Appeal from the Circuit Court of Sangamon County; the Hon.
Richard E. Mann, Judge, presiding.
JUSTICE MILLS DELIVERED THE OPINION OF THE COURT:
Gas Revenue Tax Act interpretation.
What is the definition of "total long term debt" as a component of "invested capital"?
Illinois Power and the Department of Revenue could not agree.
The trial court sided with Revenue.
We hold with Illinois Power.
Ergo, we reverse and remand.
Section 2a.1 of the Gas Revenue Tax Act (Ill. Rev. Stat. 1981, ch. 120, par. 467.17a.1) imposes a tax on those utilities subject to the Act, "in an amount equal to .8% of [such utility's] invested capital for the taxable period." The tax was enacted as one of the replacement taxes for the personal property tax and became effective July 1, 1979. The tax is in addition to those imposed by the State on income and gross receipts.
On April 3, 1981, plaintiff Illinois Power Company, a utility subject to the Act, filed suit in the circuit court of Sangamon County against defendants, J. Thomas Johnson and Jerry Consentino, in their capacities as Director of Revenue of the Department of Revenue, and State Treasurer, respectively, seeking injunctive relief against portions of the tax which were assessed against it for the calendar year 1980. Plaintiff paid, under protest, the portion of the tax in dispute before filing suit. The complaint requested that Director Johnson and his agents be enjoined from depositing the money paid under protest into the State treasury and from taking any action against plaintiff for those funds. The complaint also requested that Treasurer Consentino be ordered to refund to plaintiff any funds paid under protest that had been received by the treasurer.
The trial court granted certain temporary relief, but, after a bench trial, it entered an order on October 19, 1982, denying the permanent relief requested. Plaintiff appeals. We reverse.
Section 1 of the Act defines "invested capital" as:
"that amount equal to (i) the average of the balances at the beginning and end of each taxable period of the taxpayer's total stockholder's equity and total long-term debt, less investments in and advances to all corporations, as set forth on the balance sheets included in the taxpayer's annual report to the Illinois Commerce Commission for the taxable period; (ii) multiplied by a fraction determined under [the Illinois Income Tax Act]." (Emphasis added.) (Ill. Rev. Stat. 1981, ch. 120, par. 467.16.)
Section 1 also defines "taxable period" as "each period which ends after the effective date of this Act and which is covered by an annual report filed by the taxpayer with the Illinois Commerce Commission." (Ill. Rev. Stat. 1981, ch. 120, par. 467.16.) Plaintiff files this report on a calendar year basis. The pertinent forms of the report are here set forth:
The dispute between the parties concerns the calculation of items to be considered in determining the "total long-term debt" component of "invested capital" under the provisions of section 2a.1. Plaintiff maintains that certain adjustments should be made to the total face amount of bonds outstanding to obtain a true "total long-term debt" balance. It would make (1) a subtraction for the unamortized discount and expense which it incurred upon the issuance of bonds, and (2) an addition for the unamortized premium realized from the issuance of bonds. Defendants maintain that no such adjustments should be made. For the year 1980, plaintiff's tax was assessed at an amount $32,362.06 higher than it would have been had its method of computation been used. That sum was paid under protest.
When a corporation such as plaintiff floats a bond issue, a usual method is to offer bonds of a particular maturity at a stated face amount and interest rate. The bonds are then bid upon and sold for an amount that usually varies from the face amount of the bonds, creating an effective interest rate that is either greater or less than that stated on the bonds. If the bonds are sold at a greater price than the face amount, they are said to have been sold at a premium. If sold at a lower price, they are said to have been sold at a discount. Under generally accepted accounting principles and under the requirements of the Illinois Commerce Commission, the premium or discount and the expenses of the issuance of the bonds are amortized over the life of the bonds. The amortization of the discount and costs of issuance constitute expenses and the amortization of the premium constitutes income.
Plaintiff contends that it is necessary to make the adjustments it proposes to determine a true amount for "invested capital" because: (1) Money spent for the expenses of the issuance of bonds is not available for the purchase of assets for the corporation; (2) if bonds are issued at a discount, the full face amount of the bonds is never received by the corporation; (3) when bonds are issued at a premium, a sum in excess of the face amount of the bonds is received by the corporation, and unless used for expenses of issuance, is available for investment in assets.
The gradual amortization of the debit account of bond discounts and expenses decreases stated profits, thereby decreasing "stockholder's equity," while at the same time true long-term debt would be increasing by the same amount. The reverse is true for amortization of premiums. Plaintiff's theory was supported by the undisputed testimony of accounting experts that, under generally accepted accounting principles, to determine actual "invested capital," the face amount of the bonds would be so adjusted. Evidence was also presented that for the purpose of determining invested capital for setting utility rates, ...