Supreme Court rejects ‘Bob Richards rule’

Tax Hot Topics newsletterThe U. S. Supreme Court has reached a unanimous decision in Rodriguez v. FDIC (No. 18-1269) to reverse an expansive interpretation of a long-standing common-law rule for determining where to distribute a tax refund in a consolidated group when no tax-sharing agreement is in place.

The decision reverses the 10th Circuit Court of Appeals decision, which had applied an expansive application of the so-called “Bob Richards rule” to hold that the U.S. federal income tax refund to a U.S. consolidated group should be distributed to the member that generated the loss (in this case the FDIC acting as receiver for the bank subsidiary) and not the common parent (in this case the trustee for the bankruptcy estate of such corporation).

The Bob Richards rule was the result of the 1973 holding in In re Bob Richards Chrysler-Plymouth Corp (473 F.2d 262) in which the 9th Circuit crafted a common-law rule holding that, where there was no tax sharing agreement in place, the income tax refund would be distributed to the member that generated the loss. Since then, the rule has been expanded by certain courts to apply even where there is a tax sharing agreement in place, but such agreement is not clear and unambiguous.

The Supreme Court held that the issue of how to distribute the federal income tax refund is not a matter for the narrow application of federal common law as the issue was not one where lawmaking is “necessary to protect uniquely federal interests.” Treasury regulations provide who the agent is who receives the income tax refund, but the Court held that at that point, the federal interest is terminated. The court held that the distribution of such refund is a matter for state law such as contract interpretation or equitable doctrines.

Greg Fairbanks
Managing Director
Washington National Tax Office
T +1 202 521 1503

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