Howell v. United States

775 F.2d 887 (1985)

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Howell v. United States

United States Court of Appeals for the Seventh Circuit
775 F.2d 887 (1985)

Facts

Under the Internal Revenue Code, employers had two main ways to contribute to pension plans for their employees. In the employers’-contributions system, employers contributed to the plan on top of employees’ stated salaries; these contributions were not taxable to employees until the benefits were paid out during retirement. In the employees’-contributions system, employers gave employees higher stated salaries, with some salary funds being dedicated to the pension plan; these contributions were taxable income to employees, but future disbursements were not. The distinction made little difference for employers but could have significant consequences for employees. Congress then amended the Internal Revenue Code to allow state-government employers to exercise both options: the governmental employers could treat contributions as employees’ contributions for state purposes and then pick up the contributions and treat them as employers’ contributions for federal purposes. Until 1981, Illinois used an employees’-contributions system, which taxed employees’ current contributions and allowed for no taxation during retirement. Illinois passed a statute that allowed the state to engage in the new hybrid method after 1981, that is, to use employers’ contributions for federal purposes, resulting in no taxation for employees until retirement. Judge Snyder Howell (plaintiff) sought a refund for federal taxation sums paid before 1981, claiming that he was entitled to the refund under the hybrid system because the employers’ contributions had been picked up by Illinois (i.e., were employers’ contributions under the new statute). The Internal Revenue Service (defendant) denied Howell’s request, and Howell sued. The district court concluded that because, under federal law, the employers’ designation of contributions controlled and Illinois had designated the contributions as employees’ contributions before 1981, Howell was not entitled to a refund. Howell appealed.

Rule of Law

Issue

Holding and Reasoning (Easterbrook, J.)

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