The US Supreme Court on Tuesday unanimously ruled that, even in cases concerning federal bankruptcy and tax law, state tax law is to be applied concerning corporate property. The ruling vacates the decision of the lower court that applied a federal common-law rule known as the Bob Richards rule on how to allocate a tax refund paid to an affiliated group.

The decision arises from a dispute between Simon Rodriguez, trustee for United Western Bancorp, Inc., and the Federal Deposits Insurance Corp (FDIC). United Western was forced into bankruptcy soon after suffering large losses. When the IRS issued the group a $4 million tax refund the FDIC and the parent corporation’s bankruptcy trustee, Simon Rodriguez, each sought claim to it.

However, the Supreme Court granted certiorari not to decide who gets the money, but only how to decide the dispute. The question the court faced was whether state law or federal common-law, commonly known as the Bob Richards rule, determines who owns the tax refund. The court held “the Bob Richards rule is not a legitimate exercise of federal common lawmaking.”

The Bob Richards rule provides that “in the absence of a tax allocation agreement, a refund belongs to the group member responsible for the losses that led to it.” The Sixth Circuit held strict conditions must be satisfied to apply federal common-law in the absence of congressional authorization. One of the most basic requirements being the common lawmaking must be “necessary to protect uniquely federal interests.”

The Supreme Court found “nothing like that exists here,” ruling the Bob Richards rule bypasses the question of what interest the federal government could have in determining how a tax refund is distributed among group members. In holding that the Bob Richards rule does not apply in this case, the court explained state law is well equipped to handle disputes involving corporate property rights.