Appeal from the Circuit Court of Winnebago County; the Hon.
John E. Sype, Judge, presiding.
JUSTICE LINDBERG DELIVERED THE OPINION OF THE COURT:
Plaintiff Rockford Life Insurance Company (Rockford) appeals from an order of the circuit court of Winnebago County affirming the 1978 assessment of its capital stock by defendant-appellee, Department of Revenue (Department). Rockford also appeals from the order in the case consolidated with the instant appeal entering judgment against Rockford in the amount of $723,053.70 and costs. Rockford argues that certain of its securities (mortgage-backed securities of the Government National Mortgage Association (GNMA), and obligations issued pursuant to the New Communities Act (NCA), the New Community Development Act (NCDA), and the Merchant Marine Act (MMA)) improperly were included in the capital stock assessment because they are direct obligations of the United States immune from State taxation. Because we conclude the obligations at issue are not direct obligations issued by the Federal government, we affirm.
On December 21, 1978, the Illinois Department of Local Government Affairs assessed the capital stock of Rockford for the year 1978 at a value of $6,937,000. Review of the assessment was requested by Rockford, and on May 2, 1979, the Illinois Department of Local Government Affairs, by letter, confirmed the assessment. Rockford thereupon filed a complaint in the circuit court of Winnebago County, Illinois, pursuant to the Administrative Review Act (Ill. Rev. Stat. 1979, ch. 110, par. 264 et seq.). Following hearings on motions, the court ordered that the case be remanded to the Department of Local Government Affairs with instructions to formally notify Rockford of its decision in accordance with its rules. On October 29, 1979, the Department of Local Government Affairs served notice of its decision confirming the assessment. Pursuant to Rockford's request, the Department of Revenue (as successor to the Department of Local Government Affairs) held a hearing on December 21, 1979. Following the hearing, the Director of the Department affirmed the assessment.
The company thereafter filed its complaint seeking judicial review of the decision of the Department affirming the 1978 assessment, and the Department filed the administrative record as its answer to the complaint. In the trial court, Rockford argued that: (1) since the three types of securities were exempt as U.S. obligations under the Constitution and statutes of the United States, their value could not be included in computing the capital stock assessment; and (2) the Department was estopped because of its exclusion of the securities in 1974 through 1978 from including these securities in the 1978 capital stock assessment. In a memorandum decision, the trial court affirmed the Department's ruling and entered the following findings: (1) the securities in question were not "obligations of the United States" under 31 U.S.C. § 742 (1976) and therefore were not constitutionally immune from State taxation; (2) the Department's erroneous inclusion of non-exempt property as exempt property in its property tax manual did not preclude subsequent correction of the error and taxation of the property; and (3) the necessary fraud or injustice required for the application of the doctrine of estoppel was not demonstrated by the erroneous ruling of the Department or its failure to assess taxable property in prior years. Rockford filed a timely appeal from the trial court order entered on June 10, 1983, affirming the Department assessment. This appeal solely concerns the capital stock assessment against Rockford for 1978 because the capital stock tax was abolished on January 1, 1979, by article IX, section 5, of the Constitution of Illinois of 1970 (Ill. Const. 1970, art. IX, sec. 5).
Rockford asserts that the Department is estopped from assessing the securities in question because of its previous administrative determinations that the securities were exempt from state taxation. The doctrine of equitable estoppel is "the effect of the voluntary conduct of a party whereby he is precluded from asserting rights which might otherwise have existed as against another party who has relied in good faith upon such conduct and has been led thereby to change his position for the worse." (Tyska v. Board of Education (1983), 117 Ill. App.3d 917, 930, 453 N.E.2d 1344, 1355; Kyker v. Kyker (1983), 117 Ill. App.3d 547, 453 N.E.2d 108.) The party claiming the estoppel must have relied upon the acts or representations of the other and have had no knowledge or convenient means of knowing the true facts. Hickey v. Illinois Central R.R. Co. (1966), 35 Ill.2d 427, 447, cert. denied (1967), 386 U.S. 934, 17 L.Ed.2d 806, 87 S.Ct. 957.
The doctrine of estoppel can be applied against the State when acting in a governmental capacity only in the most compelling circumstances. (Hickey v. Illinois Central R.R. Co. (1966), 35 Ill.2d 427, cert. denied (1967), 386 U.S. 934, 17 L.Ed.2d 806, 87 S.Ct. 957; Tyska v. Board of Education (1983), 117 Ill. App.3d 917, 453 N.E.2d 1344; see generally Annot., 21 A.L.R. 4th 573 (1983).) "[W]here public revenues are involved, public policy ordinarily forbids the application of estoppel to the State" and "`[t]he government is not estopped by previous acts or conduct of its agents with reference to the determination of tax liabilities or by failure to collect the tax, nor will the mistakes or misinformation of its officers estop it from collecting the tax.'" Austin Liquor Mart, Inc. v. Department of Revenue (1972), 51 Ill.2d 1, 4-5.
While acknowledging the principle that a State will generally not be estopped from collecting a tax, Rockford argues this case presents extraordinary circumstances justifying application of the estoppel doctrine and relies upon Hickey v. Illinois Central R.R. Co. (1966), 35 Ill.2d 427, cert. denied (1967), 386 U.S. 934, 17 L.Ed.2d 806, 87 S.Ct. 957, for support. In Hickey, a railroad maintained and improved large amounts of lakefront property for over 50 years. Refusing to recognize "a right in the State officially disclaimed [by the State] for half a century" (35 Ill.2d 427, 449), the supreme court held the State should be estopped from now asserting its interest in the subject property. The court in Hickey emphasized the railroad's reliance on the State's position:
"Meanwhile, numerous other lake shore boundary line agreements have been consummated and confirmed, conveyances made, leases executed and options granted; proposals for lake shore development were agreed upon and accepted whereby substantial construction obligations were apportioned as between the city, Park Commissioners and the railroad in reliance upon the assumption that the railroad was the fee owner of the lands it occupied * * *." (35 Ill.2d 427, 450.)
Therefore, while the Hickey court reiterated that qualified immunity from the estoppel doctrine was enjoyed by the State, it held that under these "extraordinary circumstances," the State was estopped from asserting its latent title claim.
Rockford argues the circumstances here similarly are "extraordinary." In the case at bar, Rockford reported NCA obligations on its 1974 tax return which were initially assessed but were later ruled exempt by the Director. In 1975, Rockford reported NCA and GNMA obligations which were initially assessed, but were later deducted from its capital stock assessment. Rockford in its 1976 return reported MMA obligations in addition to the GNMA obligations which the Director initially assessed, but upon reconsideration exempted from the capital stock tax computation. In its 1977 return, Rockford reported additional GNMA and MMA obligations as deductions which the Department allowed. In 1978, the Department reversed its prior position and decided that the GNMA, MMA, NCA and NCDA obligations were subject to the capital stock tax.
Rockford argues that these circumstances constitute appropriate grounds for estoppel and contends all of the elements of the doctrine are satisfied: (1) positive acts by the Department; (2) justifiable reliance by Rockford upon these acts; (3) amounting to fraud and injustice. Rockford cites the regulations contained in the Department's manual and the approval of the exemption in the years 1974-77 as positive acts by the State. The Department counters that its exemptions of these securities at issue are less affirmative than were the actions of the State in Austin Liquor Mart, Inc. v. Department of Revenue (1972), 51 Ill.2d 1, where the Department accepted payment from the taxpayer of his assessment and then attempted to reopen the investigation concerning the period covered by the assessment. The Department also quotes supreme court language that "State inspectors perform[ing] the ministerial acts of computing the tax due under one particular formula does not estop the State from repudiating that formula." (People ex rel. Scott v. Chicago Thoroughbred Enterprises, Inc. (1973), 56 Ill.2d 210, 220.) Nevertheless, we conclude the approval of the exemption constitutes a positive act of the State.
• 1 Rockford also asserts it relied upon the exemption, planning its investment strategy on the assumption that the obligations would continue to be excluded from calculation of the capital stock tax. Rockford's additional purchases of the subject obligations in the years 1974 through 1977 arguably provide some evidence of reliance by Rockford on the acts of the Department. However, Rockford's reliance was not reasonable. The taxable nature of these securities was unclear during at least three of the four subject years. No court decision or legislative pronouncement had resolved the issue, and therefore, Rockford's reliance on the inconsistent Department rulings was unjustified. This is especially true because, unlike the 50-year time period in Hickey, here the Department had only exempted the obligations for four years prior to its decision to include them in the tax calculation. The Department also raises a persuasive public policy argument, stating that were this court to apply the estoppel doctrine on the basis of four years of inconsistent Department actions, an administrative agency considering a novel issue would be bound by its initial ruling and would be precluded from adopting a new policy or from correcting an erroneous construction of the applicable law.
While the absence of reasonable reliance is alone fatal to Rockford's estoppel claim, Rockford has also failed to establish fraud. Rockford's allegations of fraud are unpersuasive. Rockford cites the fact that the Department's policy change resulted in almost a $500,000 tax liability, but the magnitude of the tax does not establish the existence or absence of fraud. Additionally, Rockford states that the Department's delay in assessing the tax until the last year of the capital stock tax "raises the inference of a calculated plan to catch this taxpayer offguard." This allegation, however, is unsupported. Any allegation that the Department was negligent also does not amount to fraud.
"More importantly, perhaps, is the possibility that application of laches or estoppel doctrines may impair the functioning of the State in the discharge of its government functions, and that valuable public interests may be jeopardized or lost by the negligence, mistakes or inattention of public officials." (Hickey v. Illinois Central R.R. Co. (1966), 35 Ill.2d 427, 447-48, cert. denied (1967), 386 U.S. 934, 17 L.Ed.2d 806, 87 S.Ct. 957.)
In the absence of any proof that the Department's action constituted a fraud resulting in any injustice done to Rockford, the State should not be estopped from including the subject obligations in Rockford's capital stock tax calculation for 1978.
Rockford next contends that the debt obligations here were improperly included in the capital assessment because they constitute property of the United States immune from State taxation.
GNMA is a government-sponsored private corporation which was created in 1968 out of and partitioned from the Federal National Mortgage Association (FNMA). Both FNMA and GNMA are authorized to "purchase, service, sell, or otherwise deal in any mortgages which are insured or guaranteed under [a variety of Federal statutes]." (12 U.S.C. § 1717(b)(1) (1976).) GNMA's role is to implement the mortgage-backed securities program. GNMA enters into "Guaranty Agreements" with private investors who assemble pools of mortgages and issue them for public offering. The issuer retains title to the ...