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Caterpillar Tractor Co. v. Lenckos

OPINION FILED OCTOBER 10, 1979.

CATERPILLAR TRACTOR CO. ET AL., PLAINTIFFS-APPELLEES AND CROSS-APPELLANTS,

v.

DANIEL J. LENCKOS, ACTING DIRECTOR, ILLINOIS DEPARTMENT OF REVENUE, ET AL., DEFENDANTS-APPELLANTS AND CROSS-APPELLEES. — (COCA-COLA COMPANY ET AL., INTERVENING PLAINTIFFS-APPELLANTS; MULTISTATE TAX COMMISSION, AMICUS CURIAE.)



APPEAL from the Circuit Court of Peoria County; the Hon. STEPHEN J. COVEY, Judge, presiding.

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

Rehearing denied November 13, 1979.

There is no dispute as to the facts pertinent to the issues presented on this appeal. Caterpillar Tractor Co. is a California corporation with its principal headquarters at 100 N.E. Adams Street, Peoria, Illinois. Caterpillar Tractor Co. is the parent corporation of a number of subsidiaries in the United States and foreign countries. Certain of these subsidiaries are also subject to Illinois income tax and their cases were joined with that of Caterpillar Tractor Co. before the Illinois Department of Revenue (hereinafter referred to as the Department), before the court below and in this appeal. Joined were Caterpillar Americas Co. (Americas), Caterpillar Credit Corp. (Credit), Caterpillar Finance Corp. (Finance) and Caterpillar Machinery Corp. (Machinery). Coca-Cola and 15 other companies were permitted to intervene by the trial court. On appeal we permitted the Multistate Tax Commission to file an amicus curiae brief.

Caterpillar Tractor Co. and its subsidiaries together constitute the largest manufacturer of earthmoving, construction and materials handling equipment in the world. Each of the companies carries out one or more production, marketing, and service functions as part of an integrated enterprise. For example, Caterpillar Tractor Co. produces, sells and services virtually every item in the Caterpillar line of products. Americas, Caterpillar Overseas, S.A., and Caterpillar Far East, Ltd., are marketing companies which engage in sales and service functions in specific geographic areas. Caterpillar Tractor Co., Ltd., Caterpillar Belgium, Caterpillar of Canada, Caterpillar of Australia and other subsidiaries manufacture and sell components of, or complete machines in, the Caterpillar product line. Other companies such as Caterpillar Overseas Credit Corporation, S.A., Caterpillar of Delaware, and Credit provide financing and other services to other Caterpillar companies and to independent Caterpillar dealers which market Caterpillar products in their particular area.

Many of the Caterpillar machines are manufactured by more than one of the Caterpillar companies. Each type of machine, wherever manufactured, is identical to other machines manufactured at other plants throughout the world. Worldwide product uniformity permits maximum product and part interchange and allows any particular company to manufacture not only its own product but also components to be used in the manufacture of products by other Caterpillar companies. Consequently, there is a high degree of intercompany sales of parts and components. Product uniformity also allows for substantial uniformity of advertising, warranties, employee training and other aspects of the business carried on by each company.

Worldwide product uniformity is maintained by having the responsibility for design control, product specifications and quality assigned to a central design group located at Caterpillar Tractor Co.'s general office in Peoria. In order to further promote uniformity of products and to maximize the efficient operation of all of the companies, Caterpillar Tractor Co. exercises centralized direction over its subsidiaries, including a direction and control over manufacturing standards, budgets, accounting, compensation levels and benefits, insurance, labor contracts, and research and development. As a result of the nature and operations of Caterpillar Tractor Co. and its subsidiaries, their operations are integrated with, dependent upon, and contribute to the overall success of the business activities of the group carried on throughout the world.

Caterpillar Tractor Co. and each of the subsidiaries subject to tax in Illinois, hereinafter referred to jointly as the plaintiffs, initially filed Illinois income tax returns for each of the years 1969 through 1974 on a separate basis utilizing the statutory apportionment formula. In these separate returns each company, where appropriate, subtracted from its Federal taxable income deemed dividends includible in Federal taxable income under section 78 of the Internal Revenue Code (hereinafter referred to as "deemed dividend income") and Subpart F income and deducted their own foreign income taxes paid or accrued which each company had credited for Federal income tax purposes.

The Department audited the plaintiffs' returns for each of the years 1969 through 1974 and denied the subtractions for the deemed dividend income and Subpart F income and foreign income taxes, proposing additional assessments of tax as a result of these adjustments. The plaintiffs paid said assessments, but on February 21, 1974, they each filed refund claims for the years 1969, 1970 and 1971 (excepting Finance, which filed a claim for 1971 only) requesting the refund of the amount of the assessments paid plus additional amounts resulting from the further subtraction of foreign dividends, interest and royalties to the extent included in base income on a nonunitary basis.

With one exception, the claims for refund relating to the taxable year 1969 were not timely filed since the three year period prescribed by the statute of limitations had expired. On May 18, 1973, Caterpillar Tractor Co. paid additional income tax and interest for the 1969 taxable year totaling $175,965.37. Therefore, the period of limitations had not expired as to this sum of $175,965.37. Six months later, on August 21, 1974, these claims were deemed denied, and subsequently protests to this deemed denial of their claims were filed in which hearings were requested.

On October 15, 1974, timely supplemental claims for refund of overpayments for 1970 and 1971 were filed asserting the applicability of the unitary apportionment method. Protests to the denial of these claims were filed on May 19, 1975.

On May 7, 1976, each of the taxpayers filed timely supplemental claims for refund of overpayment for the years 1972 through 1974. Claims also asserted the applicability of the unitary apportionment method.

Thereafter, as a result of audit examinations, 30-day letters were issued by the Department to taxpayers for the years 1969 through 1974. The taxpayers responded with timely statements of objections, and notices of a deficiency were issued by the Department on March 8, 1978, for the tax years 1969 through 1974. Timely protests were filed on March 10, 1978, and on March 14 and 15, 1978, an administrative hearing was held before the Illinois Department of Revenue.

The Department issued a notice of decision which held, in relevant part, that the operations of Caterpillar Tractor Co. and its domestic and foreign subsidiaries constituted a unitary business during the period August 1, 1969, to December 31, 1969, and for each of the calendar years 1970 to 1974. The Department agreed with the plaintiffs that a fair apportionment of the income of Caterpillar Tractor Co. and its subsidiaries to Illinois could only be achieved through application of the unitary method of apportionment. Consequently, the Department found that the plaintiffs should be allowed, as they had requested, to use the unitary method of apportionment in determining their income tax liability in each of the years 1970 through 1974.

In addition to the Department's ultimate findings regarding the existence of a unitary business and the applicability of the unitary method of apportionment for the years 1970 through 1974, the Department made certain subsidiary findings regarding the method of computing the plaintiffs' Illinois income tax liability on the unitary method of apportionment. Finally, the Department determined that the plaintiffs were also required to ...


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