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Supreme Court Defers to State Law on Ownership of Tax Refund
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
The Court stressed that "there is 'no federal general common law.'" Id. at 3, quoting Erie R. Co., v. Tompkins, 304 U.S. 64, 78 (1938). Federal judges "may appropriately craft the rules of decision" in such limited areas as admiralty disputes and "certain controversies" between States. But unless Congress authorizes it, "common lawmaking must be 'necessary to protect uniquely federal interests.'" Id., quoting Texas Industries, Inc. v. Radcliff Materials, Inc., 451 U.S. 630, 640 (1981). Id.
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