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Tax Refund Rule ‘Isn’t Implicated’ in Fight, SCOTUS Told

Oct. 18, 2019, 7:07 PM

When the Supreme Court considers a case involving a parent-subsidiary tax dispute later this year, it shouldn’t delve into a rule that tells courts how to assign ownership of tax refunds because the issue is irrelevant, the Federal Deposit Insurance Corp. said in a reply brief.

The Supreme Court agreed to take the case after a trustee for the bankruptcy estate of parent company United Western Bancorp Inc. (UWBI) asked the court to repudiate the “Bob Richards rule,” where a court presumes a tax refund belongs to the subsidiary unless the parent company and subsidiary have a clear agreement that it doesn’t. The court will hear arguments in the case on Dec. 3.

None of the parties dispute that a $4 million tax refund was owed to the subsidiary, United Western Bank, for which the FDIC is a receiver. Because there was agreement, the Bob Richards rule doesn’t need to come into play when the high court hears the case, the FDIC said.

“Whatever the merits of that default allocation rule, it is not implicated here, because the members of the UWBI group did have a tax allocation agreement,” the FDIC said in the Oct. 17 brief.

An issue can arise if a parent files bankruptcy in the time between receiving a refund from the IRS and handing it over to its subsidiary. The subsidiary can wind up being treated as merely one of multiple creditors vying for what’s in the parent’s bankruptcy estate.

UWBI filed a consolidated tax return with its subsidiaries, which included United Western Bank, allowing the subsidiaries to offset their losses against one another, which can lower overall liability. IRS rules require the agency to generally pay the parent company refunds that are actually owed to a subsidiary.

To solve the question of who owns a refund before there is a handover, the Supreme Court would have to resolve a disagreement between lower appellate courts over the Bob Richards rule, the trustee said. The trustee asked the high court to reject the Bob Richards rule in favor of a rule from federal common law that says judges should use applicable state law to determine who owns the tax refund.

“State law, not a federal common law presumption, governs ownership of tax refunds paid to an affiliated group. And in this case, that law unambiguously assigns the refund at issue to UWBI,” the trustee said in an Aug. 30 brief.

Hogan Lovells, the firm representing the trustee, didn’t respond to a request for comment.

The case is Rodriguez v. Fed. Deposit Ins. Corp., U.S., No. 18-1269, brief filed 10/17/19.

To contact the reporter on this story: Aysha Bagchi in Washington at abagchi@bloombergtax.com

To contact the editors responsible for this story: Patrick Ambrosio at pambrosio@bloombergtax.com; Colleen Murphy at cmurphy@bloombergtax.com