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New proposed rule for financial institutions in consolidated tax filing groups

May 5, 2021

The Office of the Comptroller of the Currency, Treasury; Board of Governors of the Federal Reserve System; and Federal Deposit Insurance Corporation recently issued a notice of proposed rulemaking that is applicable to financial institutions (“institutions”) that are included as part of a consolidated tax filing group. The proposed rule (“proposal”) would establish requirements for tax allocation agreements between institutions and their holding companies in a consolidated tax filing group. The proposal would promote safety and soundness by preserving depository institutions’ ownership rights in tax refunds and ensuring equitable allocation of tax liabilities among entities in a holding company structure. Under the proposal, national banks, state banks, and savings associations that file tax returns as part of a consolidated tax filing group would be required to enter into tax allocation agreements with their holding companies and other members of the consolidated group that join in the filing of a consolidated group tax return. The proposal also would describe specific mandatory provisions in these tax allocation agreements, including provisions addressing the ownership of tax refunds received. If the agencies were to adopt the proposal as a final rule, the agencies would rescind the interagency policy statement on tax allocation agreements that was issued in 1998 and supplemented in 2014.

The proposal would apply to all institutions that file federal and state income taxes in a consolidated group in which one or more of the institutions in the consolidated group is supervised by any of the agencies. A consolidated group refers to an institution, its parent, and any affiliates of the institution that join in the filing of a tax return as a single consolidated, combined, or unitary group. While the interagency policy statement and 2014 addendum only apply to insured depository institutions, the OCC has observed similar problematic tax practices at uninsured institutions it supervises. Therefore, the OCC proposes to apply relevant provisions of the proposal to uninsured institutions as well.

The proposal would require institutions to include certain provisions in all tax allocation agreements, such as: the timing and amounts of any payments for taxes due to taxing authorities; the acknowledgment of an agency relationship between institutions and their holding companies in a consolidated group with respect to tax refunds received; and a provision stating that documents, including returns, relating to consolidated or combined federal, state, or local income tax filings must be made available to an institution or any successor during regular business hours. The proposal further addresses the regulatory reporting treatment of an institution’s deferred tax assets (DTAs).

In their supervision of institutions, the agencies above have observed that some institutions in consolidated groups either lack tax allocation agreements with their holding companies or have agreements that do not have language conforming with section 23A or 23B. Section 23A and 23B deal with loans and other extensions of credit from an insured depository institution to its affiliate. One of the reasons for the proposal is to ensure that an institution’s tax-sharing agreement causes it to be in compliance with section 23A and 23B.

To meet the above objectives, the proposal will require tax sharing agreements to:

  • Require holding companies in a consolidated group to promptly transmit the appropriate portion of a consolidated group’s tax refund to their subsidiary institutions
  • Acknowledge an agency relationship between the institution and the holding company
  • Prohibit payments in excess of the current period tax expense or reasonably calculated estimated tax expense of the institution on a separate-entity basis
  • Prohibit payment for the settlement of any deferred tax liabilities of the institution
  • Prohibit payment from occurring earlier than when the institution would have been obligated to pay the taxing authority had it filed as a separate entity
  • State that if an institution’s loss or credit is used to reduce the consolidated group’s overall tax liability, the institution must reflect the tax benefit of the loss or credit in the current portion of its applicable income taxes in the period the loss or credit is incurred, and the parent company must compensate the institution for the use of its loss or credit at the time that it is used
  • State that all materials, including, but not limited to, returns, supporting schedules, workpapers, correspondence, and other documents relating to the consolidated federal income tax return and any consolidated, combined, or unitary group state or local returns must be made available on demand to the institution or any successor during regular business hours. The tax allocation agreement must provide that this obligation will survive any termination of the tax allocation agreement

Though the proposal will not be made final until after the public comment period (60 days after the date of publication in the Federal Register), it would be advisable for those charged with the institution’s governance to read the proposal and review the institution’s tax sharing agreement that is in place to ascertain whether the agreement will meet the criteria of the proposal when it is finalized.

If you have questions, please contact John Lind at [email protected] or your CSH advisor.

All content provided in this article is for informational purposes only. Matters discussed in this article are subject to change. For up-to-date information on this subject please contact a Clark Schaefer Hackett professional. Clark Schaefer Hackett will not be held responsible for any claim, loss, damage or inconvenience caused as a result of any information within these pages or any information accessed through this site.


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