APPEAL from the Circuit Court of Cook County; the Hon. F.
EMMETT MORRISSEY, Judge, presiding.
MR. JUSTICE MCGLOON DELIVERED THE OPINION OF THE COURT:
Plaintiff-taxpayer, First Chicago Building Corporation (hereinafter the Bank), brought this action in administrative review against an order of the Illinois Department of Revenue which assessed use taxes against the taxpayer in the amount of $537,924.32 plus penalties and interest in the amount of $521,971. The circuit court of Cook County found the Department of Revenue's order to be against the manifest weight of the evidence and contrary to law. The Department of Revenue appeals, arguing that the taxpayer had engaged in tax evasion, and that the trial court incorrectly determined the applicable law.
The record discloses the following pertinent facts, herein summarized. The First National Bank of Chicago, a national banking association, wanted to construct a new facility for its operations. On March 8, 1963, the Bank created a subsidiary corporation, the Madison-Dearborn Corporation, to own, manage and develop real estate. Immediately after the subsidiary corporation was created, the Bank acquired fee interests in half the land to be used for the new Bank building, and the subsidiary corporation acquired long term leases in the remaining land. The Bank hired an architect to design its new building, and on November 13, 1964, the Bank and its subsidiary entered into an agreement to jointly develop the building property. The Bank leased its fee interests to the subsidiary, and the subsidiary began razing the existing structures. On April 12, 1965, the subsidiary corporation, the Madison-Dearborn Corporation, changed its name to the First Chicago Building Corporation, herein referred to as First Chicago. On September 3, 1965, First Chicago contracted with a general contractor for the actual construction of the proposed bank and office edifice, The One First National Plaza Building. Construction began on March 1, 1966, and was substantially completed on or about December 31, 1969.
The instant dispute is concerned with the process by which building materials were acquired for use in The One First National Plaza Building, as viewed in the context of the applicable laws. During the construction period, an applicable Federal statute (12 U.S.C. § 548 (1964)) provided, and the Rules of the Illinois Department of Revenue reflected, that a national banking association was not subject to the Retailers' Occupation Tax Act (ROTA). As explained fully in First National Bank v. Jones (1971), 48 Ill.2d 282, 269 N.E.2d 494, the legal incidence of Illinois ROTA is on the retailer, and not on a purchaser-bank, so that ROTA was not in violation of the Federal law. Should a national banking association make a purchase from an Illinois retailer, the retailer would be liable for ROT, although the retailer would customarily pass the tax burden to the purchaser. If the Bank or First Chicago had purchased the building materials from a retailer subject to ROTA, the amount of ROT would have been passed along to the purchaser. Since, however, at the time of the construction, ROTA did not apply to national banking associations, the Bank purchased the building materials for resale and then sold them to First Chicago at a markup. In this fashion, the Bank was a retailer, but was not subject to ROTA. Section 3 of the Illinois Use Tax Act (UTA) provided:
"If the seller of tangible personal property for use would not be taxable under the Retailers' Occupation Tax Act despite all elements of the sale occurring in Illinois, then the tax imposed by this Act shall not apply to the use of such tangible personal property in this State." (Ill. Rev. Stat. 1967, ch. 120, par. 439.3.)
First Chicago did not pay the use tax on these purchases because the seller, The First National Bank of Chicago, was not taxable under ROTA, and First Chicago, accordingly, claimed the exemption provided by section 3, above quoted.
The Department of Revenue, however, asserted that First Chicago was liable for use tax for purchases made from The First National Bank of Chicago, and issued a notice of tax liability to the taxpayer, First Chicago. First Chicago filed a timely protest, and a hearing in the matter was held before a Department of Revenue hearing officer on July 30, 1973. By agreement of the parties, no testimony was taken, and the matter proceeded primarily upon the stipulation of facts. The stipulation of facts consisted of, in great part, the facts herein summarized. Based upon the stipulated facts, the hearing officer found that the taxpayer had a statutory exemption from payment of the use tax, "if one considers the form and ignores substance" and that there was no indication in the stipulation of a valid business purpose served by the arrangement. "In matters of form, Taxpayer appears to have achieved tax exempt status. In matters of substance, Taxpayer is an Illinois user of tangible personal property purchased at retail with the Bank acting as a mere conduit for the principal if not sole purpose of tax evasion." Based upon the hearing officer's findings, the Department of Revenue issued a final assessment.
In an action in administrative review challenging the final assessment, the circuit court of Cook County found that the taxpayer was legally entitled to the exemption provided by section 3 of the UTA, that the business arrangement was structured for the purpose of tax avoidance, and that such tax avoidance is compatible with the law. Judgment was entered in favor of First Chicago, and against the Department of Revenue.
The Department of Revenue's first argument on appeal is that section 3 of the UTA does not exempt First Chicago from Use Tax Act liability. First Chicago argues that section 3 does apply by its stated terms, and furthermore, that Congress intended that such an exemption should occur.
The Department bases its argument upon language in Caterpillar Tractor Co. v. Department of Revenue (1970), 47 Ill.2d 278, 265 N.E.2d 675, where the Illinois Supreme Court, in reference to purchases of imported machinery from an Illinois retailer, stated:
"Since these transactions would not be taxable under the Retailers' Occupation Tax Act, the [trial] court concluded that section 3 of the Use Tax Act exempted [the taxpayer] from the imposition of a use tax.
The Department of Revenue, however, contends that this exemption in section 3 was intended only to exempt certain types of transactions from the operation of the use tax, such as isolated or occasional sales or sales incidental to service which are not subject to the retailers' occupation tax even if all elements of the sale occur in Illinois. (See Ill. Rev. Stat. 1969, ch. 120, pars. 440, 440(a).) We agree with this construction." (47 Ill.2d 278, 281, 265 N.E.2d 675, 677.)
The court based its conclusion upon the fact that if the use of imported goods by Illinois residents were not subject to the use tax, the tax base of ROTA and UTA would be impermissibly impaired, contrary to the legislature's intentions. In the case at bar, the Department makes the same argument, that the legislature did not intend in section 3 of the Use Tax Act to diminish the tax base. It is further argued that questions of tax exemptions are ...