Appeal from the Circuit Court of Cook County; the Hon. Earl
Arkiss, Judge, presiding.
JUSTICE MCGILLICUDDY DELIVERED THE OPINION OF THE COURT:
Rehearing denied December 2, 1982.
This action, brought by the trustees of the Chicago Dock and Canal Trust (the Trust), sought administrative review of the decision of the Illinois Department of Revenue (the Department) denying the Trust's claim for a refund of certain State income taxes paid by the Trust. The trustees appeal from an order of the circuit court of Cook County which affirmed the Department's denial.
The issues presented for review are: (1) whether the Illinois income tax constituted an unconstitutional retroactive tax; (2) whether the tax discriminated against the class of corporate taxpayers; and (3) whether the Trust should be treated as a corporation for Illinois income tax purposes.
The Chicago Dock and Canal Trust was organized on January 22, 1962, as an Illinois business trust to succeed to the business and assets of the Chicago Dock and Canal Company (the Company), an Illinois special charter corporation. The conversion to the trust was a qualified reorganization for Federal income tax purposes. The trust succeeded to the Company's Federal income tax bases in assets acquired from the Company, and the Trust's holding period for those assets included the Company's holding period.
On October 31, 1972, the Trust sold certain property that had been held by the Company since the 1800's. The sale price of that property was $4,500,000; and in accordance with section 1053 of the Internal Revenue Code of 1954 (I.R.C. sec. 1053), the Federal tax basis for that property was $424,000, its fair market value as of March 1, 1913. For Federal income tax purposes, the Trust reported a long-term capital gain of $3,560,093.53. The Trust also included this gain on its Illinois income tax return for its fiscal year ending April 30, 1973, and, at the 4% tax rate, paid $142,403.74 in taxes to the State.
On August 13, 1976, the Trust filed a claim for refund for overpayment of its Illinois income taxes with the Department of Revenue. In computing the refund amount, the Trust applied the provisions of section 203(e)(2)(B) of the Illinois Income Tax Act (the Income Tax Act) (Ill. Rev. Stat. 1973, ch. 120, par. 2-203(e)(2)(B)) and reduced its capital gain from the real estate sale by the amount the property appreciated prior to August 1, 1969, the date the Act became effective. The pre-August 1, 1969, appreciation amount, known as the valuation limitation amount, was defined by statute as: "that amount which bears the same ratio to the total gain reported in respect of the property for federal income tax purposes for the taxable year, as the number of full calendar months in that part of the taxpayer's holding period for the property ending July 31, 1969 bears to the number of full calendar months in the taxpayer's entire-holding period for the property." (Ill. Rev. Stat. 1973, ch. 120, par. 2-203(e)(2)(B).) In the instant case, the number of months in the entire holding period (March 1, 1913, to October 31, 1972) was 716; and the number of months in the Trust's holding period prior to the date of the Act (March 1, 1913, to August 1, 1969) was 677. Thus, the Trust applied the ratio of 677/716 to the Federal gain of $3,560,093.53 and determined the valuation limitation amount to be $3,366,177.82. The Trust thereupon reduced its taxable gain by the valuation limitation amount to arrive at a net gain of $193,915.71. Applying a 4% tax rate, the Trust determined that it should have paid income taxes in the amount of $7,756.63 rather than $142,403.74. Therefore, the Trust requested a refund of Illinois income taxes in the amount of $134,647.11.
Although the claim for refund was filed on August 13, 1976, the Department of Revenue did not issue its notice of decision advising the Trust that the claim was denied until April 30, 1980. A corrected notice was issued on May 8, 1980. The Trust sought administrative review. The circuit court of Cook County affirmed the Department's decision, and this appeal followed.
The Illinois Income Tax Act, as originally enacted, did not provide a valuation limitation deduction. *fn1 However, a valuation limitation was inferred when in Thorpe v. Mahin (1969), 43 Ill.2d 36, 250 N.E.2d 633, the Illinois Supreme Court determined that the legislature intended to tax only that portion of capital gains accruing after the Income Tax Act became effective. In 1971, the legislature amended the Income Tax Act and created the valuation limitation deduction for individuals, trusts and estates. (See Ill. Rev. Stat. 1973, ch. 120, pars. 2-203(a)(2)(F), 2-203(c)(2)(F).) The valuation limitation was not made applicable to corporations. See Ill. Rev. Stat. 1973, ch. 120, par. 2-203(b).
The Trust argues that without the valuation limitation deduction, the Illinois income tax, as applied to corporations, is an unconstitutional retroactive tax because it taxes corporate income realized from the sale of property that appreciated in value prior to the effective date of the Income Tax Act. The Trust contends that Thorpe held that the tax was a retroactive tax without the valuation limitation. The Trust argues that the legislature, by denying the valuation limitation deduction to corporations, ignored the judicial dictates in Thorpe and thus violated the separation of powers doctrine (Ill. Const. 1970, art. II, sec. 1). The Trust further contends that the trial court in the instant case acted improperly by ignoring Thorpe and ruling that the income tax was not an unconstitutional retroactive tax.
We reject the Trust's arguments since Thorpe did not determine whether the income tax, as it was originally enacted, was an unconstitutional retroactive tax. While recognizing that retroactive revenue laws may be unconstitutional if they are harsh and oppressive, the court eliminated the retroactive aspect of the Illinois income tax when it determined that the legislature intended to tax only that portion of capital gain accruing after the effective date of the Act. Furthermore, 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 supreme court specifically stated that Thorpe was decided without reaching the question of whether retroactive application rendered the tax unconstitutional. *fn2 51 Ill.2d 452, 456, 283 N.E.2d 465, 467.
The constitutionality of the Income Tax Act was, however, decided by this court in Warren Realty Co. v. Department of Revenue (1978), 62 Ill. App.3d 450, 379 N.E.2d 100. In that case, the court adopted the realization of income theory that had been recognized in Justice Davis' dissenting opinion in Mitchell v. Mahin (1972), 51 Ill.2d 452, 458, 283 N.E.2d 465, 468. Warren Realty held that the Illinois income tax was not retroactive despite the fact that a portion of the gain taxed was attributable to increases in value occurring prior to the effective date of the Income Tax Act since the gain or profit was not realized until after such date.
In the case at bar, the Trust argues that Warren Realty should be rejected because this court unnecessarily discussed the retroactive taxation issue and because, absent alleged dilatory tactics by the Department of Revenue, the case at bar would have preceded Warren Realty at the appellate court level and would thus not have been controlled by Warren Realty.
We are not persuaded by the Trust's arguments regarding the precedential value that should be accorded to Warren Realty. Furthermore, we note that the majority view in this country, as stated in City National Bank v. Iowa State Tax Com. (1960), 251 Iowa 603, 102 N.W.2d 381, is that a taxing act is not retroactive when it taxes gain or profit realized by the sale of property subsequent to ...