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FEDERAL RESERVE BANK OF NEW YORK 8429 Circular Wo. October 3, 1978 Intercorporate Tax Practices of Bank Hoiding Companies and State Member Banks 7o -4// RanCs and RaaAr T/oM/ng Co/wpaMies /a fAe VecotJ Cetera/ Dfxmct. The Board of Governors of the Federal Reserve System has issued a policy statement regarding inter corporate tax practices of bank holding companies and their State-chartered member bank subsidiaries. The policy statement is substantially the same as that published for comment earlier this year and sent to you with our Circular No. 8355, dated May 25, 1978. Printed below is the text of the Board's policy statement. Questions regarding this policy may be directed to our Bank Examinations Department (Tel. No. 212-791-5240). PAUL A. VOLCKER, P o lic y S ta te m e n t R e g a r d in g I n te r c o r p o r a te 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 tio n s o f B a n k H o ld in g C o m p a n ie s a n d S ta te -C h a r te r e d B a n k s th a t are M e m b e r s o f th e F e d e ra l R eserv e S ystem It has come to the attention o f the Board o f G o v deferred tax account to the parent, in most cases along ernors o f the Federa! Reserve System that a few bank with an equivalent amount o f cash or earning assets. holding companies and certain o f their bank subsidi W hile aries are engaging in intercorporate income tax ac Board believes that they are inappropriate and should counting transactions that have the cease. Accordingly, the Board will apply appropriate effect o f trans these practices are not now widespread, the ferring assets and income from the subsidiary banks to supervisory remedies to these practices including, under the parent company without offsetting benefits to the certain circumstances, its cease and desist powers under bank. the Financial Institutions Supervisory Act (12 U .S .C . § The practices include: (1) the bank paying taxes to 1818). the parent under an arrangement that may leave the One o f the advantages o f a bank holding company bank less well o ff than if the bank filed a return on a organization is to derive tax savings by offsetting the separate entity b a s i s ;-i /( 2 ) the bank paying taxes to the profits and losses o f the various entities that participate parent prior to the time that the parent's actual or in the filing o f the consolidated tax return. Typically, estimated current tax liability is, or normally would be, bank subsidiaries having a profit pay current taxes to due and payable; their parent either on a separate entity basis or on one and (3) the bank transferring its J_/ As it is used in this statement, the term separate entity basis recognizes that certain adjustments, in particuiar tax elections in a consoiidated return, may. in certain periods, result in higher payments by the affiliated bank than would have been made were the bank unaffiliated. The Board normally would regard such adjustments as acceptable. (Over) o f a variety o f allocation methods that often results in companied some lesser amount o f taxes the dollar amount o f cash or earning assets. The Board be parent. In those cases where a bank incurs a loss, the lieves that a bank's deferred tax account does not con being remitted to by the bank transferring an equivalent bank may or may not receive an equitable refund from stitute a current liability o f the bank. Consequently, its parent. when a bank transfers its deferred tax account to its The Board does not wish to prescribe the tax ac parent, usually along with an equivalent amount o f cash counting methods to be used by bank holding co m or earning assets, the bank is engaging in a transaction panies. However, the Board does require that those that has an adverse effect on its financial condition. equitable Such a transaction is tantamount to a prepayment or treatment. Such equitable treatment would not result if: excessive payment o f taxes. Moreover, the Board be methods employed give bank subsidiaries (1) the bank's tax payments to the parent during a lieves that the transfer o f a bank's deferred tax account profitable period exceed what the bank would pay if it would result in the bank subsequently filing inaccurate Hied on a separate entity basis; (2) the bank does not reports for supervisory purposes. receive an appropriate refund from the parent w hen the In those few instances where deferred tax accounts bank incurs a loss; or (3) the bank's tax payments to the parent significantly precede the time that a consolidated actual or estimated current tax liability would be due o f state m em ber banks have already been transferred to the parent, the Board believes that such transfers should be reversed in the most expeditious way that is and payable to the tax authorities. practical, M any bank holding companies now have written tax given attendant circumstances and super visory objectives. In most cases, this would involve an sharing agreements with their bank subsidiaries that immediate reinstatement o f the deferred tax on the specify The books o f the bank, along with the transfer by the parent Board believes that having such agreements is desirable o f an equivalent amount o f cash or appropriate earning intercorporate tax settlement policies. and wishes to encourage all holding companies to have assets. such agreements. mediately remit cash or appropriate earning assets, the In those cases where the parent cannot im In the last several years, an increasing number o f holding company and the bank should work out an banks have been transferring their deferred tax account appropriate alternative arrangement with their Federal to their parent. Typically, these transfers have been ac Reserve Bank.
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