Law.com Subscribers SAVE 30%

Call 855-808-4530 or email [email protected] to receive your discount on a new subscription.

Supreme Court Defers to State Law on Ownership of Tax Refund

By Michael L. Cook
April 01, 2020

Federal courts should "turn to state law to resolve" a "fight over a tax refund," held a unanimous U.S. Supreme Court on Feb. 25, 2020. Rodriquez v. FDIC (In re United W Bancorp., Inc.), 589 U.S. ___, 2020 WL 889191 (Feb. 25, 2020). Vacating a Tenth Circuit decision, the Supreme Court remanded the case for the lower court to apply state law in resolving "the distribution of a consolidated corporate tax refund." The bankruptcy trustee of a bank holding company was litigating against the Federal Deposit Insurance Corporation (FDIC), as receiver for the subsidiary bank that had incurred losses generating the refund. According the Supreme Court, it was not deciding "[w]ho is right about all this …." Id. at 4. Instead, the Court rejected the Tenth Circuit's application of the Ninth Circuit's so‑called Bob Richards rule. In re Bob Richards Chrysler‑Plymouth Corp., 473 F.2d 262, 265 (9th Cir. 1973) (in absence of tax allocation agreement, refund belongs to group member responsible for losses that led to it). In so doing, the Court rejected the Bob Richards rule as inappropriate federal "common lawmaking."

Relevance

The Court granted certiorari in Rodriguez not only to resolve a split among the circuits, but also "to decide Bob Richard's fate." Id. at 3. As it evolved over time, Bob Richards supplied a federal common law rule that, absent a clear agreement to the contrary, tax refunds belong to a taxpayer group member responsible for the losses that led to the refund.

The Facts

The Internal Revenue Service (IRS) in Rodriguez paid a tax refund to the bank holding company, although the tax refund had resulted from losses incurred by its bank subsidiary. The bankruptcy trustee of the holding company sued the FDIC, as receiver for the bank, claiming ownership of the refund. The Tenth Circuit, applying Bob Richards, affirmed the district court's judgment that the tax refund belonged to the FDIC, finding that the parties' tax allocation agreement was "ambiguous." Nevertheless, the Tenth Circuit relied on the terms of the document providing that any "ambiguity … shall be resolved … in favor of any insured depository institution." The parent holding company had an agency relationship "with respect to federal tax refunds" and had agreed to an "equitable allocation of tax liability." According to the agreement, tax benefits would be computed "on a separate‑entity basis for each" member of the affiliated corporate group.

The Supreme Court

The Court explained how federal courts should resolve a dispute when "the group members dispute the meanings of the terms found in their agreement …. State law is replete with rules readymade for such tasks — rules for interpreting contracts, creating equitable trusts, avoiding unjust enrichment, and much more." Id. at 2.

Limited Federal Common Law

This premium content is locked for Entertainment Law & Finance subscribers only

  • Stay current on the latest information, rulings, regulations, and trends
  • Includes practical, must-have information on copyrights, royalties, AI, and more
  • Tap into expert guidance from top entertainment lawyers and experts

For enterprise-wide or corporate acess, please contact Customer Service at [email protected] or 877-256-2473

Read These Next
Bankruptcy Sales: Finding a Diamond In the Rough Image

There is no efficient market for the sale of bankruptcy assets. Inefficient markets yield a transactional drag, potentially dampening the ability of debtors and trustees to maximize value for creditors. This article identifies ways in which investors may more easily discover bankruptcy asset sales.

Why So Many Great Lawyers Stink at Business Development and What Law Firms Are Doing About It Image

Why is it that those who are best skilled at advocating for others are ill-equipped at advocating for their own skills and what to do about it?

A Lawyer's System for Active Reading Image

Active reading comprises many daily tasks lawyers engage in, including highlighting, annotating, note taking, comparing and searching texts. It demands more than flipping or turning pages.

The DOJ's Corporate Enforcement Policy: One Year Later Image

The DOJ's Criminal Division issued three declinations since the issuance of the revised CEP a year ago. Review of these cases gives insight into DOJ's implementation of the new policy in practice.

Blockchain Domains: New Developments for Brand Owners Image

Blockchain domain names offer decentralized alternatives to traditional DNS-based domain names, promising enhanced security, privacy and censorship resistance. However, these benefits come with significant challenges, particularly for brand owners seeking to protect their trademarks in these new digital spaces.