View PDF

The full text on this page is automatically extracted from the file linked above and may contain errors and inconsistencies.

Federal Reserve Bank
of

Dallas

ROBERT D. McTEER, JR.
DALLAS, TEXAS

P R E S ID E N T

75265-5906

A ND C H IE F E X E C U T IV E O F F IC E R

December 30, 1998

Notice 98-124

TO:

The Chief Executive Officer of each
financial institution and others concerned
in the Eleventh Federal Reserve District

SUBJECT
Interagency Policy Statement on
Income Tax Allocation in a Holding Company Structure
DETAILS
The Office of the Comptroller of the Currency, the Board of Governors of the Federal
Reserve System, the Federal Deposit Insurance Corporation, and the Office of Thrift Supervision
(collectively, the agencies) have adopted a uniform interagency policy statement regarding
intercompany tax allocation agreements.
The policy applies to banking organizations and savings associations that file an
income tax return as members of a consolidated group. It provides 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, which requires the agencies to work jointly to make uniform their regulations and
guidelines implementing common statutory or supervisory policies.
ATTACHMENT
A copy of the agencies’ notice as it appears on pages 64757-59, Vol. 63, No. 225 of
the Federal Register dated November 23, 1998, is attached.

For additional copies, bankers and others are encouraged to use one of the following toll-free numbers in contacting the Federal
Reserve Bank of Dallas: Dallas Office (800) 333-4460; El Paso Branch Intrastate (800) 592-1631, Interstate (800) 351-1012;
Houston Branch Intrastate (800) 392-4162, Interstate (800) 221-0363; San Antonio Branch Intrastate (800) 292-5810.

This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org)

-2-

MORE INFORMATION
For more information, please contact Rob Jolley at (214) 922-6071. For additional
copies of this Bank’s notice, contact the Public Affairs Department at (214) 922-5254.
Sincerely yours,

\

Federal Register/Vol. 63, No. 225/Monday, November 23, 1998/Notices
DEPARTMENT OF THE TREASURY
Office of the Comptroller of the
Currency
[Docket No. 9 8 -1 7 ]

FEDERAL RESERVE SYSTEM
[Docket No. R -1022]

FEDERAL DEPOSIT INSURANCE
CORPORATION
DEPARTMENT OF THE TREASURY
Office of Thrift Supervision
[Docket No. 9 8 -9 3 ]

Interagency Policy Statement on
Income Tax Allocation in a Holding
Company Structure

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.
AGENCIES:

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 intercom pany tax allocation
agreements for banking organizations
and savings associations (institutions)
that file an incom e tax return as
members of a consolidated group. The
intent of this interagency policy
statem ent is to provide guidance to
institutions regarding the allocation and
paym ent of taxes among a holding
com pany and its depository institution
subsidiaries. In general, intercorporate
tax settlem ents betw een an institution
and its parent com pany should be
conducted in a m anner that is no less
favorable to the institution than if it
were a separate taxpayer. This policy
statem ent is the result of the Agencies’
ongoing effort to im plem ent section 303
of the Riegle Comm unity D evelopment
and Regulatory Im provem ent Act of
1994 (CDRI Act), w hich requires the
Agencies to w ork jointly to make
uniform their regulations and guidelines
im plem enting common statutory or
supervisory policies.
DATES: This interagency policy
statem ent is effective November 23,
1998.
FOR FURTHER INFORMATION CONTACT:

OCC: Gene Green, Deputy Chief

Accountant, (202/874-4933), or Tom
Rees, Senior A ccountant, (202/8745411), Office of the Chief Accountant,
Core Policy Division, Office of the
Comptroller of the Currency, 250 E
Street, SW, W ashington, DC 20219.
Board: Charles Holm, Manager, (202/
452-3502), or A rthur 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,
W ashington, DC 20551. For the hearing
im paired only, Telecom m unication
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, Exam ination
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, W ashington, DC
20429.
OTS: Tim othy 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, W ashington, DC 20552.
SUPPLEMENTARY INFORMATION:

I. Background
Section 303(a)(3) of the of the CDRI
Act directs the Agencies, consistent
w ith the principles of safety and
soundness, statutory law and policy,
and the public interest, to work jointly
to make uniform regulations and
guidelines im plem enting common
statutory or supervisory policies.
Section 303(a)(1) of the CDRI Act also
requires the Agencies to review their
regulations and w ritten policies and to
streamline those regulations where
possible.
In 1978, the FDIC, the OCC, and the
Board each published a separate policy
statem ent regarding the allocation and
paym ent of incom e taxes by depository
institutions w hich are members of a
group filing a consolidated incom e 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
m andate, 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
m inor inconsistencies in the policy
statements and supervisory guidance.
Although largely lim ited to differences
in language and not to the substance of

64757

the policies and guidelines themselves,
the Agencies determ ined that it w ould
be beneficial to adopt a uniform
interagency policy statem ent regarding
intercorporate tax allocation in a
holding com pany structure.
II. Policy Statement
This interagency policy statem ent
reiterates and clarifies the position the
Agencies w ill take as they carry out
their supervisory responsibilities for
institutions regarding the allocation and
paym ent of income taxes by institutions
that are members of a group filing a
consolidated return. The interagency
policy statem ent reaffirms that
intercorporate tax settlem ents between
an institution and the consolidated
group should result in no less favorable
treatm ent to the institution than if it had
filed its incom e 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 am ount the institution
w ould have paid had it filed separately.
The paym ents by the subsidiary to the
parent generally should not be made
before the subsidiary w ould 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 am ount no less
than the am ount the institution w ould
have received as a separate entity,
regardless of w hether the consolidated
group is receiving a refund. However,
adjustments for statutory tax
considerations w hich may arise in a
consolidated return are perm itted as
long as the adjustm ents are made on a
basis that is equitable and consistently
applied among the holding company
affiliates. Regardless of the m ethod used
to settle intercorporate income tax
obligations, w hen depository institution
members prepare regulatory reports,
they m ust provide for current and
deferred income taxes in am ounts that
w ould 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 w hich 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

64758

Federal Register/Vol. 63, No. 225/Monday, November 23, 1998/Notices

from any of the group members if tax
payments are not made w hen due.
Finally, the Agencies recom m end that
financial institution members of a
consolidated group have a w ritten,
com prehensive tax allocation agreement
to address intercorporate tax policies
and procedures.
This interagency policy statem ent
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
Statem ent of Policy on “Income Tax
Remittance by Banks to Holding
Company Affiliates” (43 FR 22241, May
24, 1978); and the OTS’s “OTS TaxSharing Policy,” (Section 500, “Funds
D istribution,” OTS Holding Companies
Handbook). This interagency policy
statem ent does not m aterially change
any of the guidance previously issued
by any of the Agencies.
The text of the interagency policy
statem ent 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
statem ent to provide guidance to
banking organizations and savings
associations regarding the allocation
and paym ent of taxes among a holding
com pany and its subsidiaries. A holding
com pany and its depository institution
subsidiaries w ill often file a
consolidated group incom e tax return.
However, each depository institution is
view ed 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
am ount and tim ing of paym ents or
refunds should be no less favorable to
the subsidiary than if it w ere a separate
taxpayer. Any practice that is not
1 Throughout this policy statem ent, the terms
“separate entity” and “separate taxpayer” are used
synonym ously. W hen a depository institution has
subsidiaries of its own, the institution’s applicable
incom e taxes on a separate entity basis include the
taxes of the subsidiaries o f the institution that are
included w ith the institution in th e consolidated
group return.

consistent w ith this policy statem ent
m ay be view ed as an unsafe and
unsound practice prom pting either
inform al or formal corrective action.
Tax Sharing Agreem ents
A holding com pany and its subsidiary
institutions are encouraged to enter into
a w ritten, com prehensive tax allocation
agreement tailored to their specific
circumstances. The agreement should be
approved by the respective boards of
directors. Although each agreement w ill
be different, tax allocation agreements
usually address certain issues common
to consolidated groups. Therefore, such
an agreement should:
• Require a subsidiary depository
institution to com pute its income taxes
(both current and deferred) on a
separate entity basis;
• Discuss the am ount and timing of
the institu tio n ’s paym ents for current
tax expense, including estim ated tax
payments;
• Discuss reim bursem ents to an
institution w hen it has a loss for tax
purposes; and
• Prohibit the paym ent or other
transfer of deferred taxes by the
institution to another m em ber of the
consolidated group.
M easurem ent o f Current and Deferred
Incom e 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
m ust provide for deferred incom e taxes
resulting from any temporary
differences and tax carryforwards.
W hen 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
adjustm ents for statutory tax
considerations that arise in a
consolidated return, e.g., application of
graduated tax rates, m ay be m ade to the
separate entity calculation as long as
they are m ade on a consistent and
equitable basis among the holding
com pany affiliates.
In addition, w hen an organization’s
consolidated income tax obligation
arising from the alternative m inim um
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 m ethod should be
based u p o n the portion of tax
preferences, adjustm ents, and other
items generated by each group member
w hich causes the AMT to be applicable
at the consolidated level.
Tax Paym ents to the Parent C om pany
Tax paym ents from a subsidiary
institution to the parent com pany
should not exceed the am ount the
institution has properly recorded as its
current tax expense on a separate entity
basis. Furtherm ore, such payments,
including estim ated tax payments,
generally should not be m ade before the
institution w ould have been obligated to
pay the taxing authority had it filed as
a separate entity. Paym ents m ade in
advance m ay be considered extensions
of credit from the subsidiary to the
parent and m ay 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 paym ent of
deferred incom e taxes by an institution
to its holding com pany is considered a
dividend subject to dividend
restrictions,2 not the extinguishm ent of
a liability. Furtherm ore, such payments
may constitute an unsafe and unsound
banking practice.
Tax R efunds From the Parent C om pany
An institution incurring a loss for tax
purposes should record a current
income tax benefit and receive a refund
from its parent in an am ount no less
than the am ount the institution w ould
have been entitled to receive as a
separate entity. The refund should be
m ade to the institution w ithin a
reasonable period following the date the
institution w ould have filed its own
return, regardless of w hether the
consolidated group is receiving a
refund. If a refund is not m ade to the
institution w ithin this period, the
institu tio n ’s prim ary federal regulator
m ay consider the receivable as either an
extension of credit or a dividend from
the subsidiary to the parent. A parent
com pany may reim burse an institution
more than the refund am ount it is due
on a separate entity basis. Provided the
2 These restrictions include the Prom pt Corrective
A ction provisions of section 38(d)(1) of the Federal
Deposit Insurance Act (12 U.S.C. 1831o(d)(l)) and
its im plem enting regulations: for insured state
nonm em ber banks, 12 CFR part 325, subpart B; for
national banks, 12 CFR 6.6; for savings associations,
12 CFR part 565; and for state m em ber banks, 12
CFR 208.45.

Federal Register/Vol. 63, No. 225/M onday, November 23, 1998/Notices
institution w ill not later be required to
repay this excess am ount to the parent,
the additional funds received should be
reported as a capital contribution.
If the institution, as a separate entity,
w ould not be entitled to a current
refund because it has no carryback
benefits available on a separate entity
basis, its holding com pany m ay still be
able to utilize the institution’s tax loss
to reduce the consolidated group’s
current tax liability. In this situation,
the holding com pany m ay reim burse the
institution for the use of the tax loss. If
the reim bursem ent will be m ade on a
tim ely 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 incom e taxes in
the loss year. Rather, the tax loss
represents a loss carryforward, the
benefit of w hich is recognized as a
deferred tax asset, net of any valuation
allowance.
Regardless of the treatm ent of an
institu tio n ’s tax loss for regulatory
reporting and supervisory purposes, a
parent com pany that receives a tax
refund from a taxing authority obtains
these funds as agent for the consolidated
group on behalf of the group m em bers.3
Accordingly, an organization’s tax
allocation agreement or other corporate
policies should n ot p urport to
characterize refunds attributable to a
subsidiary depository institution that
the parent receives from a taxing
authority as the property of the parent.
Incom e Tax Forgiveness Transactions
A parent com pany m ay require a
subsidiary institution to pay it less than
the full am ount of the current income
tax liability that the institution
calculated on a separate entity basis.
Provided the parent w ill not later
require the institution to pay the
rem ainder of the current tax liability,
the am ount of this unrem itted liability
should be accounted for as having been
p aid w ith a sim ultaneous 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 w hich 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.
A lthough the subsidiaries have no direct
obligation to rem it tax paym ents to the
taxing authorities, these authorities can
collect some or all of a group liability
from any of the group members if tax
paym ents are not m ade w hen 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

64759


Federal Reserve Bank of St. Louis, One Federal Reserve Bank Plaza, St. Louis, MO 63102