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Searle Pharmaceuticals v. Dep't of Revenue

OPINION FILED JANUARY 16, 1986.

SEARLE PHARMACEUTICALS, INC., APPELLANT,

v.

THE DEPARTMENT OF REVENUE, APPELLEE.



Appeal from the Circuit Court of Cook County; the Hon. Earl Arkiss, Judge, presiding.

PRESIDING JUSTICE LINN DELIVERED THE OPINION OF THE COURT:

Plaintiff, member of an affiliated corporate group that voluntarily elected to exercise the privilege of filing a Federal consolidated tax return (26 U.S.C. § 1501 (1984)), filed an amended Illinois tax return seeking a refund arising from carrying back a net operating loss. Defendant, Illinois Department of Revenue, denied plaintiff's claim for refund, finding that the clear and literal language of section 2-203(e)(2)(E) of the Illinois Income Tax Act (Ill. Rev. Stat. 1983, ch. 120, par. 2-203(e)(2)(E)) requires that any member of an affiliated corporate group electing to file a consolidated return be deemed to have made the carryback relinquishment election set forth in section 172 of the Internal Revenue Code (26 U.S.C. § 172(b)(3)(C) (1984)), such that net operating losses may only be carried forward for purposes of State tax liability.

Upon denial of its claim for refund, plaintiff filed a complaint for administrative review in the circuit court of Cook County, challenging the constitutionality of section 2-203(e)(2)(E) as a denial of equal protection and uniformity of treatment. The circuit court upheld the statute, and plaintiff now appeals.

We affirm the decision of the circuit court.

BACKGROUND

Plaintiff, Searle Pharmaceuticals, Inc., formerly Searle Diagnostics, Inc. (Searle), is a 100% owned subsidiary of G.D. Searle & Company of Skokie that consented to the filing of its United States Income Tax Return on a consolidated basis pursuant to the election to exercise that privilege set forth in section 1501 of the Internal Revenue Code. 26 U.S.C. § 1501 (1984).

For the taxable year ending December 31, 1977, G.D. Searle and its consolidated subsidiaries, including plaintiff, filed a Federal consolidated return reporting a loss of $22,919,533, later amended to $23,935,337. Searle prepared a pro forma Federal income tax return for 1977, reporting for State tax purposes $7,005,123 of the consolidated loss as its income loss.

On April 9, 1981, plaintiff filed an amended Illinois corporate income tax return for 1974, attempting to carry back its 1977 pro forma income loss to reduce its 1974 Federal taxable income for State tax purposes from $4,951,137 to zero, and seeking a State tax refund of $103,193. On that same date, plaintiff filed an amended Illinois corporate income tax return for 1975, attempting to carry back the remainder of its 1977 pro forma loss to reduce its 1975 Federal taxable income for State tax purposes from $4,946,610 to $2,892,624, and seeking a State tax refund of $44,032.

On July 23, 1981, defendant, the Illinois Department of Revenue (Department), denied plaintiff's claims for refunds for the taxable years 1974 and 1975 on the ground that section 2-203(e)(2)(E) of the Illinois Income Tax Act (Ill. Rev. Stat. 1983, ch. 120, par. 2-203(e)(2)(E)) requires an affiliate that consents to filing a consolidated Federal income tax return to carry forward net operating losses to adjust separately determined Federal taxable income in future years.

Plaintiff filed a complaint for administrative review in the circuit court of Cook County, challenging the constitutionality of section 2-203(e)(2)(E) on the basis of equal protection and lack of uniformity. The circuit court affirmed the decision of the Department, upholding the constitutionality of section 2-203(e)(2)(E) of the Illinois Income Tax Act and affirming the denial of plaintiff's claims for tax refunds. Plaintiff now appeals.

OPINION

On appeal, plaintiff challenges the constitutionality of section 2-203(e)(2)(E) of the Illinois Income Tax Act on the ground that it unfairly discriminates against affiliated corporations that voluntarily choose to take advantage of the privilege offered in section 1501 of the United States Internal Revenue Code (26 U.S.C. § 1501 (1984)) of filing a consolidated Federal tax return. Section 2-203(e)(2)(E) of the Illinois Income Tax Act (Ill. Rev. Stat. 1983, ch. 120, par. 2-203(e)(2)(E)) reads as follows:

"(E) Consolidated corporations. In the case of a corporation which is a member of an affiliated group of corporations filing a consolidated income tax return for the taxable year for federal income tax purposes, taxable income determined as if such corporation had filed a separate return for federal income tax purposes for the taxable year and each preceding taxable year for which it was a member of an affiliated group. For purposes of this subparagraph, the taxpayer's separate taxable income shall be determined as if the elections provided by Section 243(b)(2) and Section 172(b)(3)(C) of the Internal Revenue Code had been in effect for all such years; * * *." (Emphasis added.)

The election referred to in section 2-203(e)(2)(E) with which plaintiff takes issue is that provided by section 172(b)(3)(C) of the Internal Revenue Code, which provides that any taxpayer entitled to a net operating loss carryback period, in which losses may be carried back to reduce taxable income for the three taxable years preceding the taxable year of such loss, may elect to relinquish the entire carryback period, thereby electing to carry forward the losses to reduce taxable income in future years. (26 U.S.C. § 172(b)(3)(C) (1984).) The effect of section 2-203(e)(2)(E) is that affiliated corporations that voluntarily consent to file consolidated Federal tax returns are deemed to have made the election to relinquish the carryback period and are consequently required to carry forward net operating losses. Such is not the case with affiliated corporations that do not choose to file consolidated Federal tax returns; they are not deemed to have made the election to relinquish the carryback period and may, accordingly, choose to carry back net operating losses to reduce taxable income from prior taxable years.

Plaintiff asserts that the disparity of treatment arising from the "deemed" election of carryback relinquishment made for those affiliate corporations that choose to file consolidated Federal tax returns renders section 2-203(e)(2)(E) discriminatory as an unconstitutional denial of equal protection. Plaintiff maintains that (1) this difference in treatment of affiliates that file consolidated Federal tax returns and affiliates that file separate Federal tax returns violates the constitutional requirement that taxpayer classifications be rationally based and related to a proper legislative purpose, and (2) that the difference in treatment of the two corporate groups has no rational basis and no logical relation to any legitimate purpose.

• 1 The Department, on the other hand, posits that section 2-203(e)(2)(E) is not unconstitutional as a denial of equal protection since a set of facts, namely administrative convenience and fiscal planning, can be conceived to sustain the classification. Defendant further asserts that section 2-203(e)(2)(E) is not unconstitutional due to the voluntary nature of the election made at the Federal level that determines whether plaintiff is included or excluded from the classification set forth therein. The trial court, finding that (1) there was a set of facts that justified the classification and (2) that the classification bears a rational relationship to a legislative purpose, affirmed the decision of the hearing officer and upheld the constitutionality of section 2-203(e)(2)(E). Based on the following analysis, we agree with the decision of the trial court.

I

• 2 The power of the legislature to make classifications, particularly in the field of taxation, is very broad, and the fourteenth amendment to the Federal Constitution imposes no iron rule of equal taxation. (Department of Revenue v. Warren Petroleum Corp. (1954), 2 Ill.2d 483, 119 N.E.2d 215.) Legislation which does not create a suspect classification or infringe upon a fundamental right, but rather involves economic and social welfare policy, will be upheld against equal protection challenges if it is rationally related to the achievement of a legitimate State interest. (Clayton v. Village of Oak Park (1983), 117 Ill. App.3d 560, 453 N.E.2d 937.) In taxation, even more than in other fields, legislatures possess the greatest freedom in classification. (Madden v. Kentucky (1940), 309 U.S. 83, 84 L.Ed. 590, 60 S.Ct. 406.) There is a presumption of constitutionality which can be overcome only by the most explicit demonstration that a classification is a hostile and oppressive discrimination against particular persons and classes. (Williams v. ...


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