Fort Wayne National Corp. might ask the U.S. Supreme Court to review a recent Indiana Supreme Court decision that denied the bank a refund on what it said were improper bond taxes.

Other banks in the state also would receive refunds if the decision is reversed.

Indiana officials have said it could cost the state about $125 million to issue the refunds.

The case stems from a state financial institutions tax implemented in 1990 that replaced previous taxes on such companies.

Fort Wayne National paid more than $1.9 million in taxes under the rule in 1990, but then sought a refund of $685,533 plus interest from the state revenue department, according to court documents.

The $2 billion-asset bank said the amount represented tax on municipal and federal bond income that should have been exempt from taxation.

It argued that the legislature was prevented from using income from federal and municipal bonds issued between March 1959 and January 1990 to determine tax liability under the financial institutions tax.

"Our argument basically was that the (state's) general exemption statute did cover indirect taxes, and this was an indirect tax replacing taxes that had been exempted," said Bill Landers, an Indianapolis attorney representing Fort Wayne National.

In 1993, the Indiana Tax Court ruled in favor of the bank.

But earlier this month, the state Supreme Court reversed the decision, ruling that the tax was not improperly applied retroactively.

"We think the Supreme Court of Indiana's decision was in error," Mr. Landers said. He said the bank still is considering an appeal.

Numerous other Indiana banks had applied for refunds pending the outcome of the Fort Wayne case. That group included Tri County Bank and Trust Co. of Roachdale.

"We were looking at a $30,000 tax refund if the state supreme court had ruled the other way," said Jerry Baumgartner, the $88 million-asset bank's president and chief executive. "On the bottom line, over a five-year period it's taking $100,000 away from earnings."

Fort Wayne National's basic claim applied to state-issued bonds, but covered federal bonds as well because of nondiscrimination taxation rules. "If we were right that the Indiana tax couldn't constitutionally be applied to outstanding Indiana bonds, it (would have) a kind of a domino effect" into federal obligations, Mr. Landers said.

In that respect, the issue is like a recent Minnesota case, in which banks and other companies won refunds of more then $327 million.

In that case, the U.S. Supreme Court declined to hear an appeal of a Minnesota Supreme Court ruling that the state's banks were illegally taxed on earnings from federal obligations when they were not taxed on state- issued bond earnings. A similar case occurred in Tennessee.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.