Hillsboro National Bank v. Commissioner

460 U.S. 370 (1983)

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Nature of the Case

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Facts

These consolidated cases present the question of the applicability of the tax benefit rule to two corporate tax situations: the repayment to the shareholders of taxes for which they were liable but that were originally paid by the corporation; and the distribution of expensed assets in a corporate liquidation. P is an incorporated bank doing business in Illinois. Until 1970, Illinois imposed a property tax on shares held in incorporated banks. P customarily paid the taxes for the shareholders. P was allowed a deduction for the amount of the tax under the Code, but the shareholders were not. Illinois amended its Constitution to prohibit ad valorem taxation of personal property owned by individuals, and the amendment was challenged as a violation of the Equal Protection Clause of the Federal Constitution. During the dispute, P paid the taxes for its shareholders in 1972, taking the deduction permitted by §164(e), and the authorities placed the receipts in escrow. The state constitutional amendment was upheld, and the County Treasurer refunded the amounts in escrow that were attributable to shares held by individuals, along with accrued interest. The Illinois courts held that the refunds belonged to the shareholders rather than to P. D assessed a deficiency against P, requiring it to include as income the amount paid its shareholders from the escrow. The Tax Court held that the refund of the taxes, but not the payment of accrued interest, was includible in P's income. The Court of Appeals for the Seventh Circuit affirmed. The Supreme Court granted certiorari.