Indiana banks won't get the disputed tax refunds they had sought.

The U.S. Supreme Court refused this week to review the case of one of the banks regarding retroactive bond-interest taxes.

At issue was whether the state could retroactively place indirect taxes on interest income from the municipal and federal bonds of financial institutions.

In declining to hear the case, brought by Fort Wayne National Corp. for taxes paid in 1990, the Supreme Court let the tax stand.

Many other Indiana banks applied for tax refunds pending the outcome of the Fort Wayne case. The state said it could have cost some $125 million to issue refunds.

"They weren't going to review what we thought was an incorrect decision of the state court that permitted the state to change the rules of the game," said Indianapolis attorney Bill Landers, who represented Fort Wayne National.

The Fort Wayne case began after Indiana changed its financial institutions taxes in 1990.

Fort Wayne National sought a refund of $685,533 plus interest, which it said represented taxes on municipal and federal bond income that had previously been exempt and should have remained so.

In 1993, Indiana's Tax Court ruled in the bank's favor. But the state's Supreme Court last April reversed the decision. Fort Wayne National appealed to the U.S. Supreme Court in July.

John Finnerty, chairman of the Community Bankers Association of Indiana and president and chief executive of $60 million-asset First United Bank, Middletown, said taxation will be an even broader issue for community banks as states deal with it in the wake of interstate banking and branching.

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.