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Home / Articles / Regulators clarification set to impact Tax Sharing Agreements

Regulators clarification set to impact Tax Sharing Agreements

July 22, 2014


Across the country, today’s bankers have their hands full. As a member of a financial institution yourself, you are well aware of the many regulatory requirements that impact your business, as well as how the fluctuating economy and shifting consumer behavior can all affect the bottom line.

Of primary importance are taxes. Changes on both the federal and state level can place your financial institution under further scrutiny, and staying up-to-date with these new trends in the industry will allow your organization to be as profitable and productive as possible. Here at Clark Schaefer Hackett, we dedicate a portion of our time to events in the financial institutions sector, so we can pick up on any developments that may impact your business. With a close eye on these elements, you’ll be able to adapt and avoid any regulatory problems.

Recently, several trends have emerged in the banking industry that may have an effect on your institution. While it can be challenging to keep track of these changes in the midst of your demanding professional life, we compiled a few reports that may be of relevance to you:

FDIC rules on Income Tax Allocation Agreements
The early summer brought about some additional items of consideration for financial institutions: The Federal Deposit Insurance Corporation (FDIC) has finalized its guidance on Income Tax Allocation Agreements, which was initially put in place back in 1998. Regulators stressed the importance of adopting this Addendum to the “Interagency Policy Statement on Income Tax Allocation in a Holding Company Structure,” as soon as possible. The official deadline for implementation is October 31, 2014.

According to the FDIC, the changes directly address the relationships between insured depository institutions (IDIs) and their holding companies.  Citing examples of past breakdowns regarding the ownership of tax refunds, the guidance is requiring institutions to review their tax sharing agreements to ensure language is clear.  Included with the Addendum is an example of a paragraph that may be added to your tax sharing agreement, which would accomplish the goals set forth by the FDIC.

If you need further clarification on how to comply, the FDIC included a sample paragraph that you can include in your tax sharing agreements:

The [holding company] is an agent for the [IDI and its subsidiaries] (the ”Institution”) with respect to all matters related to consolidated tax returns and refund claims, and nothing in this agreement shall be construed to alter or modify this agency relationship. If the [holding company] receives a tax refund from a taxing authority, these funds are obtained as agent for the Institution. Any tax refund attributable to income earned, taxes paid, and losses incurred by the Institution is the property of and owned by the Institution, and shall be held in trust by the holding company] for the benefit of the Institution. The [holding company] shall forward promptly the amounts held in trust to the Institution. Nothing in this agreement is intended to be or should be construed to provide the [holding company] with an ownership interest in a tax refund that is attributable to income earned, taxes paid, and losses incurred by the Institution. The [holding company] hereby agrees that this tax sharing agreement does not give it an ownership interest in a tax refund generated by the tax attributes of the Institution.

Addendum will impact Ohio FIT
While the FDIC guidance will affect all financial institutions with state and federal income taxes, it will also impact those who take part in the Ohio Financial Institutions Tax (FIT). While the previously filed Ohio Franchise Tax Report for Financial Institutions was filed only at the Institution level, the new Ohio FIT is a consolidated filing. When reviewing your tax sharing agreement it is important to consider the impact of the consolidated FIT as well.

Conformity Election remains viable option
Each year financial institutions fall under the scrutiny of the Internal Revenue Service (IRS). One key topic of contention is tax bad debt deductions. In most cases, financial institutions have the ability to use a Conformity Election in determining the worthlessness of a debt for tax purposes. This Election provides protection for the taxpayer in the event of an audit by the IRS.  It also provides beneficial tax treatment for the non-accrual of interest income.

In order to make the Conformity Election the taxpayer must receive an Express Determination Letter at the end of each exam.  To remain in Conformity, it is critical that the taxpayer request this letter from their examiners each time there is an examination of their bad debt procedures.

Recent changes can confound some institutions
Overall, the climate surrounding financial institutions is changing. As this evolution takes place, you will want to ensure your organization adapts – or else risk encountering a growing number of problems.

At Clark Schaefer Hackett, we know that your industry is one of the most heavily regulated in the country. That can make it tough to grow and prosper, but working with our expert professionals can grant you the tools you need to succeed. For more than 25 years, we’ve worked with many financial institutions to offer audit and tax consulting, risk management services, bank rescue assistance and much more. Contact us today to speak to one of our professionals about the regulatory and tax compliance issues you encounter on a daily basis.

© 2014

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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