Appeal from the Circuit Court of Cook County; the Hon. Joseph
Wosik, Judge, presiding.
JUSTICE CAMPBELL DELIVERED THE OPINION OF THE COURT:
Rehearing denied July 11, 1983.
Plaintiffs, Continental Illinois National Bank and Trust Company of Chicago (hereinafter the bank), a corporation, and seven subsidiary corporations, Continental Illinois Corporation, Continental Illinois Leasing Corporation, Marina City Building Corporation, Cobak Corporation, Continental Illinois (Delaware) Limited, Continental Illinois Overseas Service Corporation, and Continental Illinois Service Corporation, brought this action seeking income tax refunds. The taxes were paid by the bank under protest pursuant to sections 1 through 2a.1 of "An Act in relation to the payment and disposition of moneys received by officers and employees of the State of Illinois by virtue of their office or employment" (Ill. Rev. Stat. 1977, ch. 127, pars. 170 through 172a) and held in a protest account pending the final disposition of the case. Defendants are the Department of Revenue of the State of Illinois, the Director of Revenue of the Department of Revenue of the State of Illinois, and the Treasurer of the State of Illinois. Defendants have appealed from the judgment entered in favor of plaintiffs on January 13, 1981, and the order of March 20, 1981, denying the motion for reconsideration of said judgment. The Multistate Tax Commission *fn1, with leave of court, was allowed to file an amicus curiae brief.
The issues presented for review are as follows: (1) Whether apportionment of multistate business income to Illinois shall include interest received on United States obligations, which interest is exempt from Illinois income tax, in applying the apportionment formula prescribed in section 304(c) of the Illinois Income Tax Act (Ill. Rev. Stat. 1977, ch. 120, par. 3-304(c)); (2) Whether all amounts paid or accrued to the taxpayer as interest on State and municipal bonds during the taxable year to the extent excluded from (U.S.) gross income, must be included in Illinois income; and (3) Whether underpayment of estimated income taxes, without correction by the final assessment date, requires an underpayment penalty.
The trial court ruled that the following amounts were assessed wrongly and improperly and contrary to law:
Apportionment (#1) $12,175 $22,714 $60,694 Amortization (#2) 48,611 17,749 49,394 Penalty (#3) - - 48,132
and held that plaintiff was entitled to a credit for those monies paid under protest for the taxable year in question.
• 1 The first issue presents a question of first impression in Illinois and relates to whether under the provisions of article 3 of the Illinois Income Tax Act (Ill. Rev. Stat. 1977, ch. 120, par. 3-301 et seq.) the numerator and denominator of the apportionment factor of plaintiff for the years 1973, 1974 and 1975 properly should include the amount of plaintiff's interest income for such years from United States government obligations, even though such interest income was exempt from the Illinois income tax.
Whenever a corporation conducts business in more than one State, a question arises as to how much business income is earned in each of the States where business is transacted. Under the apportionment method, a one-, two-, or three- factor formula is commonly used to determine the percentage of a corporation's business actually conducted within the State. This percentage is multiplied by the corporation's total taxable business income (tax base) in order to determine the portion of taxable income earned within the State. (Ill. Rev. Stat. 1979, ch. 120, par. 3-304.) Apportionment does not increase or decrease the tax base (total taxable income); it determines what portion of that income was earned in each of the States in which a taxpayer transacts business. A corporation's tax base remains constant. "The purpose of the uniform act and article 3 of the Illinois act is to assure that 100%, and no more or no less, of the business income of a corporation doing multistate business is taxed by the States having jurisdiction to tax it." GTE Automatic Electric, Inc. v. Allphin (1977), 68 Ill.2d 326, 335, 369 N.E.2d 841, 845.
In Caterpillar Tractor Co. v. Lenckos (1981), 84 Ill.2d 102, 106-07, 417 N.E.2d 1343, 1346, the supreme court stated:
"Under section 304(a), the Director of Revenue (Director) applies a three-factor (sales, payroll and property) apportionment formula which separately compares the total value of a corporation's in-State and out-of-State sales, payroll, and property, both tangible and intangible, with the total value of the corporation's in-State sales, payroll, and property alone. To illustrate: if the total multistate sales of a corporation are $10 million and its total Illinois sales are $1 million, the Illinois sales would represent one-tenth of the total multistate sales of the corporation, giving a sales factor of 10%. Once the percentage of the other factors, payroll and property, is calculated, the three factors are averaged. This average is then multiplied by the total amount of business income generated by the corporation's in-State and out-of-State operations. If, for example, the sales, payroll and property multistate factors of the corporation are each 10% and its combined business income is $20 million, the amount of business income attributable to Illinois is $2 million."
Article 3 of the Illinois Income Tax Act, which provides for the three-factor formula for the allocation and apportionment of the income of a corporation doing multistate business, contains the language of the Uniform Division of Income for Tax Purposes Act (GTE Automatic Electric, Inc. v. Allphin (1977), 68 Ill.2d 326, 369 N.E.2d 841), and the customary three-factor formula is utilized by most States to measure in-State business activity as follows:
In-State In-State In-State Property Payroll Sales ____________ ____________ ____________ Everywhere Everywhere ...