WASHINGTON (CN) — The U.S. Supreme Court was unanimous Tuesday in trashing a rule several federal appeals courts have used for decades to determine how tax refunds are distributed to parent companies and their subsidiaries.
The Ninth Circuit announced the so-called Bob Richards rule in 1973, vying to fill a hole in federal tax law that leaves it unclear how tax refunds should be distributed between a parent company and its subsidiaries when they file a consolidated tax return.
Under the rule, the refund is presumed to belong to the member whose losses caused the company to receive the refund. But the Supreme Court never endorsed the rule, and it has created a split between the circuits.
In a unanimous six-page opinion issued Tuesday, Justice Neil Gorsuch wrote the federal appeals courts overstepped in crafting the rule.
“Should federal courts rely on state law, together with any applicable federal rules, or should they devise their own federal common law test?” Gorsuch wrote. “To ask the question is nearly to answer it. The cases in which federal courts may engage in common lawmaking are few and far between. This is one of the cases that lie between.”
The Trump appointee wrote courts have a “necessarily modest role” in developing federal common law rules and that there is no compelling reason for them to do so on the issue of how to distribute corporate tax refunds.
Instead, Gorsuch wrote, state law should suffice in the absence of a judicially created rule.
“We took this case only to underscore the care federal courts should exercise before taking up an invitation to try their hand at common lawmaking,” Gorsuch wrote. “Bob Richards made the mistake of moving too quickly past important threshold questions at the heart of our separation of powers.”
In the case the court ruled in on Tuesday, the Bob Richards rule meant a $4 million tax refund went into the hands of the Federal Deposit Insurance Corporation, acting as the receiver for United Western Bank, instead of the trustee for the bank’s parent company, United Western Bancorp. Both entities are in bankruptcy and the fight over the $4 million refund began during United Western Bancorp’s bankruptcy proceedings.
Mitchell Reich, an attorney with the firm Hogan Lovells who represented the trustee of United Western Bancorp, said it is satisfying to see a unanimous opinion in his client’s favor.
“This came out just the way we were hoping, with a pretty clear repudiation of the Bob Richards rule and a strong win for our clients,” Reich said in a phone interview.
He said the case will have major implications for high-stakes fights over tax refunds that routinely run into the hundreds of millions of dollars.
The Justice Department did not return a request for comment on the case.