FDIC 'Falling Flat' on Busted Bank Tax Claims: Street Whispers

NEW YORK (TheStreet) --The Federal Deposit Insurance Corp. has been striking out in its efforts to lay claim to tax refunds from failed banks, and at least one analyst who has been following the cases believes the regulator is doomed to failure in these efforts.

When the FDIC takes over a failed bank, the entity it takes over is the operating company. The legal corporate entity--known as the holding company--files for bankruptcy. In many instances the only asset it retains is a claim to a tax refund from the Internal Revenue Service.

CRT Capital Group analyst Kevin Starke writes for an audience of investors in distressed debt securities who want to know the likelihood the refund will be paid out to the banks' creditors. According to Starke, the FDIC's efforts to step in front of creditors and lay claim to the refund, while dogged, are "falling flat in case after case."

The FDIC doesn't discuss active litigation, according to a spokesman.

The key to the FDIC's arguments are the tax sharing agreements between the legal entities that make up the company.

The FDIC has tried to claim that the holding company is merely a conduit through which assets automatically get passed on to the operating company. While such a "principal-agent" relationship isn't specifically laid out in the vast majority of the tax sharing agreements, neither do they state that such a relationship doesn't exist. As a result, the FDIC has been arguing, a principal-agent relationship should be accepted as the default.

But bankruptcy courts don't work that way, according to Starke.

"Bankruptcy courts look at your rights as a creditor typically more in line with the minimum protection that you're entitled to rather than the maximum protection that you're entitled to. You have to prove that you're entitled to something more, not assume that you're entitled to something more and then simply prove that you're not entitled to less. The FDIC's trying to go that latter route--they're trying to say its obvious that we're entitled to something more and you had to prove that we're entitled to less. That's not working at all," Starke says.

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