The Supreme Court on Friday invalidated a decision to impose back taxes on the former Industrial Bank of Japan for writing off nonperforming loans it made to an insolvent “jusen” mortgage lender.

The ruling by the top court’s No. 2 Petty Bench reverses a March 2002 decision made by the Tokyo High Court, which said tax authorities had authority to impose some 150 billion yen in corporate taxes and penalties on the long-term credit bank.

IBJ made a provisional tax payment while filing a suit against the government.

The state will now have to return the taxes, as well as 68 billion yen in interest, to IBJ, which has since merged with other banks and is now part of Mizuho Financial Group Inc.

Together with the regional and other levies imposed on IBJ in connection with the back taxes, the total to be repaid is expected to exceed 300 billion yen.

At issue was whether it was appropriate for IBJ to list the debts it forgave to the jusen as losses in its financial report.

Presiding Justice Shigeo Takii said all the debts must be irrecoverable for a lender to enter them as losses in earnings reports. He also said, “This must be judged comprehensively, in line with generally accepted views and after also taking the circumstances of the creditor, such as the losses that would be sustained from the manpower and other problems of collecting the loans, into account.”

According to the Tokyo High Court, IBJ, one of the founders of Japan Housing Loan Inc., decided in March 1996 to give up about 376 billion yen in loans it had extended to the jusen on condition it that transferred its operations by the end of that year to an entity tasked with handling the jusen issue.

The bank reported losses for the business year to March 1996 after treating the abandoned loans as losses and writing them off tax-free under a government scheme for liquidating seven of the failed housing loan firms.

But national tax authorities did not recognize the full loan amount to be irrecoverable or that the writeoff was finalized by the end of the business year, and promptly imposed back taxes.

In March 2001, the Tokyo District Court invalidated the imposition of back taxes after determining the loans were all irrecoverable. However, the high court overturned this ruling, saying that tax authorities acted appropriately as Japan Housing Loan still had assets that made the loans recoverable.

At a Dec. 6 Supreme Court session, Mizuho Corporate Bank, which succeeded IBJ in handling the litigation, called for the reversal of the high court decision, saying that resolving the jusen issue was a national policy at the time, and that the state’s actions were tantamount to tripping up a runner heading toward the goal line.