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F ederal Reserve Bank of Dallas DALLAS, TE X A S 75222 C i r c u l a r No. 78-68 May 31, 1978 TAX TRANSACTIONS BETWEEN STATE MEMBER BANKS AND THEIR PARENT HOLDING COMPANIES TO ALL STATE MEMBER BANKS AND BANK HOLDING COMPANIES IN THE ELEVENTH FEDERAL RESERVE DISTRICT: T h e Board of G o v e rn o rs of th e Federal R e s e r v e System is su e d for comment on May 23, 1978, a p r o p o s e d policy statem ent on tax t r a n s actions b e tw ee n State m em b er b a n k s a n d t h e i r p a r e n t h o ld in g co m p a n ies. P r in te d on the r e v e r s e of th is c i r c u l a r is a copy of the policy statem e n t. Comments b y in te re s te d p a r t i e s should be subm itted to the S e c r e t a r y , B oard of G o v e r n o r s of the Fe d e ra l R e s e r v e System , W ash in gto n , D .C . 20551. Comments should be re c e iv e d no la ter than J u n e 23, 1978, a n d sh o uld c ontain r e f e r e n c e to Docket No. R-0163. S in c e r e ly y o u r s , R obert H . Boykin F irst Vice President This publication was digitized and made available by the Federal Reserve Bank of Dallas' Historical Library (FedHistory@dal.frb.org) E x tra c t From FEDERAL REGISTER, VOL. 43, NO. 103 F r i d a y , May 26, 1978 p p . 22782 - 22783 [6210 - 01 ] [Docket No. R-0163] INTERCORPORATE INCOME TAX A CCO U N TING TRANSACTIONS O F BANK HOLDING C O M PANIES AND STATE-CHARTERED P o licy S ta te m e n t AGENCY: Board of Governors of the Federal Reserve System. ACTION: Proposed Policy Statement. S U M M A R Y : The Board of Governors of the Federal Reserve System be lieves that a bank holding company should serve as a source of strength for i s subsidiary banks and that sub t sidiary banks should not be disadvan taged by reason of their control by a bank holding company. It has come to the attention of the Board that a few bank holding companies and their sub sidiary banks are engaging in certain intercorporate tax accounting transac tions that appear to be in conflict with this established policy of the Board. The Board believes that these prac tices are inappropriate and should cease. Comments on the proposal may be submitted until June 23, 1978. Public comments are being requested so that the Board may fully consider the implications of this policy for in tercorporate operations, flow of funds and tax planning. DATE: Comments must be received by June 23,1978. ADDRESS: Secretary, Board of Gov ernors of the Federal Reserve System, Washington, D.C. 20551. All material submitted should include Docket Number R-0163. F O R F U R T H E R INFORMATION CONTACT: Sandra A. Greene, Senior Staff As sistant 202-452-2742 or Samuel H. Talley, Assistant Director 202-452 3354, of the Division of Banking Su pervision and Regulation, or Robert E. Mannion, Associate General Counsel, Legal Division 202-452 3274, Board of Governors of the Fed eral Reserve System, Washington, D.C. 20551. S U P P L E M E N T A R Y INFORMATION: The Board proposes to issue the fol lowing statement of policy pursuant to the Financial Institutions Supervisory Act (12 U.S.C. §1818) and section 23A of the Federal Reserve Act (12 U.S.C. §371(0). P S t a t e m e n t R e g a r d in g I n t e r I n c o m e T a x a c c o u n t in g T r a n s a c t io n s of B ank H o l d in g C o m p a n ie s and S t a t e-C h a r t er ed B a n k s th a t are M em bers o p t h e F ederal R eser v e S y st e m o l ic y corporate It has come to the attention of the Board of Governors of the Federal Re serve System that a few bank holding companies and certain of their bank subsidiaries are engaging in intercor porate income tax accounting transac tions that have the effect of transfer ring assets and income from the sub sidiary banks to the parent company without offsetting benefits to the bank. These practices include: (1) The bank paying taxes to the parent under an arrangement that may leave the bank less well off than i the bank f filed a return on a separate entity basis; (2) the bank paying taxes to the parent prior to the time that the par ent’ actual or estimated current tax s liability i due and payable; and (3) s the bank transferring i s deferred tax t account to the parent, in most cases along with an equivalent amount of cash or earning assets. While these practices are not now widespread, the Board believes that they are inappro priate and should cease. Accordingly, the Board will apply appropriate su pervisory remedies to these practices including, under certain circum stances, i s cease and desist powers t under the Financial Institutions Su pervisory Act (12 U.S.C. § 1818). One of the advantages of a bank holding company organization i to s derive tax savings by offsetting the profits and losses of the various enti ties that participate in the filing of the consolidated tax return. Typically, bank subsidiaries having a profit pay current taxes to their parent either on a separate equity basis or on one of a variety of allocation methods that often results in some lesser amount of taxes being remitted to the parent. In those cases where a bank incurs a l s , os the bank may or may not receive an equitable refund from i s parent. t The Board does not wish to pre scribe the tax accounting methods to be used by bank holding companies. However, the Board does require that those methods employed give bank subsidiaries equitable treatment. Such equitable treatment would not result i : (1) The bank’ tax payments to the f s parent during a profitable period exceed what the bank would pay i i f t filed on a separate entity basis; (2) the bank does not receive an appropriate refund from the parent when the bank incurs a l s ; or (3) the bank’ tax pay os s ments to the parent significantly pre cede the time that the parent’ actual s or estimated current tax liability i s due and payable to the tax authori te. is Many bank holding companies now have written tax agreements with their bank subsidiaries that specify in tercorporate tax settlement policies. The Board believes that having such agreements i desirable and wishes to s encourage a l holding companies to l have such agreements. In the last several years, an increas ing number of banks have been trans ferring their deferred tax account to their parent. Typically, these transfers have been accompanied by the bank transferring an equivalent dollar amount of cash or earning assets. The Board believes that a bank’ deferred s tax account does not constitute a cur rent l a ility of the bank. Consequent ib l , when a bank transfers i s deferred y t tax account to i s parent, usually t along with an equivalent amount of cash or earning assets, the bank i en s gaging in a transaction that has an ad verse effect on i s financial condition. t Such a transaction i tantamount to a s prepayment or excessive payment of taxes. Moreover, the Board believes that the transfer of a bank’ deferred s tax account would result in the bank subsequently filing inaccurate reports for supervisory purposes. In those few instances where de ferred tax accounts of state member banks have already been transferred to the parent, the Board believes that such transfers should be reversed in the most expeditious way that i prac s t c l given attendant circumstances ia, and supervisory objectives. In most cases, this would involve an immediate reinstatement of the deferred tax on the books of the bank, along with the transfer by the parent of an equiva lent amount of cash or appropriate earning assets. In those cases where the parent cannot immediately remit cash or appropriate earning assets, the holding company and the bank should work out an appropriate alternative arrangement with their Federal Re serve Bank. In most situations, the most appropriate alternative would in volve the bank recording a loan to the parent. By Order of the Board of Governors, May 23, 1978. T h e o d o r e E. A l l i s o n , S e c r e ta r y o f th e B o a rd . [■FR Doc. 78-14774 Filed 5-2 5 -7 8 ; 8:45 a m ]
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