Disbursing Corporate Tax Refunds

When the IRS issues a corporate tax refund to a corporation that has subsidiaries, federal courts traditionally held that the refund is owned by the entity – either the parent corporation or its subsidiary – whose losses led to the refund. This rule is known as the Bob Richards rule, named after the case that first crafted the rule.

The United States Supreme Court recently threw out the Bob Richards rule, instead holding that the entity who owns the refund is determined by state law in state courts, not by federal law in federal courts. In Rodriguez v. FDIC, a subsidiary bank fell on hard times and the FDIC became its receiver. The subsidiary’s hard times eventually spread to the parent corporation, who then filed for bankruptcy protection. When the IRS issued a $4 million tax refund, the parent and the subsidiary fought in several federal courts over who owns the refund. The Circuit Court of Appeals applied the Bob Richards rule and held that the FDIC (the parent’s receiver) owns the refund.

The Supreme Court reversed the Court of Appeals but did not decide who owns the refund. Instead, the Supreme Court held that the determination of the refund’s owner should be made under state law, not federal law (unless Congress passes legislation that addresses this issue).

Under Ohio law, a parent and subsidiary may enter an agreement to determine which entity would own a tax refund. A well-crafted agreement could avoid expensive litigation, as what happened in Rodriguez. Every parent-subsidiary relationship is different and unique. Corporations should consult with an experienced business attorney to determine whether such an agreement would be necessary.