Appeal from the United States District Court for the Northern District of Illinois, Eastern Division - No. 69 B 1647, Hubert L. Will, Judge.
Fairchild, Chief Circuit Judge, Tone and Bauer, Circuit Judges.
Involuntary bankruptcy proceedings were initiated against F. W. Koenecke & Sons, Inc. ("Koenecke") in 1969. Following an adjudication of bankruptcy a receiver/trustee was appointed and a priority tax claim was presented by the State of Illinois in the amount of $1,268,334.60 for unpaid taxes under the Illinois Cigarette Tax Act and Cigarette Use Tax Act for the period of July 1, 1965 to June 30, 1968. The bankruptcy judge disallowed the claim and the district court affirmed. The central issue on appeal is whether the State of Illinois is estopped to recover the taxes because of the involvement of state employees in Koenecke's plan to obtain maximum tax discounts through multiple licenses. We reverse.
Prior to its bankruptcy Koenecke was the largest licensed cigarette distributor in Illinois. It was required by Illinois law to collect and remit the tax imposed on the sale and use of cigarettes. Ill. Rev. Stats. 1963, Ch. 120, §§ 453.1-453.67. A distributor prepays the cigarette tax by purchasing tax stamps and affixing them on the cigarettes to be sold. For its services in purchasing and affixing the stamps, Koenecke was entitled to receive a discount, which up until 1963 was a flat 5% of all stamps purchased.
By an Act approved July 16, 1963, Ill. Rev. Stats. 1963, Ch. 120, § 453.2(b), the Illinois General Assembly enacted a graduated declining discount schedule to reflect the high volume distributor's decreased cost per revenue stamp affixed. The constitutionality of the graduated discount was upheld by the Illinois Supreme Court in Heyman v. Mahin, 49 Ill.2d 284, 275 N.E.2d 421, cert. denied 405 U.S. 1075, 31 L. Ed. 2d 809, 92 S. Ct. 1499 (1972).
The maximum discount was fixed at 1 2/3% of the first $700,000 of tax paid by a licensed distributor during the year, reduced to 1 1/3% of the next $700,000, 1% of the next $700,000 and 2/3 of 1% of any additional taxes paid. The discount rate schedule was further revised in 1965 and 1967.
In the case of Koenecke, its volume of cigarettes sales was so high that the purchase of $700,000 in stamps occurred at the end of one week, and the minimum discount bracket was reached in the first three weeks of each year.
To circumvent the graduated declining discount formula of the statute and to insure the highest possible discount for its operations, Robert F. Koenecke, the principal shareholder of the bankrupt company, and his wife, filed over 52 multiple license applications as cigarette distributors in the individual names of company employees.
Theodore Issacs, then Director of the Illinois Department of Revenue, received a legal opinion from William J. Clark, then Attorney General for the State of Illinois, informing him that multiple licenses could not be issued to persons closely related to a distributor unless: "Separate applications are made by each licensee distributor which are in all other respects conformable to the statute . . . ." There is a serious dispute between the parties as to whether or not the Clark opinion sanctioned the multiple licensing scheme devised by Koenecke to obtain favorable tax treatment. Although the opinion is somewhat nebulous, we believe that the Attorney General's opinion made it clear that in order to obtain multiple licenses the persons applying must have been qualified distributors and not merely persons who purported to be distributors. Nevertheless, officials of the Illinois Department of Revenue having responsibility for administering the cigarette tax acts granted secondary or multiple licenses to persons closely related to Koenecke even though it was obvious that such secondary licensees were mere figureheads and were to be utilized solely for the purpose of avoiding the effect of the graduated discount law.
In fact employees of the state affirmatively participated in Koenecke's attempt to minimize taxes.*fn1 The evidence shows that one of the Department of Revenue's auditors actually taught Koenecke personnel how to compute and report the nominal intercompany transfers to and from secondary licensees which were shown on the monthly returns. It was admitted that from time to time Department personnel called Koenecke and other distributors to remind them that it was time to change licenses in order to avoid going over the $700,000 limit.
There is no doubt Koenecke's licensees were mere figureheads and never intended to or did, in fact, engage in the business as distributors of cigarettes. Many of the Koenecke employees, who were presented to the State of Illinois as licensees, denied signing or authorizing Koenecke to sign their signatures to the license applications. However two former key employees testified that it was common knowledge among all employees that their names were being used in order to obtain secondary licenses and thus qualify for maximum discounts. Koenecke testified that he had the express or implied authority of the person whose name he signed. The trial judge did not expressly find that Koenecke had authority but did find that the procedure was common knowledge among employees and that the secondary licenses were publicly displayed on a bulletin board in the common work room of the company.
In 1968, a new director, Theodore Jones, took action against the multiple license procedure used by Koenecke and other distributors. He ordered all of the so-called "secondary" licenses to be cancelled and directed his staff to make audits to assess the difference between the discounts received under the multiple licensing procedure and the correct discount available as a single licensed distributor.
Although the multiple license scheme originated with Koenecke, other smaller distributors in the state adopted the same practice. The state admits that they have not pursued collection of additional taxes from these distributors. Koenecke claims that such conduct is a violation of the constitutional right of equal protection and that it is a victim of the State's discriminatory tactics. However, the state contends that the evidence shows that only Koenecke consistently falsified license applications and that the record is barren of evidence that any other licensee was guilty of such flagrant conduct. In addition the state points out that Koenecke avoided over $2,000,000*fn2 in unpaid cigarette taxes while the average discrepancy for every other distributor was only $32,000. The State Department of Revenue's decision not to make assessments to the other distributors does not rise to the level of a controlling administrative determination of state law, especially in view of the Illinois Supreme Court cases discussed below. It amounted only to an election by the state to proceed only against Koenecke. That election did ...