This summer, Professor Diane Lourdes Dick is evaluating recent bank failures and the complicated tax questions that arise.
Monday, July 10, 2023

Diane Lourdes Dick, professor at Iowa Law, focuses her teaching and scholarship on business and tax law, with an emphasis on commercial finance, business bankruptcy and out-of-court restructuring, and business entity taxation. Her scholarship has been showcased by The New York Times and Reuters BreakingViews, and has been cited and discussed by courts and litigants.

We caught up with Professor Dick for a Q&A to learn more about what she is working on this summer.

Can you tell us about a research topic you are working on this summer?  

One of several projects I’m working on this summer examines the thorny intersection of federal tax, banking, and bankruptcy law. In a previous article, I explored the bankruptcy treatment of a corporate debtor’s tax attributes, such as tax credits and net operating losses.

Tax attributes can be extremely valuable, as many can be carried forward and applied to future tax years. For instance, net operating loss carryovers can be used to offset future income, while certain unused tax credits can be used to directly reduce future tax liabilities. My earlier paper addressed the more straightforward question of whether and to what extent bankruptcy law treats tax attributes as potentially distributable value, and whether the normal creditor safeguards in the U.S. Bankruptcy Code work to ensure that this value is allocated fairly.

In the years following publication of that paper, there has been some improvement in the way that bankruptcy courts deal with these undeniably valuable assets. But recent high-profile bank failures highlight the additional wrinkles that arise when a bank is seized by the FDIC and its corporate parent files for bankruptcy.

Because these entities file tax returns as a consolidated group, the banking subsidiary’s valuable tax attributes land on the books of the bankrupt parent. Without adequate safeguards in place, this value can be siphoned by the parent’s preferred stakeholders while the FDIC’s deposit insurance fund foots the bill for the bank’s investment losses.

As these bankruptcy cases unfold, some of the most vexing questions concern the treatment of tax refund checks, net operating losses, and other valuable tax assets received or held by the parent company in its capacity as agent for the consolidated group.

How does the research strengthen the area of law you are in? 

Across academia and the practice community, only a small number of people have expertise in both corporate bankruptcy and tax law. This means that the bankruptcy courts often struggle (understandably) with questions that arise at the intersection of these two fields.

For instance, when it comes to evaluating, safeguarding, and distributing valuable tax assets, where do the tax laws end and the bankruptcy laws begin? To what extent are tax attributes considered property of the bankruptcy estate, and how should we go about assigning present value to them? How should the bankruptcy courts interpret tax allocation agreement entered into by and among members of a consolidated group?

In my most recent article, I try to unpack these and related questions to help strengthen the jurisprudence across these two fields.

What are emerging trends you are seeing in this area of legal research?

One of the cases I’m writing about this summer is Silicon Valley Bank. On March 10, 2023, the FDIC seized the bank’s assets. With approximately $209 billion in assets and more than $175 billion in deposits, it is the largest U.S. bank to fail since Washington Mutual’s 2008 collapse.

But while the FDIC handles the orderly liquidation of the banking subsidiaries, Silicon Valley Bank’s nonbanking corporate affiliates face their own day of financial reckoning in bankruptcy court. The case provides a wonderful opportunity to analyze many of the questions I highlighted above and to help architect new solutions to the valuation and distributional challenges.

Where do you see opportunities for more research in this field?  

I think there is still quite a bit of work left to do on developing and refining suitable approaches for valuing and allocating tax attributes. The prevailing valuation approaches provide too much discretion to downplay the value of these assets, while the prevailing distribution methods privilege some stakeholders at the expense of others.

The paper I am working on this summer proposes new mechanisms that have the potential to enhance both the safety and soundness of the banking system and the fairness and efficiency of the bankruptcy process.