TAX NEWS - 2010

FDIC To Seek Dismissal Of Colonial Bank Tax Refund Suit

The Federal Deposit Insurance Corp. said it will ask a federal judge to throw out a lawsuit filed by the former parent company of Colonial Bank, which was seized by federal regulators last year, over the rights to millions of dollars in tax refunds.

The FDIC said in a court filing Friday that it would ask a district court judge to dismiss the suit filed by the bank's former parent over the ownership of the disputed tax refunds, one of a number of legal disputes between the federal banking agency and the failed bank.

Colonial BancGroup Inc. (CBCGQ), the failed thrift's corporate parent, has previously claimed that it's the rightful owner of some $166 million in tax refunds.

The FDIC, which took over Colonial Bank after it was seized last year, says the refunds are its property under federal law.

"When corporations file joint income tax returns as a consolidated group, tax attributes such as net operating loss carrybacks, and tax refunds arising from the application of such attributes, inure to the benefit of the entity that actually paid the taxes and incurred the loss giving rise to the refund," according to the filing with the U.S. Bankruptcy Court in Montgomery, Ala.

"In this case, Colonial Bank paid the substantial majority of taxes, incurred the substantial majority of losses and owns the substantial majority of tax refunds that might be recovered from taxing authorities," lawyers for the FDIC said.

Lawyers for the Colonial and the FDIC couldn't immediately be reached for comment.

The FDIC, the federal agency charged with managing the receiverships of failed banking institutions, says Colonial's holding company owes it more than $1 billion, an amount equal to the gap between how much capital its banking subsidiary was required to have and what it actually had on hand when it was seized by regulators.

The FDIC was named receiver of Colonial Bank after regulators seized the Montgomery bank in the summer of 2009. Colonial, which had $25 billion in assets and $20 billion in deposits, was the biggest bank of failure of last year.

The FDIC, which says Colonial Bank's failure will cost its deposit-insurance fund $2.8 billion, sold Colonial Bank's assets to BB&T Corp. (BBT).

The fight between Colonial BancGroup and the FDIC over the tax refunds is just one of several disputes the holding company and the regulator are playing out in federal courtrooms in Alabama.

The holding company has sued the FDIC over the rights to a number of assets--including proceeds from insurance policies and other property as well as capital contributions made to shore up the bank--that it says belong to the bankruptcy estate.

Alabama banking authorities closed Colonial Bank in August 2009 after its parent failed to raise the funds needed to keep it afloat. The company had suffered losses related to its commercial real-estate lending.

Parent company Colonial BancGroup filed for bankruptcy protection later that month. Colonial has acknowledged it is the target of a criminal probe by the U.S. Department of Justice in relation to its mortgage warehouse-lending division and alleged accounting irregularities.