Hillsboro National Bank (bank) (plaintiff) was incorporated in Illinois. Hillsboro’s shareholders were subject to a state property tax on their shares. Hillsboro paid the property tax on behalf of its shareholders, and then deducted the payments from its federal income taxes. In 1970, the state repealed the property-tax law, but the repeal did not take effect until 1973. From 1970 to 1973, the state continued to enforce the property tax and escrow property-tax collections. When the repeal finally took effect, the state refunded the escrowed property taxes directly to Hillsboro’s shareholders, not to Hillsboro itself. Hillsboro reasoned that it had recovered none of its 1970-1973 tax payments, and therefore did not need to report the tax refunds as income. The commissioner of internal revenue (commissioner) (defendant) determined that the refunds should have been included in Hillsboro’s tax return. Hillsboro petitioned the tax court for a redetermination. The tax court ruled for the commissioner, and the United States Court of Appeals for the Seventh Circuit affirmed. The United States Supreme Court granted certiorari.