In its recent decision in Rodriguez v. Federal Deposit Insurance Corp., No. 18–1269 (Sup. Ct. Feb. 25, 2020), the Supreme Court held that federal courts may not apply the federal common law “Bob Richards Rule” to determine who owns a tax refund when a parent holding company files a tax return but a subsidiary generated the losses giving rise to the refund. Instead, the court should look to applicable state law.

General Legal Background

The Bankruptcy Code limits in many ways the rights of nondebtors under contracts with a debtor in bankruptcy. There are, however, some crucial exceptions, which Congress deemed important for the orderly function of the securities markets. In particular, agreements governing securities repurchase (or repo) transactions involving a financial institution may be terminated and liquidated notwithstanding the bankruptcy filing of the repo seller.

The IRS announced in July that it has withdrawn proposed regulations (the net value regulations) that provided guidance regarding corporate formations, reorganizations and liquidations of insolvent corporations. Those regulations, which were proposed in 2005, required the exchange (or, in the case of the liquidation of a subsidiary into its parent, the distribution) of “net value” in order for the transaction to qualify for nonrecognition treatment under the Internal Revenue Code (the Code).

The Net Value Regulations

Net Value in 332 Liquidations