Court Opinion

ID: 9467596
Source: CourtListenerOpinion
Date Created: 2023-08-05 01:52:17.243073+00
Date Added: 2024-06-11T17:40:25.603260
License: Public Domain

PELL, Circuit Judge,
dissenting.
Essentially, the majority members of the panel in this case, without any real analysis *532of the merits, feel themselves bound by this court’s opinion in First Trust & Savings Bank v. United States, 614 F.2d 1142 (7th Cir. 1980). Ordinarily, even though I regard First Trust as having been incorrectly decided, I would likewise feel bound by a prior' applicable opinion of this court, particularly one as recent as First Trust. Because, however, I regard that case as distinguishable, I respectfully dissent.
Both in First Trust, 614 F.2d at 1146, and in the majority opinion in the present case, there is a reference to the taxpayer bank having secured a “windfall.” This just is not so. The taxpayer did, of course, take the deduction to which it was entitled by the revenue code.1 While it got the benefit in the year the tax was paid this was nothing more than the ordinary situation in which a taxpayer is permitted a deduction for a state tax it has paid. That tax, however, was imposed not on the bank but was a tax on the individual shareholders of the bank. State statutes, such as the Illinois statute here involved,2 made the bank liable for the tax on the shareholders’ shares if the shareholders didn’t pay the tax. Because of the obvious exposure resulting from some shareholders not getting around to paying a traditionally unpopular tax on intangible personal property, the banks, at least, from the early part of this century, have voluntarily paid all the tax owing by all of their shareholders. Yet, even though the tax would have been deductible if it had been paid directly by the shareholders whose obligation it was, no deduction was permitted by anyone until the enactment of the Revenue Act of 1921. As the Supreme Court pointed out in Wisconsin Gas & Electric Co. v. United States, 322 U.S. 526, 531, 64 S.Ct. 1106, 1109, 88 L.Ed. 1434 (1944):
The origins of the present § 23(d) in the Revenue Act of 1921 [now 26 U.S.C. § 164(d)] disclose that its adoption was prompted by the plight of various banking corporations which paid and voluntarily absorbed the burden of certain local taxes imposed upon their shareholders, but were not permitted to deduct those payments from gross income.
Wisconsin Gas in the marginal note supporting the above quotation refers to the Hearings before the Committee on Finance on H.R. 8245, U.S. Senate, 67th Cong., 1st Sess., 250-51. Turning to that legislative history we find the following:
Dr. Adams. [Dr. T.S. Adams, Tax Adviser, Treasury Department] Now, Senator Smoot, reverting to your proposition, the Bankers’ Association are asking that they be allowed to claim deduction for State and local property taxes which they pay. The banks pay these taxes for and on behalf of their stockholders. The taxes, you will remember, are on the stockholders. The bank voluntarily assumes it and pays it. The Banks now want to claim a deduction for it. They do it almost universally.
Senator Smoot. If it were the stockholder it would be allowed, but as long as the bank takes it out, they do not allow it.
*533Dr. Adams. They pay it voluntarily. A pays B’s taxes voluntarily. The banks pay it voluntarily.
(Informal discussion followed.)
Dr. Adams. Banks may be given a deduction because, as a matter of strict legal theory, it is imposed on the stockholders and the stockholders do not take it. This is what worries me. The Revised Statutes provide the manner in which the banks shall take. The Federal statute provides this, that the States may tax the real estate of national banks as other real estate is taxed; and that, in addition, the value of the shares of the national banks may be included in the personal property of the shareholders. That is only taxed at the place where the bank is located. The consequence is that a habit has grown up of assessing the shareholders of the national banks and asking them to pay it.
******
Senator Smoot. I have been a director in a bank out in Salt Lake City for over 20 years. They have paid that tax ever since I have owned a share of stock in the bank. I have never taken a single cent deduction in any way. I am president of a bank, too, and they pay every single cent of that tax. I know nothing about it. I do not take 1 cent of credit for deductions, and the banks are entitled to it. They pay it out.
This achieved an essentially fair situation, one which we like to think of as a hallmark of our system of voluntary taxation. In other words, the tax was paid and one, but only one, deduction was allowed. Unfairness did not rear its head until the Illinois personal property tax on individuals was abolished and a refund was made. If this refund had been made to the bank which had voluntarily3 paid the taxes, then under normal procedures of the tax benefit rule, the refund would have been taxable to the bank. The Appellate Court of Illinois, however, decreed otherwise as to the identity of the recipient of the refund, holding that it was the shareholder upon whom the tax had been imposed who was entitled to the refund. Lincoln National Bank v. Cullerton, 18 Ill.App.3d 953, 310 N.E.2d 845 (1974). We now then have arrived at the situation presented by the present case. The bank receives not one penny of the refund and is not entitled to do so but it pays an income tax nevertheless. The shareholder who receives the refund must also include it in his taxable income. This is double taxation, purely and simply.
At the same hearing of the Committee on Finance quoted from above, an amendment of a different part of the code was considered which throws light on the then position of the Treasury in an analogous situation:
Dr. Adams.... The next change occurs in lines 24 and 25, at the bottom of page 76. “Nor shall such tax be included in the gross income of the obligee.”
That is a difficult point that has caused almost more trouble than anything in the law. The point is this: In the tax-free covenant bond the corporation pays the tax for the bondholder, or 2 per cent of it. Now, while the debtor corporation is paying 2 per cent for the bondholder and he is really paying that much tax for himself, still strict theory requires that the bondholder put that in his return as his income. We want to clear that up so that that particular interest shall not be included in the gross income of the obligee.
Similarly, as far as I can ascertain, the IRS has not attempted to collect taxes from the shareholders for the payment by the banks of the local taxes; yet now, through a fortuitous circumstance of the tax refund, the endeavor is launched to collect twice on the same sum, an endeavor which is now for the second time approved by this court.4
*534To put the matter in perspective, we can assume two parallel situations in substance but not in form with the resultant taxation dependent upon the form and not the substance.5

Bank A Bank B

1972

Shareholders pay their own Personal property tax. Shareholders who itemize deductions, take the deductions. The bank takes no deduction. No income tax paid. The bank pays the personal property tax of the shareholders. The bank takes the deduction. The shareholders take no deduction. No income tax paid.

1973

Shareholders receive a refund. Bank receives no part of the refund. Shareholder includes amount of refund in taxable income. Bank has no taxable consequences. Shareholders receive a refund. Bank receives no part of the refund. Shareholder includes amount of refund in taxable income. Bank also includes amount of refund in taxable income.
There remains only the matter of First Trust. I would be less than candid if I did not say that I think this panel should circulate an opinion to all of the active judges of the court pursuant to Circuit Rule 16(e), asking for approval of the overruling of First Trust. However, it is on its facts sufficiently distinguishable so that we do not need to overrule it. In First Trust, the refund checks were payable jointly to the bank and the shareholders. The bank there was in a position to assert its views as to the disposition of the checks. Here, the bank had no opportunity to exercise any control over the refunds; they went directly to the shareholders. In Lincoln National Bank, the Illinois court pointed out that the payment of the tax by the bank reduced pro tanto the assets of all of the shareholders. 310 N.E.2d at 849. The payment of the income tax the following year in the present case will again achieve this effect. In addition, however, the shareholders’ personal assets will also be reduced by the payment of income tax on the refund. If the bank has some say about the disposition of the refund checks, as it would if they were payable to the bank and the shareholders jointly, it is not inconceivable that the shareholders might be interested in declining what amounts to a double dip out of their assets.
The majority opinion in the present case denies validity to the bank’s argument that an “actual recovery” was made in First Trust, and holds that this argument gives too narrow a reading to this court’s construction of the tax benefit rule in First Trust. As I read the opinion of this court in that case it appears to me that the court was unwilling to rest on the “windfall” aspect of the case, a situation which, as I have indicated, did not exist. Instead, the court went ahead to say:
Moreover, even if an actual “recovery” by the Bank is viewed as essential to the application of the rule, we find such a recovery here. The Bank admittedly “received” the refunded taxes, in checks payable jointly to it and its stockholders. Although state law presumably precluded retention of the refund by the Bank, the relevant cases indicate that a “recovery” is not vitiated by a requirement that it ultimately be distributed by the taxpayer.
614 F.2d at 1146. Here, of course, there was no recovery either in fact or in law. What there is here though is what to me is a distressing situation in a country whose founding was marked by resistance to unfair taxation in which the unwarranted and unfair ingenuity of the tax collectors has now received judicial approval.

. 26 U.S.C. § 164(e) provides as follows:
Where a corporation pays a tax imposed on a shareholder on his interest as a shareholder, and where the shareholder does not reimburse the corporation, then—
(1) the deduction allowed by subsection (a) shall be allowed to the corporation; and
(2) no deduction shall be allowed the shareholder for such tax.

. Illinois Revised Statutes, 1971, 120 § 558, provides in pertinent part as follows:
For the purpose of collecting such taxes, it shall be the duty of every such bank, or the managing officer or officers thereof, to retain so much of any dividend or dividends belonging to such stockholders as shall be neces-
sary to pay any taxes levied upon their shares of stock, respectively, until it shall be made to appear to such bank or its officers that such taxes have been paid; and any officer of any such bank who shall pay over or authorize the paying over of any such dividend or dividends, or any portion thereof, contrary to the provisions of this section, shall thereby become liable for such tax; and if the said tax shall not be paid, the collector of taxes where said bank is located shall sell said share or shares to pay the same, like other personal property. And in case of sale the provision of law in regard to the transfer of stock when sold on execution, shall apply to such sale.

. Under the circumstances of the voluntariness, it seems appropriate to italicize the word.

. Although the case of the shareholder taxpayers is not before this court, it was conceded during oral argument that the shareholders would have to include the refunds in taxable income.

. I am not unmindful that the difference between tax evasion and tax avoidance may be dependent upon form and, indeed, taxable consequences may often depend on the form of a transaction. In this case, however, even giving controlling significance to form over substance involves a situation where the bank taxpayer did not recover that from which it had a tax benefit.