Whose Tax Refund Is It? Eleventh Circuit Holds That Chapter 11 Debtor Parent Company Must Distribute Tax Refunds To Members Of A Consolidated Group Under A Tax Sharing Areement

On August 15, 2013, in Zucker v. FDIC (In re BankUnited Finance Corp.), the United States Court of Appeals for the Eleventh Circuit, reversing a decision by the Bankruptcy Court for the Southern District of Florida, held that a holding company in chapter 11, BankUnited Financial Corporation (the "Holding Company"), could not retain as property of its bankruptcy estate tax refunds received during its bankruptcy case.1 Before bankruptcy, the Holding Company entered into a tax sharing agreement (the "TSA") with one of its subsidiaries, BankUnited FSB (the "Bank"), through which the Holding Company would file income tax returns in its own name for itself and its subsidiary corporations (the "Consolidated Group") and the Bank would pay all taxes due on behalf of the Consolidated Group. The Court of Appeals determined that pursuant to its interpretation of the TSA, when the Holding Company received tax refunds, it received such refunds intact—as if in escrow—for the benefit of the Bank, and in turn, the other members of the Consolidated Group. Therefore, the Holding Company was required to give those tax refunds to the Bank for distribution to members of the Consolidated Group in accordance with the TSA.

Background

Federal Income Tax Law

According to United States Department of Treasury regulations, a parent company may file in its own name a consolidated income tax return for itself and its subsidiary corporations.2 The parent company then receives in its name any income tax refunds due to itself and those subsidiaries for which the company filed the consolidated tax return. Because the federal income tax regulations do not address the manner in which such tax refunds must be allocated, the parent and its subsidiaries may provide, by way of contract, how such tax refunds should be allocated.

In re BankUnited Fin. Corp.

In 1997, the Holding Company and the Bank, the principal operating entity for the Consolidated Group, entered into a TSA for the benefit of the Holding Company, the Bank and the remaining Holding Company subsidiaries in the Consolidated Group. The TSA provides that the Holding Company would file the Consolidated Group's income taxes and the Bank would pay all of the taxes due. Pursuant to the TSA, within thirty days after the filing of the tax return and payment of taxes, each member of the Consolidated Group would reimburse the Bank for its respective share of taxes that the Bank paid on its behalf. Although the TSA requires the...