[Federal Register Volume 63, Number 225 (Monday, November 23, 1998)]
[Notices]
[Pages 64757-64759]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-31179]



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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:
     Require a subsidiary depository institution to compute its 
income taxes (both current and deferred) on a separate entity basis;
     Discuss the amount and timing of the institution's 
payments for current tax expense, including estimated tax payments;
     Discuss reimbursements to an institution when it has a 
loss for tax purposes; and
     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