Supreme Court to Tackle a Bankruptcy Tax Refund Circuit Split

To resolve a split of circuits, the Supreme Court has granted certiorari to decide whether state or federal law governs the ownership of tax refunds when a subsidiary generated the losses but the government pays the refund to the bankrupt corporate parent. The issue came to the fore in the wake of the banking crisis beginning some 10 years ago. A bank would fail and be taken over by the Federal Deposit Insurance Corporation, or FDIC. The bank’s parent holding company often would end up in bankruptcy. The parent and subsidiary typically would have a prebankruptcy tax allocation agreement, or TAA, calling for the parent holding company to file a consolidated tax return for the corporate group. Usually, the failed bank would have incurred the losses giving rise to a tax refund. However, the Internal Revenue Service would pay the refund to the parent corporation as the entity that filed the tax return. When the tax refund arrives from the IRS, does the bankrupt parent keep the cash, or does it go to the FDIC as receiver for the failed bank? That’s where the courts are split.

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