In In re Downey Financing Corp., a Delaware bankruptcy court addressed whether consolidated return refunds that the parent company (“Parent”) received in bankruptcy were part of its bankruptcy estate. The consolidated group’s pre-petition tax sharing agreement (“TSA”) required Parent to transfer the refunds to its non-debtor subsidiary (“Subsidiary”). Parent, however, did not transfer the refunds to Subsidiary, and instead claimed the refunds as part of its bankruptcy estate.
The Eleventh Circuit addressed this same issue in two recent cases discussed in a prior post, and found that under the TSAs at issue in those cases, the subsidiary owned the tax refunds. Parent held the refunds either as agent of the subsidiary or “as if in escrow” for the benefit of the subsidiary. Therefore, the funds were not part of the parent company’s bankruptcy estate, and the parent company was required to forward the refunds to its subsidiary. The bankruptcy court in In re Downey Financing Corp. found these cases factually distinguishable.
The decisions in these cases were based on contract law and established that a properly drafted tax sharing agreement can define who is liable for a consolidated group’s taxes or entitled to its refunds. If you have any questions about these cases or issues, please contact one of the undersigned or any of the other Tax lawyers at Thompson & Knight.