A recent unanimous Supreme Court decision, Rodriguez v. FDIC,1, reinforces the need for each consolidated U.S. tax group – particularly when the consolidated tax group has issued debts supported by some, but not all, of the group`s entities to carefully assess whether the group should have a formal tax participation agreement (ASD). In addition, if the group already has a written ASD, the group should carefully review the existing agreement to ensure that the agreement is properly developed in accordance with the Group`s intentions and that it is being applied correctly and consistently. Tax allocation agreements generally cover issues that arise frequently, for example. B: control of audit agreements and other agreements. In light of changes to the legislation under the CARES Act, taxpayers should audit their ASDs and related agreements to verify potential exposures. However, this revision should not be limited to NOLs. Taxpayers should also bear in mind that after the Court of Justice`s decision in Rodriguez, the courts will have to decide whether (a) the designated representative of the group holds the refund of income tax in his capacity as agent of the consolidated group (or constructively trusted) or (b) the designated representative is the rightful owner of the tax refund (the subsidiary having , with the other creditors of the designated agent, a claim against the parent company as part of the tax-sharing agreement).
Bob Richards` rule resulted in a predictable four-decade result, treating the tax refund as a member of the consolidated group that generated the losses or deductions that led to the refund, unless the tax-sharing agreement clearly provided for something else. In situations where the parties to the dispute do not have a tax allocation agreement, which clearly provides that the designated representative of the consolidated group will receive reimbursement as an agent (or constructive confidence) for another member of the consolidated group, the courts will be forced to consider applicable national law, which will likely lead to unpredictable and differentiated results. For U.S. taxpayers, the CARES Act1 has created a valuable new tax value – the ability to recoup net operating losses (NOL) for five years.2 A company`s access to that asset may depend on its tax-sharing or tax allocation (TSAs) agreements. Section 1501 of the Internal Revenue Code allows a related group of businesses to file a federal consolidated income tax return. In accordance with Section 1.1502-77 (d) (5) of the Treasury Settlements, any refund of federal income tax must be paid to the designated representative of the group for a year of consolidated restitution, without a written agreement to the contrary, and the payment to the designated representative is taken away by the government from any member of the consolidated group with respect to that refund. It is customary for members of a consolidated group to enter into a written tax allocation agreement to determine how income tax charges should be distributed and the distribution of tax refunds among the members of the consolidated group. On February 25, 2020, the U.S. Supreme Court in Rodriguez struck down against the Federal Deposit Insurance Corporation[1] a federal common law rule – known as the Bob Richards Rule – used by the courts to award tax refunds to members of a related group, if the group does not have a written tax participation agreement , or at least in some federal settings where an agreement does not provide refunds.