Appeal from the Circuit Court of Cook County; the Hon. Earl
Arkiss, Judge, presiding.
PRESIDING JUSTICE WILSON DELIVERED THE OPINION OF THE COURT:
This is an appeal by the partners of the Chicago law firm of Winston, Strawn, Smith and Patterson (Winston, Strawn) a law partnership, from an order of the circuit court of Cook County which affirmed the Department of Revenue's denial of plaintiffs' claim for a refund of certain State income taxes. *fn1
Winston, Strawn files its tax returns using a fiscal year basis ending January 31. *fn2 On its Illinois partnership return for fiscal year February 1, 1969, to January 31, 1970, Winston, Strawn reported net income in the amount of $3,061,284.04. Of this total, $2,095,480.76 was reported as net income from February 1, 1969, to July 31, 1969, and was distributed to plaintiffs on or before July 31, 1969. The balance of $965,803.28 was reported as net income for the period from August 1, 1969, to January 31, 1970. Winston, Strawn claimed a subtraction modification for its February to July income and explained that the money "* * * [was] excluded from Illinois modified partnership ordinary income pursuant to [the] specific election hereby claimed under section 2-202(b)(2) of the Illinois Income Tax Act * * *." Section 2-202(b)(2) provides that:
"If the taxpayer so elects, in the case of a taxable year beginning before August 1, 1969 and ending after July 31, 1969, there shall be taken into account in computing base income only those items earned, received, paid, incurred or accrued after July 31, 1969 * * *. The election provided by this paragraph shall be made in such manner and at such time as the Department may by forms or regulations prescribe * * *." Ill. Rev. Stat. 1981, ch. 120, par. 2-202(b)(2).
Plaintiffs report their Federal as well as State income on a calendar year basis which ends December 31. Each partner reported on his Illinois return his distributive share of the firm's net income for the entire fiscal year from February 1, 1969, to January 31, 1970. *fn3 Each also claimed a subtraction modification equal to his share of the firm's income modification of $2,095,480.76. The effect of the subtraction modification was to exclude all of the income that a partner earned between February 1 and July 31, 1969. Thus, in reporting their Illinois income for the 1969 fiscal year, Winston, Strawn as well as each partner excluded income received between February 1, 1969, and July 31, 1969.
The Department of Revenue disallowed the deduction and assessed each partner a tax deficiency. It ruled that section 2-202(b)(2) does not apply to the 1970 tax year; (2) a law firm is not a taxpayer under the Illinois Income Tax Act; and (3) Administrative Regulation section 2-202-2(e)(1) is constitutional. Section 2-202-2(e)(1) provides that:
"Partnerships are not subject to the Illinois income tax and are not taxpayers within the meaning of the Act. [See Section 205(b) and 1501(a)(23).] Accordingly, Section 202(b)
, which provides taxpayers with alternative methods of computing net income for taxable years which begin before and include August 1, 1969, is not applicable to partnerships." Administrative Regulation sec. 2-202-2(e)(1).
The department's ruling was affirmed by the circuit court. This appeal followed. The issues presented for review are: (1) whether Administrative Regulation section 2-202-2(e)(1) is valid; (2) whether a partnership can exercise the income tax election as stated in section 2-202(b)(2); and (3) whether, pursuant to section 2-202(b)(2), an individual partner can elect to exclude his distributive share of partnership income earned before August 1, 1969. For the reasons that follow, we affirm.
Plaintiffs contend that Administrative Regulation 2-202-2(e)(1) is unreasonable because it denies a partnership the same rights as an individual taxpayer yet the partnership must compute base income (for reporting purposes) as though it were an individual. Plaintiffs assert that a partnership should therefore have the same right as an individual to make an exclusion of its pre-August 1 income. Section 2-202-2(e)(1) specifically refers to section 2-205(b) of the Income Tax Act, which in 1969 provided that:
"A partnership as such shall not be subject to the tax imposed by this Act, but shall compute base income as it if were an individual, and shall file such returns and other information at such time and in such manner as may be required * * *." Ill. Rev. Stat. 1969, ch. 120, par. 2-205(b). *fn4
• 1, 2 We find plaintiffs' reasoning unpersuasive. A partnership is not a taxpayer. A partnership serves as an entity for the purpose of calculating and filing informational returns and as a conduit through which the taxpaying obligation passes to the individual partners. The fact that a partnership computes base income as if it were an individual cannot, therefore, be construed to mean that it should have the correlative rights of an individual (nonpartner) taxpayer. To treat a partnership in this manner would be in contravention of the Income Tax Act which carefully provides for the allocation of partnership business and nonbusiness income (Ill. Rev. Stat. 1981, ch. 120, pars. 3-305(a), (b)), and it would be contrary to Illinois case law which recognizes a partnership as a contractual relationship of mutual agency which is formed to carry on a business purpose of a particular kind. (Ramacciotti v. Simpkins (1970), 130 Ill. App.2d 733, 266 N.E.2d 700; Urban v. Brady (1967), 86 Ill. App.2d 158, 230 N.E.2d 65.) Similar language portraying this issue is found in United States v. Basye (1973), 410 U.S. 441, 35 L.Ed.2d 412, 93 S.Ct. 1080, where the Supreme Court held that "the partnership is regarded as an independently recognizable entity apart from the aggregate of its partners. Once its income is ascertained and reported, its existence may be disregarded since each partner must pay a tax on a portion of the total income as if the partnership were merely an agent or conduit through which the income passed." (410 U.S. 441, 448, 35 L.Ed.2d 412, 419, 93 S.Ct. 1080, 1085.) Additionally, we note that an administrative regulation enjoys a presumption of validity. (People ex rel. Colletti v. Pate (1964), 31 Ill.2d 354, 358, 201 N.E.2d 390.) When promulgated pursuant to legislative authority, rules and regulations of administrative agencies have the force and effect of statutes (Du-Mont Ventilating Co. v. Department of Revenue (1977), 52 Ill. App.3d 59, 367 N.E.2d 532) and should be set aside only when clearly arbitrary, capricious or unreasonable. Illinois State Chamber of Commerce v. Pollution Control Board (1977), 49 Ill. App.3d 954, 959-60, 364 N.E.2d 631.
• 3 In our opinion, for the reasons previously set forth, plaintiffs failed to sustain their burden of showing that section 2-202-2(e)(1) is unreasonable or arbitrary. We therefore hold that the regulation is valid and that it does not entitle a partnership to the same rights and privileges as an individual taxpayer. Because of the conclusion reached on this issue, we need not ...