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Warren Realty Co. v. Dept. of Revenue

OPINION FILED JULY 10, 1978.

WARREN REALTY COMPANY, PLAINTIFF-APPELLANT,

v.

THE DEPARTMENT OF REVENUE, DEFENDANT-APPELLEE.



APPEAL from the Circuit Court of Cook County; the Hon. EARL ARKISS, Judge, presiding.

MR. PRESIDING JUSTICE GOLDBERG DELIVERED THE OPINION OF THE COURT:

Warren Realty Company (plaintiff) made payment under protest of an assessment of income taxes and penalties to the Illinois Department of Revenue. Plaintiff filed suit for refund in the circuit court. Plaintiff has appealed from an order dismissing the suit.

Plaintiff, a Missouri corporation qualified to do business in Illinois, purchased improved real estate in Illinois in 1950. Each year thereafter plaintiff took a deduction on its Federal income tax return for depreciation on the improvements. Plaintiff sold the property in 1972 for more than its original cost. On its Federal income tax return plaintiff reported as gain the amount by which the sale price exceeded the original cost less depreciation. In this manner plaintiff included in its taxable income the appreciation which occurred in prior years.

On August 1, 1969, the Illinois Income Tax Act went into effect. (Ill. Rev. Stat. 1977, ch. 120, par. 1-101 et seq.) The Act grants to non-corporate taxpayers who have sold property during the year a deduction equal to the amount of appreciation which occurred prior to the effective date of the Act. (Ill. Rev. Stat. 1977, ch. 120, pars. 2-203(a)(2)(F), 2-203(c)(2)(F).) This deduction is known as the "valuation limitation amount." (Ill. Rev. Stat. 1977, ch. 120, par. 2-203(e).) In this way non-corporate taxpayers may capitalize appreciation which occurred prior to August 1, 1969.

On its 1973 Illinois income tax return plaintiff deducted the valuation limitation amount from its Federal taxable income in arriving at its net income for Illinois tax purposes. Defendant disallowed the deduction because plaintiff, a corporate taxpayer, was not entitled thereto. (Ill. Rev. Stat. 1977, ch. 120, par. 2-203(b).) Plaintiff paid the tax claimed as due plus interest under protest and this litigation followed.

In this court, plaintiff contends that the Illinois Income Tax Act (Ill. Rev. Stat. 1977, ch. 120, par. 1-101 et seq.), unconstitutionally taxes corporations at a rate higher than allowed by article IX, section 3(a) of the Illinois Constitution of 1970 by allowing individuals certain deductions not allowed to corporations; and the Illinois Income Tax Act violates the Illinois Constitution of 1970 to the extent it taxes depreciation which was not allowed as a deduction on Illinois income tax returns so that the tax is not measured by income.

In Thorpe v. Mahin (1969), 43 Ill.2d 36, 250 N.E.2d 633, the Illinois Supreme Court held that the Constitution of 1870 permitted the tax on income which had been imposed by the Income Tax Act of 1969. In defining the scope of the Act, the court found that the legislature did not intend to tax the appreciation in property that occurred prior to the effective date of the Act. The court indicated that such a retroactive tax might constitute a deprivation of property without due process of law. Thus, by initiating this value limitation, the court did not reach the issue of the constitutionality of taxing prior appreciations in property.

The legislature subsequently amended the Income Tax Act to provide for the valuation limitation announced in Thorpe. (1971 Ill. Laws 1368, § 1, in part, added subsecs. (a)(2)(E), (c)(2)(E), and (e) to Ill. Rev. Stat. 1969, ch. 120, par. 2-203.) However, this amendment only allowed non-corporate taxpayers to deduct the valuation limitation amount. Thus we are presented with the question which was not decided in Thorpe.

It is plaintiff's contention that "to the extent that the Illinois income tax law is applied to depreciation taken on pre-1969 Federal income tax returns, which depreciation was never allowed on Illinois income tax returns, it is not a tax on income and, therefore, exceeds the constitutional authority of Article IX." In broader terms, plaintiff's argument is that all appreciation occurring prior to the effective date of the Act constituted capital on that date and therefore could not be taxed as income.

In Mitchell v. Mahin (1972), 51 Ill.2d 452, 283 N.E.2d 465, cert. denied (1972), 409 U.S. 982, 34 L.Ed.2d 245, 93 S.Ct. 317, the court reaffirmed its holding that the legislature had intended to include a valuation limitation when it enacted the Income Tax Act. In so doing the court noted that the "General Assembly has seen fit to express itself explicitly on the question by amending [the Act] * * * and, with exceptions not here relevant, has enacted the August 1, 1969, valuation limitation enunciated in Thorpe." (51 Ill.2d 452, 456.) (Emphasis added.) In our opinion, this language indicates tacit approval of the denial of the valuation limitation to corporations.

• 1 More directly, in our opinion, a tax on appreciation occurring prior to the effective date of a taxing act, but not realized until after that date, is a tax on income within the authority granted by article IX of the Illinois Constitution of 1970.

• 2 Justice Davis, in his dissent in Mitchell, presents a thorough review of the law on this subject. (51 Ill.2d 452, 458.) Since the majority in Mitchell did not address itself to this issue, we are free to adopt the reasoning of the dissent. It is important to note the conclusion stated by Justice Davis (51 Ill.2d 452, 464):

"It seems clear from these cases that a tax measured by income is a tax upon realized gain. The fact that a portion of the gain may be attributable to increases in value of the income-producing items prior to the effective date of the Act, or may be attributable to something done prior to such date, does not render the taxing statute retroactive so long as the gain or profit is not `realized' until after such date."

Since plaintiff actually realized no gain until after the effective date of the Act, we conclude that the entire amount of such ...


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