Hillsboro Nat'l Bank v. CommissionerAnnotate this Case
460 U.S. 370 (1983)
U.S. Supreme Court
Hillsboro Nat'l Bank v. Commissioner, 460 U.S. 370 (1983)
Hillsboro Nat'l Bank v. Commissioner
Argued November l, 1982
Decided March 7, 1983
460 U.S. 370
CERTIORARI TO THE UNITED STATES COURT OF APPEALS FOR
THE SEVENTH CIRCUIT
Until 1970, Illinois imposed a property tax on shares of stock held in incorporated banks, but in 1970 the Illinois Constitution was amended to prohibit such taxes. The Illinois courts thereafter held that the amendment violated the Federal Constitution, but, pending disposition of the case in this Court, Illinois enacted a statute providing for collection of the disputed taxes and placement of the receipts in escrow. Petitioner Bank in No. 81-485 paid the taxes for its shareholders in 1972, taking the deduction for the amount of the taxes pursuant to § 164(e) of the Internal Revenue Code of 1954 (IRC), which grants a corporation a deduction for taxes imposed on its shareholders but paid by the corporation and denies the shareholders any deduction for the tax. The authorities placed the receipts in escrow. After this Court upheld the constitutional amendment, the amounts in escrow were refunded to the shareholders. When petitioner, on its federal income tax return for 1973, recognized no income from this sequence of events, the Commissioner of Internal Revenue assessed a deficiency against petitioner, requiring it to include as income the amount paid its shareholders from the escrow. Petitioner then sought a redetermination in the Tax Court, which held that the refund of the taxes was includible in petitioner's income. The Court of Appeals affirmed. In No. 81-930, respondent corporation, which operated a dairy, in the taxable year ending June 30, 1973, deducted the full cost of the cattle feed purchased for use in its operations as permitted by § 162 of the IRC, but a substantial portion of the feed was still on hand at the end of the taxable year. Two days into the next taxable year, respondent adopted a plan of liquidation and distributed its assets, including the cattle feed, to its shareholders. Relying on § 336 of the IRC, which shields a corporation from the recognition of gain on the distribution of property to its shareholders on liquidation, respondent reported no income on the transaction. The Commissioner challenged respondent's treatment of
the transaction, asserting that it should have included as income the value of the feed distributed to the shareholders, and therefore increased respondent's income by $60,000. Respondent paid the resulting assessment and sued for a refund in Federal District Court, which rendered a judgment in respondent's favor. The Court of Appeals affirmed.
1. Unless a nonrecognition provision of the IRC prevents it, the tax benefit rule ordinarily applies to require the inclusion of income when events occur that are fundamentally inconsistent with an earlier deduction. Pp. 460 U. S. 377-391.
2. In No. 81-485, the tax benefit rule does not require petitioner to recognize income with respect to the tax refund. The purpose of § 164(e) was to provide relief for corporations making payments for taxes imposed on their shareholders, the focus being on the act of payment, rather than on the ultimate use of the funds by the State. As long as the payment itself was not negated by a refund to the corporation, the change in character of the funds in the hands of the State does not require the corporation to recognize income. Pp. 460 U. S. 391-395.
3. In No. 81-930, however, the tax benefit rule requires respondent to recognize income with respect to the distribution of the cattle feed to its shareholders on liquidation. The distribution of expensed assets to shareholders is inconsistent with the earlier deduction of the cost as a business expense. Section 336, which clearly does not shield the taxpayer from recognition of all income on distribution of assets, does not prevent application of the tax benefit rule in this case. Section 336's legislative history, the application of other general rules of tax law, and the construction of identical language in § 337, which governs sales of assets followed by distribution of the proceeds in liquidation and shields a corporation from the recognition of gain on the sale of the assets, all indicate that § 336 does not permit a liquidating corporation to avoid the tax benefit rule. Pp. 460 U. S. 395-402.
No. 81-485, 641 F.2d 529, reversed; No. 81-930, 645 F.2d 19, reversed and remanded.
O'CONNOR, J., delivered the opinion of the Court, in which BURGER, C.J., and WHITE, POWELL, and REHNQUIST, JJ., joined, and in Parts I, II, and IV of which BRENNAN, J., joined. BRENNAN, J., filed an opinion concurring in part and dissenting in part,post, p. 460 U. S. 403. STEVENS, J., filed an opinion concurring in the judgment in part and dissenting in part, in which MARSHALL, J., joined, post, p. 460 U. S. 403. BLACKMUN, J., filed a dissenting opinion,post, p. 460 U. S. 422.
JUSTICE O'CONNOR delivered the opinion of the Court.
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. We conclude that, unless a nonrecognition provision of the Internal Revenue Code prevents it, the tax benefit rule ordinarily applies to require the inclusion of income when events occur that are fundamentally inconsistent with an earlier deduction. Our examination of the provisions granting the deductions and governing the liquidation in these cases leads us to hold that the rule requires the recognition of income in the case of the liquidation, but not in the case of the tax refund.
In No. 81-485, Hillsboro National Bank v. Commissioner, the petitioner, Hillsboro National Bank, is an incorporated bank doing business in Illinois. Until 1970, Illinois imposed a property tax on shares held in incorporated banks. Ill.Rev.Stat., ch. 120, § 557 (1971). Banks, required to retain earnings sufficient to cover the taxes, § 558, customarily paid
the taxes for the shareholders. Under § 164(e) of the Internal Revenue Code of 1954, 26 U.S.C. § 164(e), [Footnote 1] the bank was allowed a deduction for the amount of the tax, but the shareholders were not. In 1970, 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. The Illinois courts held the amendment unconstitutional in Lake Shore Auto Parts Co. v. Korzen, 49 Ill.2d 137, 273 N.E.2d 592 (1971). We granted certiorari, 405 U.S. 1039 (1972), and, pending disposition of the case here, Illinois enacted a statute providing for the collection of the disputed taxes and the placement of the receipts in escrow. Ill.Rev.Stat., ch. 120,