Bank holding companies typically file consolidated tax returns with their subsidiary depository institutions. In 1998, the Board of Governors of the Federal Reserve System (Board), the Federal Deposit Insurance Corporation (FDIC), and the Office of the Comptroller of the Currency (OCC) adopted an Interagency Policy Statement on Income Tax Allocation (Policy Statement) regarding the allocation and payment of taxes where the income tax returns are filed on a consolidated basis. The goal of the Policy Statement was to clarify the depository institution’s ownership rights in tax refunds. A 2014 addendum encouraged depository institutions in a consolidated group to maintain an appropriate relationship regarding the payment of taxes and treatment of tax refunds. The Policy Statement was strictly guidance, and therefore unenforceable. There is, however, a chance that could change later this year. In April, the Board issued a proposal which will make the principles in the Policy Statement enforceable to ensure tax settlements between the depository institution and its holding company are conducted in a manner that is no less favorable to the depository institution than if the depository institution were a separate taxpayer.

The proposal would require a depository institution filing a consolidated tax return to reflect net operating losses or tax credit carry-forwards on its stand-alone regulatory reporting balance sheet if those assets have not yet been absorbed by the consolidated group. Additionally, the proposal would reaffirm that a depository institution cannot report its individual deferred tax assets or temporary differences separately from the asset or liability that gave rise to such assets. The proposal would also require that a depository institution be compensated when its tax assets are used to reduce the tax liability of the consolidated group, raising Regulation W issues. Normally, holding company deductions reduce tax liability, but in certain situations, a depository institution’s net operating loss could shield consolidated income. The proposal requires that the depository institution be compensated for the tax savings it provides. Finally, the proposal would require that the bank (or FDIC, as receiver) have access to consolidated tax returns for a consolidated group of which the depository institution is a member.

Most banks have tax allocation agreements based on the 1998 and 2014 Policy Statements. However, it is unlikely that the tax allocation agreements address net operating losses, tax credit carry-forwards, and deferred tax assets for temporary differences. More importantly, such allocation agreements do not address the potential issue with Regulation W on compensation for tax losses. Although a proposal, this is likely to be initiated without change. Any failure to update the consolidated group’s tax allocation policy to include these changes will likely be cited as a violation of regulation, not a contravention of guidance, thus raising the examination stakes.