Appeal from the Circuit Court of Ogle County; the Hon. Alan W.
Cargerman, Judge, presiding.
JUSTICE HOPF DELIVERED THE OPINION OF THE COURT:
Rehearing denied March 15, 1985.
Plaintiff, Citizens State Bank of Mount Morris, brought a complaint for an injunction against J. Thomas Johnson, Director of the Illinois Department of Revenue (the Department), and James H. Donnewald, Treasurer of the State of Illinois (the Treasurer). Plaintiff argued that the Department had improperly disallowed certain deductions of interest income on plaintiff's 1979 and 1980 tax returns. The bank contends that under section 203 of the Illinois Income Tax Act (Ill. Rev. Stat. 1981, ch. 120, par. 2-203), the interest it earned on certain investments was exempt from State taxation at the time it filed its State returns. It urged that the Department and the Treasurer should be enjoined from depositing into the State treasury the sums paid by plaintiff under protest. Subsequent to the filing of briefs and memoranda, the defendant's motion for summary judgment was granted.
On appeal, plaintiff contends that the State of Illinois cannot retroactively tax the interest income earned from Government National Mortgage Association (GNMA) participation certificates. The Department published an information bulletin which stated that these certificates were deductible. On this basis, plaintiff argues, it filed its 1979 and 1980 returns and took the deductions. The Department published a subsequent bulletin which disallowed the deductions, and plaintiff argues the Department is estopped from applying the provisions of the subsequent Department bulletin retroactively. Plaintiff's second contention is that if the Department is allowed to apply the interpretation of the second bulletin, which would result in disallowing the deduction for interest income, such application is arbitrary, unreasonable and works a denial of plaintiff's due process rights under the fifth and fourteenth amendments to the United States Constitution.
The facts of this case are not in dispute. Plaintiff timely filed its Illinois income tax and Illinois replacement tax returns for the years ending December 31, 1979, and December 31, 1980. On those returns it deducted interest income it had earned on mortgage-backed certificates guaranteed by the GNMA. These certificates were owned by the bank as part of its investment portfolio. On the 1979 return plaintiff deducted $340,092.30. In 1980 it deducted $355,685.22. The parties agree that at the time the plaintiff filed its 1979 and 1980 Illinois tax returns, the only publication set out by the Department which addressed the topic of the deductibility of GNMA interest was the Illinois Income Tax Information Bulletin, Bulletin No. ITIB-1973-1. This bulletin stated that income earned from GNMA participation certificates was an obligation of the United States, was deductible and was exempt from State taxation pursuant to 31 U.S.C. § 742 (1976) (current version 31 U.S.C. § 3124 (1982)). Further, it stated recipients of such interest may deduct the amount thereof under section 203 of the Illinois Income Tax Act (Ill. Rev. Stat. 1981, ch. 120, par. 2-203). The bulletin went on to state: "It is important to note, however, that rulings interpreting this federal statute should be consulted for assurance that specific items of income come within its terms. For example, the U.S. Attorney General has rules [sic] that certain obligations issued by governmental agencies other than the Treasury Department are considered * * * exempt from State taxation." Following this language there was a list of obligations described as exempt, which included GNMA participation certificates.
Plaintiff contends that it relied on ITIB-1973-1, 31 U.S.C. sec. 742 (1976) (currently 31 U.S.C. § 3124 (1982)) and the U.S. Attorney General Opinion referred to above when it claimed the deductions on line 5(a) of its 1979 and 1980 Illinois tax returns.
In October of 1982, plaintiff received notice the Department was disallowing the line 5(a) deductions which had been claimed on its 1979 and 1980 tax returns. The Department relied upon income tax Information Bulletin No. ITIB-1981-2 as authority for its disallowance of plaintiff's line 5(a) deductions of interest income from GNMA certificates. The parties then proceeded through the process of audit review. On May 2, 1983, plaintiff paid $22,619 to the State of Illinois for an income tax and replacement tax deficiency arising from the disallowance of the line 5(a) interest deduction. The rationale for requiring the payment was that plaintiff should have been aware of ITIB-1981-2, which superseded ITIB-1973-1 and expressly stated that GNMA mortgage-backed securities were not exempt from State income taxation in view of a decision which had adjudicated the same issue, Montgomery Ward Life Insurance Co. v. Department of Local Government Affairs (1980), 89 Ill. App.3d 292, 411 N.E.2d 973, appeal denied (1981), 82 Ill.2d 585.
On August 30, 1983, plaintiff filed a complaint for injunction seeking to restrain the Department and the Treasurer from depositing the $42,816 which was ultimately paid by plaintiff under protest into the State Treasury. Plaintiff filed a stipulation of facts and legal issues, a motion for summary judgment as well as a memorandum of law. A hearing ensued. On December 23, 1983, the trial court granted defendant's motion for summary judgment.
Plaintiff's first contention on appeal concerns the question of whether the Department is bound by the provisions of ITIB-1973-1 and estopped to make a retroactive application of the provisions of the subsequent bulletin, ITIB-1981-2. Plaintiff argues that, other than ITIB-1973-1, the Department issued no publications or regulations which gave any guidance to the taxability of interest on GNMA securities. Thus, plaintiff contends, it acted reasonably in relying on the first bulletin, and the State is estopped to deny the provisions of the second bulletin retroactively. Plaintiff concedes that Illinois case law has clearly established the rule that estoppel does not apply to the State in the exercise of its taxing power "except under extraordinary circumstances." Mobil Oil Corp. v. Johnson (1982), 93 Ill.2d 126, 135, 442 N.E.2d 846; Austin Liquor Mart, Inc. v. Department of Revenue (1972), 51 Ill.2d 1, 4-5, 280 N.E.2d 437.
• 1 For the reasons discussed below, we find that estoppel does not bar the State from taxing plaintiff in the instant case.
Under the circumstances here, the authority by which the State taxes income of banking corporations is set forth by the Illinois Income Tax Act. (Ill. Rev. Stat. 1981, ch. 120, par. 2-201 et seq.) Section 2-203(b)(1), (2), of the Act defines "base income" for corporations. It provides that "base income" is an amount equal to taxable income as modified by adding or subtracting certain amounts. One of the items that must be deducted under the statute is: "An amount equal to all amounts included in such total which are exempt from taxation by this State either by reason of its Constitution or by reason of the Constitution, treaties or statutes of the United States; * * *." Ill. Rev. Stat. 1981, ch. 120, par. 2-203(b)(2)(H).
This provision, which plaintiff argues was unconstitutionally applied to him, was interpreted in Montgomery Ward Life Insurance Co. v. Department of Local Government Affairs (1980), 89 Ill. App.3d 292, 411 N.E.2d 973, appeal denied (1981), 82 Ill.2d 585. Montgomery Ward provides a detailed discussion of the history and purpose of GNMA and FNMA securities. The importance of the case for this appeal, however, can be limited to the fact that the court determined that GNMA certificates are not exempt from State and local taxation. The requirement found lacking was a binding promise by the United States to pay specified sums at specified dates. Because this promise was lacking, the "Ginnie Mae" certificates were ruled to not be obligations of the United States and thus not constitutionally immune from State tax. The court also stated:
"To the extent that the regulations of the Department have exempted items which are not truly obligations of the United States, it has exceeded its statutory authorization and the regulation is invalid. A construction of the Property Tax Manual which exempts the Ginnie Maes would render the regulation invalid since they are not the type of property which the legislature intended to exempt. This court may properly find that inclusion of the Ginnie Maes as exempt property is improper and that the Department is therefore not precluded from taxing them." Montgomery Ward Life Insurance Co. v. Department of Local Government Affairs (1980), 89 Ill. App.3d 292, 303, 411 N.E.2d 973, 981.
The recently decided case of Rockford Life Insurance Co. v. Department of Revenue (1984), 128 Ill. App.3d 302, 470 N.E.2d 596, also involved issues quite similar to those raised here. The insurance company appealed from the Department of Revenue's assessment of its capital stock. The Illinois Department of Local Government Affairs reviewed and confirmed the assessment. Rockford Life sought judicial review and argued that certain securities, which made up the capital stock, apparently including mortgage-backed securities of GNMA, were direct obligations of the United States and immune from State taxation. Both the trial court and the appellate court determined that GNMA's were not immune from State taxation and that the Department's erroneous inclusion of nonexempt property as exempt property in its property tax manual did not preclude subsequent correction of the error and taxation of the property. ...