Continental Illinois Corporation v. Commissioner of Internal Revenue

998 F.2d 513 (1993)

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Continental Illinois Corporation v. Commissioner of Internal Revenue

United States Court of Appeals for the Seventh Circuit
998 F.2d 513 (1993)

Facts

Continental Illinois National Bank (Continental) (plaintiff) made numerous foreign loans during the years 1975 through 1979, due to which the Internal Revenue Service (IRS) (defendant) assessed very high deficiencies against Continental. After Continental challenged the deficiencies, several trials were held that produced inconsistent rulings before the matters were consolidated on appeal. Most of the matter dealt with net loans, which were loans net of any tax imposed by the borrower’s country. For instance, if a bank wished to charge 8 percent interest on a loan to a foreign resident whose nation imposed a 50 percent withholding tax, the bank would charge a net interest rate of 12 percent, covering the tax involved and the bank’s intended return. Although the IRS allowed Continental to credit amounts paid to foreign countries for income taxes, some disputes existed. For one, Continental first argued that the taxes in question were imposed when withheld and not when paid. Secondly, Continental produced letters from the individual borrowers confirming tax payments rather than producing genuine receipts per IRS requirements. That said, a second dispute originated from Continental, arguing that if it could not validly claim the taxes in question, Continental’s taxable income on the net loans must only include the amounts other than those withheld for taxes—the principal plus 8 percent in this example. The government argued that Continental could not claim taxes withheld, only taxes paid, and only those for which Continental could legitimately prove payment. Alternatively, the government wished to impose taxable income status on the full net loan amount, including the tax set aside for withholding. Another side issue arose from so-called CAP loans, in which a foreign government might subsidize borrowers, and Continental would hold any returned interest and ultimately provide the interest to the borrowers. The government considered this interest income, but Continental disagreed.

Rule of Law

Issue

Holding and Reasoning (Posner, J.)

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