By Michael L. Cook (Schulte Roth & Zabel)
Federal courts regularly resolve consolidated corporate tax refund disputes in bankruptcy cases. In the current economic downturn, the ownership of a large tax refund paid to an affiliated group of corporate debtors can be significant. See, e.g., FDIC v. AmFin Corp., 757 F.3d 530, 532 (6th Cir. 2014) ($170 million refund). If a corporate debtor’s parent owns the refund, it is part of the parent’s bankruptcy estate, and the subsidiary may be an unsecured creditor for any claimed benefits. But if the debtor parent is an agent or trustee for its affiliates, the parent cannot use the refund to repay its creditors.
Corporate parents and their subsidiaries often file a consolidated tax return. That enables affiliates to offset their losses against each other so as to reduce the group’s overall tax liability. Because only the corporate parent may file a consolidated return, any refund is also paid to the parent, not to individual affiliates. Affiliated groups, therefore, usually enter into tax sharing or allocation agreements. These agreements – or their absence – have generated a spate of litigation.
The Circuit Courts of Appeals had been sharply split on how to resolve tax refund ownership issues until the U.S. Supreme Court resolved the issue this past February in Rodriguez v. FDIC (In re Western Bancorp, Inc.), 589 U.S. ___, 140 S. Ct. 713 (Feb. 25, 2020). Without deciding the merits, the Court remanded the case to the Tenth Circuit, directing it to apply state law to resolve the refund ownership dispute between the parent’s bankruptcy trustee and a subsidiary. The Supreme Court also rejected a purported federal default rule promulgated by the Ninth Circuit in 1973 that had been adopted by a few other Circuits, describing it as inappropriate federal “common lawmaking.” On May 26, 2020, following the Supreme Court’s remand, the Tenth Circuit, applied Colorado law, construed the relevant group tax sharing agreement, and held for the subsidiary bank, now in the hands of a FDIC receiver.
This article describes relevant issues litigated over the past fifty years. It also notes open issues that will continue to be litigated following the Rodriguez decision.
The full article is available here.