Supreme Court Strikes Down 'Bob Richards' Rule, Impacting Consolidated Group Members' Entitlement To Tax Refunds In Bankruptcy Proceedings

On February 25, 2020, in Rodriguez v. FDIC,1 the US Supreme Court unanimously rejected the application of the so-called “Bob Richards” rule, a judicial doctrine that was developed in the context of a bankruptcy case almost 60 years ago concerning ownership of tax refunds secured by the parent corporate entity on behalf of a bankrupt subsidiary included in a consolidated group tax return. By doing so, the Supreme Court has placed a premium on tax sharing agreements (“TSAs”) for consolidated groups that want certainty as to which of their members are to benefit from such refunds.

The Supreme Court decision has significant implications for members of a consolidated group that are not all in bankruptcy or where the chapter 11 debtors in the consolidated group are not substantively consolidated regarding the entitlement of such members to consolidated group tax refunds (often one of the more valuable sources of recovery for bankrupt companies and their creditors). Tax refunds are often one of the more valuable sources of recovery for bankrupt companies and their creditors, so companies that are members of a consolidated group that have filed or may file for bankruptcy (and their creditors) should consider the impact of the Rodriguez case to their circumstances. Consolidated groups that are not contemplating a bankruptcy filing may want to consider the benefits of an explicit TSA addressing the entitlement to refunds in the event one or more of the members may find themselves in bankruptcy due to unanticipated circumstances.

Background

The Bob Richards rule stemmed from the Ninth Circuit's decision in In Re Bob Richards Chrysler-Plymouth Corp.2 In that case, the bankruptcy estate of a subsidiary demanded a tax refund received by the parent of the consolidated group in a situation where the group did not have a TSA in place. The consolidated group return showed the group was entitled to a refund entirely resulting from losses generated by the bankrupt member. The corporate parent was an unsecured creditor of the bankrupt member and claimed as set off the tax refund against that obligation.

The Ninth Circuit found thatthe only reason for the tax refunds not being paid directly to the subsidiary is because income tax regulations require that the parent act as the sole agent, when duly authorized by the subsidiary. The court further noted that the Treasury regulations are basically procedural in nature for convenience purposes and that theInternal...