APPEAL from the Circuit Court of Cook County; the Hon. F.
EMMETT MORRISSEY, Judge, presiding.
MR. JUSTICE LINN DELIVERED THE OPINION OF THE COURT:
This suit was brought by Bodine Electric Co. (taxpayer) to review the decision of the Illinois Department of Revenue denying the taxpayer's claim for a refund of its 1969 and 1970 State income taxes. In reversing the Department on administrative review and ordering the refund, the circuit court of Cook County held that the taxpayer was entitled to carry back and deduct a 1971 net operating loss from taxable years 1969 and 1970. From this portion of the final order, defendant, Director of the Department of Revenue, appeals.
For the relevant years 1968 through 1971, the taxpayer filed consolidated Federal income tax returns with its wholly owned subsidiary, Microdyne, Inc. The taxpayer was able to offset its own income against the substantial yearly losses of its subsidiary by filing these consolidated Federal returns. After the Illinois Income Tax Act (Ill. Rev. Stat. 1971, ch. 120, par. 1-101 et seq.), went into effect on August 1, 1969, the taxpayer and its subsidiary were required by section 203(d)(2)(E) of the Act (Ill. Rev. Stat. 1971, ch. 120, par. 2-203(d)(2)(E)) to file separate returns for State tax purposes. Accordingly, the taxpayer filed separate State returns for 1969, 1970 and 1971. By reporting income on a separate return basis the taxpayer reported more taxable income for State purposes than for Federal purposes.
On April 1, 1971, the taxpayer sold its interest in Microdyne, Inc., for $1 and the subsidiary's accounts receivable for $1000. This sale was reflected on the taxpayer's 1971 separate State income tax return as a $2,384,337 net operating loss. However, on its consolidated Federal income tax return for 1971, the taxpayer reported taxable income of $57,707.
On September 15, 1972, the taxpayer filed with the Illinois Department of Revenue, claims for State tax refunds totaling $95,356.63. In its claims, the taxpayer asserted that it was entitled to carry back the net operating loss reflected only on its 1971 separate State return and deduct the loss to offset its 1969 and then its 1970 State taxable income. Because the taxpayer had reported taxable income on its consolidated Federal return for 1971, it had no net operating loss to carry back for Federal purposes. The Department denied the taxpayer's claims for refund and this action ensued.
On August 1, 1969, the Illinois Income Tax Act went into effect. Under the Act, a corporation's base income is equal to the taxpayer's "taxable income" (Ill. Rev. Stat. 1971, ch. 120, par. 2-203(b)(1)), as adjusted by certain specified items (Ill. Rev. Stat. 1971, ch. 120, par. 2-203(b)(2)). Taxable income is further defined as "taxable income properly reportable for Federal income tax purposes for the taxable year under the provisions of the Internal Revenue Code." Ill. Rev. Stat. 1971, ch. 120, par. 2-203(d)(1).
With special regard to a corporation such as the instant taxpayer, "which is a member of an affiliated group of corporations filing a consolidated income tax return for the taxable year for federal income tax purposes," Federal taxable income means "taxable income determined as if such corporation had filed a separate return for federal income tax purposes for the taxable year and each preceding taxable year for which it was a member of an affiliated group." (Ill. Rev. Stat. 1971, ch. 120, par. 2-203(d)(2)(E).) Read together, these provisions mandate that the taxpayer's State base income is equal to its Federal taxable income as determined on a separate return basis and subject to specified adjustments. Although the taxpayer in this case filed consolidated Federal returns with its subsidiary, it was required to recompute its Federal taxable income on a separate return basis to arrive at its State base income. It is not contended in this appeal that the taxpayer failed to properly employ this method to compute its State taxes for the years in question.
The issue raised by this appeal is whether the taxpayer is entitled to a State tax refund of 1969 and 1970 taxes for a 1971 net operating loss deduction. During the relevant time period, section 172 of the Internal Revenue Code (26 U.S.C. § 172), permitted net operating loss deductions to be carried back three years from the year of the loss and then carried forward five years until the entire loss was absorbed. The taxpayer's $2,384,337 net operating loss, resulting from its sale of Microdyne, Inc., in 1971, was reflected only on its 1971 State income tax return after it computed its Federal taxable income on a separate return basis. Because it filed a consolidated Federal return, no net operating loss appeared on its Federal return and the taxpayer received no refund of Federal income taxes paid.
On appeal, the Department claims that the taxpayer is not entitled to a refund of Illinois taxes because when the taxpayer's net operating loss is carried back three years as required by section 172, the entire loss is absorbed by 1968 Federal taxable income, and, thus, there is no part of the net operating loss to carry forward to 1969 or 1970. The taxpayer contends that since the net operating loss appeared only on the State return, it is a State loss that can only be offset by State taxable income and, since there was no State income tax act in 1968, none of the net operating loss can be absorbed in 1968. Any other construction, the taxpayer argues, would result in an impermissible retroactive application of the Illinois Income Tax Act.
The relationship between the Illinois Income Tax Act and the Internal Revenue Code is of primary importance. The taxpayer claims the authority granted by section 172, to carry back and deduct net operating losses from prior years, is incorporated into the Illinois Act by virtue of section 102 of the Act (Ill. Rev. Stat. 1971, ch. 120, par. 1-102), which states:
"Except as otherwise expressly provided or clearly appearing from the context, any term used in this Act shall have the same meaning as when used in a comparable context in the United States Internal Revenue Code of 1954 or any successor law or laws relating to federal income taxes and other provisions of the statutes of the United States relating to federal income taxes as such Code, laws and statutes are in effect for the taxable year."
The trial court adopted the taxpayer's position that section 102 incorporates by reference each and every provision of the Internal Revenue Code, creating two separate and distinct taxing statutes and, consequently, two separate and distinct net operating loss provisions. We disagree. Section 102 provides only that as a rule of construction terms will be given the same meaning for purposes of both State and Federal statutes. Thorpe v. Mahin (1969), 43 Ill.2d 36, 250 N.E.2d 633, does not hold otherwise. There is no provision in the Illinois Act which specifically adopts all federally ...