (202/898-7265), Legal Division, FDIC, 550 17th Street,

NW, Washington, DC 20429.

OTS: Timothy J. Stier, Chief Accountant, (202/906-5699), or

Christine Smith, Capital and Accounting Policy Analyst, (202/906-5740),

Accounting Policy Division, Office of Thrift Supervision, 1700 G

Street, NW, Washington, DC 20552.

SUPPLEMENTARY INFORMATION:

I. Background

Section 303(a)(3) of the of the CDRI Act directs the Agencies,

consistent with the principles of safety and soundness, statutory law

and policy, and the public interest, to work jointly to make uniform

regulations and guidelines implementing common statutory or supervisory

policies. Section 303(a)(1) of the CDRI Act also requires the Agencies

to review their regulations and written policies and to streamline

those regulations where possible.

In 1978, the FDIC, the OCC, and the Board each published a separate

policy statement regarding the allocation and payment of income taxes

by depository institutions which are members of a group filing a

consolidated income tax return. The OTS provides supervisory guidance

on this subject in its Holding Company Handbook. As part of the ongoing

effort to fulfill the section 303 mandate, the Agencies have reviewed,

both internally and on an interagency basis, the present policy

statements and the supervisory guidance that has developed over the

years. As a result of this review, the Agencies identified minor

inconsistencies in the policy statements and supervisory guidance.

Although largely limited to differences in language and not to the

substance of the policies and guidelines themselves, the Agencies

determined that it would be beneficial to adopt a uniform interagency

policy statement regarding intercorporate tax allocation in a holding

company structure.

II. Policy Statement

This interagency policy statement reiterates and clarifies the

position the Agencies will take as they carry out their supervisory

responsibilities for institutions regarding the allocation and payment

of income taxes by institutions that are members of a group filing a

consolidated return. The interagency policy statement reaffirms that

intercorporate tax settlements between an institution and the

consolidated group should result in no less favorable treatment to the

institution than if it had filed its income tax return as a separate

entity. Accordingly, tax remittances from a subsidiary institution to

its parent for its current tax expense should not exceed the amount the

institution would have paid had it filed separately. The payments by

the subsidiary to the parent generally should not be made before the

subsidiary would have been obligated to pay the taxing authority had it

filed as a separate entity. Similarly, an institution incurring a tax

loss should receive a refund from its parent. The refund should be in

an amount no less than the amount the institution would have received

as a separate entity, regardless of whether the consolidated group is

receiving a refund. However, adjustments for statutory tax

considerations which may arise in a consolidated return are permitted

as long as the adjustments are made on a basis that is equitable and

consistently applied among the holding company affiliates. Regardless

of the method used to settle intercorporate income tax obligations,

when depository institution members prepare regulatory reports, they

must provide for current and deferred income taxes in amounts that

would be reflected as if the institution had filed on a separate entity

basis.

An institution should not pay its deferred tax liabilities or the

deferred portion of its applicable income taxes to its parent since

these are not liabilities required to be paid in the current reporting

period. Similarly, 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. This is because a

parent cannot relieve its subsidiary of this potential future

obligation to the taxing authorities, since these authorities can

collect some or all of a group liability

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from any of the group members if tax payments are not made when due.

Finally, the Agencies recommend that financial institution members

of a consolidated group have a written, comprehensive tax allocation

agreement to address intercorporate tax policies and procedures.

This interagency policy statement revises and replaces the Board's

``Policy Statement on Intercorporate Income Tax Accounting Transactions

of Bank Holding Companies and State Member Banks,'' (43 FR 22782, May

26, 1978); the OCC's ``Statement of Policy on Income Tax Remittance to

Holding Company Affiliates,'' (Banking Circular No. 105, May 22, 1978);

the FDIC's Statement of Policy on ``Income Tax Remittance by Banks to

Holding Company Affiliates'' (43 FR 22241, May 24, 1978); and the OTS's

``OTS Tax-Sharing Policy,'' (Section 500, ``Funds Distribution,'' OTS

Holding Companies Handbook). This interagency policy statement does not

materially change any of the guidance previously issued by any of the

Agencies.

The text of the interagency policy statement follows:

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.

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\1\ Throughout 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.

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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:

<bullet> Require a subsidiary depository institution to compute its

income taxes (both current and deferred) on a separate entity basis;

<bullet> Discuss the amount and timing of the institution's

payments for current tax expense, including estimated tax payments;

<bullet> Discuss reimbursements to an institution when it has a

loss for tax purposes; and

<bullet> 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 Thrift 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.

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.

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\2\ These 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.

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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

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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.

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\3\ See 26 CFR 1.1502-77(a).

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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 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.

Dated: October 14, 1998.

Julie L. Williams,

Acting Comptroller of the Currency.

By order of the Board of Governors of the Federal Reserve

System, October 29, 1998.

Jennifer J. Johnson,

Secretary of the Board.

By order of the Board of Directors.

Dated at Washington, DC, this 5th day of November, 1998.

Federal Deposit Insurance Corporation.

Robert E. Feldman,

Executive Secretary.

Dated: October 14, 1998.

By the Office of Thrift Supervision.

Ellen Seidman,

Director.

[FR Doc. 98-31179 Filed 11-20-98; 8:45 am]

BILLING CODE 4810-13-P, 6210-01-P, 6714-01-P, 6720-01-P