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Brown v. Dept. of Revenue

OPINION FILED SEPTEMBER 16, 1980.

DENSIL BROWN ET AL., PLAINTIFFS-APPELLANTS,

v.

THE DEPARTMENT OF REVENUE ET AL., DEFENDANTS-APPELLEES.



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

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

Rehearing denied October 22, 1980.

Plaintiffs, Densil and Peggy Brown (hereinafter referred to as taxpayers), filed a complaint in the circuit court of Cook County pursuant to the provisions of the Administrative Review Act (Ill. Rev. Stat. 1975, ch. 110, par. 264 et seq.) to obtain judicial review of the decision rendered by the Illinois Department of Revenue (hereinafter referred to as the Department) which affirmed the tax deficiency assessed against the taxpayers by the Director of Revenue. The taxpayers appeal from the order of the circuit court which affirmed the decision of the Department.

On August 1, 1969, the Illinois Income Tax Act (hereinafter referred to as the Act) (Ill. Rev. Stat. 1975, ch. 120, par. 1-101 et seq.) became effective. The Act grants to non-corporate taxpayers who have sold property during the year a deduction equal to the amount of appreciation which accrued prior to the effective date of the Act. (Ill. Rev. Stat. 1975, ch. 120, pars. 2-203(a)(2)(F), 2-203(c)(2)(F); Warren Realty Co. v. Department of Revenue (1978), 62 Ill. App.3d 450, 451, 379 N.E.2d 100, appeal denied (1978), 71 Ill.2d 622.) This deduction is known as the "valuation limitation amount." (Ill. Rev. Stat. 1975, ch. 120, par. 2-203(e).) In this way non-corporate taxpayers may capitalize appreciation which accrued prior to August 1, 1969. (Warren Realty Co., 62 Ill. App.3d 450, 451.) The sole issue presented for review is whether the shareholders of a small business corporation may deduct on their individual tax returns, as a valuation limitation amount, gain realized from the sale by the corporation of its equipment and goodwill.

For reasons hereinafter set forth, we affirm.

The taxpayers, Densil and Peggy Brown, were shareholders from November 1961 until December 1973 of Brown Clinical Laboratories, Inc. (hereinafter referred to as the corporation), a corporation which elected, pursuant to 26 U.S.C. § 1372 (1976), to be taxed as a small business corporation, commonly referred to as a "subchapter S corporation" or a "tax option corporation." In April 1970 the corporation sold all its assets including its equipment and goodwill. The gain realized from the sale of assets was reported to the Internal Revenue Service on the installment plan in accordance with 26 U.S.C. § 453 (1976). *fn1

The undistributed taxable income of the corporation for its taxable year ending October 31, 1972, was reported, as required by 26 U.S.C. §§ 1373 and 1375, on the taxpayers' Federal individual income tax return for the calendar year 1972. This undistributed taxable income included a long-term capital gain of $53,980.42, which was realized from the sale of the corporation's equipment and goodwill. The adjusted gross income (which included the $53,980.42 gain) from the taxpayers' Federal individual income tax return (Form 1040) was then reported on the taxpayers' Illinois individual income tax return (Form IL-1040) as required by section 203 of the Act (Ill. Rev. Stat. 1975, ch. 120, par. 2-203). From the adjusted gross income the claimed valuation limitation amount of $49,661.99 was deducted to arrive at the taxpayers' income for Illinois tax purposes. The Department disallowed the deduction, concluding that the long-term capital gain realized from the sale by the corporation of its assets was the corporation's gain and not the gain of the individual (non-corporate) shareholders. A notice of deficiency was issued in the amount of $1,241.55.

Section 203(a) of the Act provides in pertinent part:

"(a) Individuals.

(1) In general. In the case of an individual, base income means an amount equal to the taxpayer's adjusted gross income for the taxable year as modified by paragraph (2).

(2) Modifications. The adjusted gross income referred to in paragraph (1) shall be modified by adding thereto the sum of the following amounts:

and by deducting from the total so obtained the sum of the following amounts;

(F) The valuation limitation amount." Ill. Rev. Stat. 1975, ch. ...


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