Update on Corporate Bankruptcy Tax Refund Litigation

The bankruptcy trustee of a bank holding company was not entitled to a consolidated corporate tax refund when a bank subsidiary had incurred losses generating the refund, held the U.S. Court of Appeals for the Tenth Circuit on May 26, 2020. Rodriguez v. FDIC (In re United Western Bancorp, Inc.), 2020 WL 2702425(10th Cir May 26, 2020). On remand from the U.S. Supreme Court, the Tenth Circuit, as directed, applied "Colorado law to resolve" the question of "who owns the federal tax refund." Id., at 2. The court had initially held for the FDIC, the bank subsidiary's receiver, but, according to the Supreme Court, mistakenly failed to apply state law and relied instead on a Ninth Circuit decision, In re Bob Richards Chrysler Plymouth Corp., 473 F.2d 262,265 (9th Cir 1973). Id. The Supreme Court rejected Bob Richards as inappropriate federal "common lawmaking," and remanded the case back to the Tenth Circuit. Id.

Relevance

Federal courts regularly resolve consolidated corporate tax refund disputes in bankruptcy cases. By way of background, corporate parents and their subsidiaries often file a single consolidated tax return. That consolidated return enables affiliates to offset their losses against each other and to reduce the group's overall tax liability. See, 26 U. S. C §§1501 et seq. It also is administratively efficient. But the affiliates must appoint the corporate parent as their agent to file the consolidated return. When the group members are entitled to a refund, the refund must be paid "directly to and in the name of "the corporate parent, not to individual affiliates. 26 C.F.R §1.1502-77(a), (e) (i). To deal with the later distribution of the refund, affiliated groups usually enter into tax sharing or allocation agreements.