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07/20/89 Filtertek, Inc., v. the Department of Revenue

July 20, 1989





541 N.E.2d 1385, 186 Ill. App. 3d 208, 133 Ill. Dec. 947 1989.IL.1130

Appeal from the Circuit Court of McHenry County; the Hon. Roland A. Herrmann, Judge, presiding.


JUSTICE McLAREN delivered the opinion of the court. NASH and REINHARD, JJ., concur.


Plaintiff appeals from the order entered by the circuit court of McHenry County on September 29, 1988. That order affirmed the findings and decision of the Department of Revenue, which had proposed a tax deficiency in the amount of $77,649 for calendar year 1980 and $90,232 for calendar year 1981, or a total of $167,881, together with interest. The court held that the Department's decision was factual in nature and should be upheld unless it were shown to be against the manifest weight of the evidence. We affirm.

Plaintiff, Filtertek, Inc. (Filtertek), is a Delaware corporation with its offices and manufacturing plant located in Hebron, Illinois. Filtertek is engaged in the manufacture and sale of plastic molded filters, which have medical, automotive, and industrial uses. In 1980 and 1981, approximately 180 people were employed at the Hebron facility, with 92% of the employees engaged in manufacturing. A small sales force also operates out of this facility.

Filtertek de Puerto Rico (Puerto Rico) is also engaged in the manufacture and sale of filters to customers in the United States and Puerto Rico. It too employed approximately 180 people in two plants located in Puerto Rico, with 92% of the employees engaged in manufacturing. Until 1975, Puerto Rico was a subsidiary corporation of Filtertek. At that time, Puerto Rico was "spun off" and became a Delaware corporation with its principal offices located in Patillas, Commonwealth of Puerto Rico.

In 1980 and 1981, over 50% of the Class A stock of both Filtertek and Puerto Rico was owned by Hayden Leason, an individual who resided in Puerto Rico. Leason was chairman of the respective boards of directors. The two firms also shared many common directors and officers. At the time in question, all members of the board of directors for Puerto Rico were on Filtertek's board. In addition to sharing corporate governance, the two firms engaged in many business transactions. Filtertek and Puerto Rico, along with several European manufacturers owned by Filtertek, engaged in interest-bearing intercompany loans, as well as the intercompany sale of manufactured products, equipment, and services.

Filtertek purchased approximately 90% of the products manufactured by Puerto Rico. Such purchases were pursuant to a contract between the two companies which specified that Filtertek would use its best efforts to distribute Puerto Rico's products. Title passed to Filtertek upon shipment and these purchases were at "arm's-length" prices. Multiple products would be shipped to Hebron from Puerto Rico in one sea container. Thereafter, Filtertek would unpackage the goods, repackage them and sell and ship them to customers, 91% to 93% of whom were out of State. Filtertek was then responsible for the billing and collection on these sales. Puerto Rico's accounts receivable from Filtertek on these purchases remained unpaid for periods in excess of six months without an interest charge, and Filtertek was free to use funds for payment as it deemed appropriate. The Puerto Rican products usually were stored and shipped out from Hebron within the next one to two days. However, if only partial orders were received, Filtertek would hold the product until a complete order for the customer could be filled.

During the years 1980 and 1981, Filtertek prepared and filed Illinois income tax returns with defendant Department of Revenue (Department), allocating its entire income to Illinois. Pursuant to an extension until June 30, 1981, Filtertek timely filed its Illinois income tax return for the calendar year 1980 on May 29, 1981. On April 30, 1984, the Department requested that Filtertek execute an agreement to extend the statute of limitations for assessments for tax year 1980 which was due to expire on May 29, 1984. The agreement was executed by Mr. Soltwedel, Filtertek's treasurer, who received a photocopy of the agreement. The three executed originals were retained by the Department's auditor and were executed by the Department later that day. None of the three executed originals was sent to Filtertek.

A Department of Revenue audit and subsequent notice of deficiency issued October 8, 1984, redetermined Filtertek's Illinois tax liability. The Department determined that Filtertek, its subsidiaries, and Puerto Rico were all members of a "unitary business" requiring application of combined apportionment under section 304(a) of the Illinois Income Tax Act (Ill. Rev. Stat. 1979, ch. 120, par. 3-304(a)). In calculating the tax owed, the Department made a unitary business income adjustment (a computation based upon the total income of the corporations comprising the unitary business). The Department further determined the percentage of income that should be apportioned to Illinois based on the statutory three-factor formula. The Department apportioned to Illinois and found subject to taxation approximately 77% of the combined business income in 1980 and approximately 64% of the combined business income in 1981. The tax computation resulted in Illinois tax deficiencies of $77,649 in 1980, and $90,232 in 1981, respectively.

A hearing with stipulated facts and oral testimony was conducted before an administrative law Judge. The Department issued a notice of decision on February 25, 1987, upholding the deficiency determination. A limited rehearing was granted on the sales factor calculation and, upon further stipulation of facts, the deficiency notice was further sustained by a decision dated and mailed August 31, 1987.

On October 2, 1987, Filtertek initiated the instant action by filing a complaint for administrative review in McHenry County. On September 29, 1988, the circuit court entered an order affirming the Department's administrative decision, finding that it was not against the ...

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