Appeal from the Appellate Court for the First District; heard
in that court on appeal from the Circuit Court of Cook County,
the Hon. Earl Arkiss, Judge, presiding.
JUSTICE MORAN DELIVERED THE OPINION OF THE COURT:
Rehearing denied March 25, 1982.
The State brought an action against defendant, International Business Machines Corporation (IBM), for nonpayment of $2,595,394.86 in personal property taxes pursuant to the Cook County assessor's 1976 assessment. The circuit court of Cook County found constructive fraud in the assessor's 1976 personal property assessment and entered judgment in favor of IBM. The appellate court affirmed (93 Ill. App.3d 564), and we granted the State leave to appeal.
The issue is whether the trial court's finding of constructive fraud in IBM's 1976 personal property tax assessment is supported by clear and convincing evidence.
The parties stipulated to the admission of many facts and documents into evidence which were thoroughly enumerated by the appellate court. To summarize briefly, for the years 1972 through 1976, IBM timely filed corporate personal property tax returns which showed valuations for all classes of personal property owned by IBM and located, or having a business situs, in Cook County. For 1976, the assessor entered assessed valuations for all classes of personal property at IBM's locations in the precise amount set forth on its return. However, the assessor increased the value of the portion of line-item 10, entitled "machines & tools used by IBM & with customers," attributable to One IBM Plaza, from $26,709,080 to an assessed value, before equalization, of $47,376,414. IBM arrived at its valuation for line-item 10 in accordance with the 1976 Rules of Valuation published by the assessor. Those rules provided:
"Depreciable assets, Item Nos. 8 and 10 should be reported at 35% of Net book value (Net book value is determined by deducting accumulated depreciation from original cost.) Assets depreciated to less than 20% of their original value should be reported at 20% as long as they possess some degree of utility to the owner."
The assessed value entered by the Cook County collector was approximately 62% of the net book value of IBM's machinery and equipment as earlier quoted. IBM made available to the assessor its 1976 inventory of data processing machines with its 1976 personal property tax return. The inventory consisted of a three-volume computer printout showing the description, type and serial number, manufacturing cost, depreciated manufacturing cost, and the date of manufacture for each item of machinery and equipment owned by IBM and leased to customers located in Cook County on April 1, 1976.
IBM paid personal property taxes to the Cook County collector for 1976 in the amount of $3,591,925.68 based upon its assessment of personal property. The State sought an added $2,595,394.86 based on its assessment of defendant's personal property.
The only evidence offered by the State was admitted pursuant to stipulation. It consisted of the 1976 tax bill, IBM's 1976 personal property tax return and supporting documents, a worksheet of the assessor indicating the increase in valuation made by him, and a stipulation that $2,595,394.86 had not been paid. IBM offered the following documents, pursuant to stipulation, which the court admitted into evidence: The three-volume inventory printout described above, IBM's personal property tax returns for 1972-76 and supporting documents filed therewith, and the Rules of Valuation of the Cook County assessor for each of the years 1972 through 1976.
IBM also offered the evidence deposition of James Meehan, which was admitted into evidence without objection. Meehan was chief of the personal property division of the Cook County assessor's office and was principally responsible for the assessment of IBM's personal property located in Cook County in 1972 through 1976. Meehan testified that on or about April 1, 1976, taxpayers were sent the 1976 Rules of Valuation along with personal property tax returns. The rules informed taxpayers of the procedure that should be followed in valuing their personal property. Meehan stated that for every year from 1972 through 1976 he calculated an increase that brought IBM's total reported valuation for all personal property up to the previous year's total assessed valuations. That total increase was added on to line-item 10. Meehan testified that $21,667,334 had to be added to bring the total 1976 valuation figure reported by IBM up to the 1972 through 1975 levels. He then stated that for some unknown reason he deducted $1 million from the increase, bringing it to $20,667,334. This amount was then added to line-item 10.
Meehan also testified that in 1972 IBM had submitted an inventory printout similar to the one in the instant case which he did not attempt to study because it would have been a "back-breaking job" and that one had been offered to him for the year 1973 which he refused to inspect. The 1976 computer printout was not submitted to the assessor, but was available to him. Meehan, however, did not attempt to obtain the printout nor did he tell IBM's attorney what information would satisfy him. Rather, he used the previous year's valuation figure. Meehan also stated that IBM's attempts to explain its 1976 schedule were not "sufficient under the circumstances." As the appellate court noted, Meehan was unable to identify any additional information that could be used to verify IBM's reported valuation.
Richard Norcross, a tax analyst for IBM who prepared IBM's Cook County personal property tax returns in 1976, testified as to how the three-volume printout containing the personal property information was compiled. Following compilation of that information, the total figures in the printout were transferred to IBM's consolidated balance sheet. Norcross testified that these totals were used in completing the multiple-recap sheet submitted along with the 1976 return. He testified that the line-item 10 valuation was based upon (1) data processing machines with customers, (2) uninstalled machines at branch offices and warehouses, (3) IBM diagnostic tools at branch offices and warehouses, and (4) data processing machines at branch offices. The actual figure for line-item 10 was arrived at by taking 35% of the net book value of those items in accordance with the assessor's rules. Norcross also testified that the valuations for all the other line items of property on the multiple-recap sheet were determined by following a similar procedure, in each case applying the proper percentage in accordance with the Rules of Valuation. The total valuations for each class of property for all locations were then transcribed in the 1976 personal property tax schedule under "Owner's Valuation."
The return, after being reviewed, was sent to John Dixon, director of excise and property taxes at IBM, who signed it. Dixon testified as to how IBM arrived at the values for machinery and equipment. He explained that the original cost figure represented labor, overhead and material that was needed in fabricating, assembling and testing each of the units of equipment. Dixon testified that the figures for depreciated cost value on the printout were arrived at by deducting accumulated depreciation from the original cost. He stated that the depreciated cost reported on the personal property tax return was never less than 20% of original cost, as per the assessor's Rules of Valuation.
The circuit court found that IBM had correctly reported the value of property on its 1976 return in accordance with the assessor's Rules of Valuation and had offered to support its valuations with detailed data. It found that the assessor arbitrarily increased IBM's assessment to that of the previous year, minus an unexplained $1 million. The court concluded that this constituted constructive fraud, and ...