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08/31/89 Kraft, Inc., F/K/A Dart & v. Jim Edgar

August 31, 1989

KRAFT, INC., F/K/A DART & KRAFT, INC., PLAINTIFF-APPELLEE

v.

JIM EDGAR, AS SECRETARY OF STATE, ET AL., DEFENDANTS-APPELLANTS



APPELLATE COURT OF ILLINOIS, FOURTH DISTRICT

543 N.E.2d 1316, 188 Ill. App. 3d 46, 135 Ill. Dec. 569

August 31, 1989, Fled

Appeal from the Circuit Court of Sangamon County; the Hon. Richard J. Cadagin, Judge, presiding. 1989.IL.1354

APPELLATE Judges:

JUSTICE KNECHT delivered the opinion of the court. McCULLOUGH, P.J., and LUND, J., concur.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE KNECHT

This case comes to us on appeal from an administrative review in the circuit court of Sangamon County. The plaintiff Kraft, Inc. (Kraft), sought review of the Secretary of State's (Secretary's) determination of tax liability. The circuit court reversed the Secretary's refusal to grant the plaintiff an adjustment based on the circuit court's reading of section 1.17 of the Business Corporation Act of 1983 (1983 BCA) and the plaintiff's due process claims. (Ill. Rev. Stat. 1985, ch. 32, par. 1.17.) We find the circuit court was in error on both grounds and reverse its decision.

The plaintiff Kraft, Inc., formerly known as Dart & Kraft, Inc., was incorporated in Delaware in 1980. On August 29, 1980, the plaintiff filed an application with the defendant Secretary for a certificate of authority to transact business in this State. Kraft's employee, who completed the application for the certificate, stated the present value of the property owned in Illinois and elsewhere, together with the business activity which had been transacted in Illinois and elsewhere, as of the date of filing. This was done in spite of the fact the application form required the plaintiff to estimate these values for the first year of operation in Illinois. As a result, the application listed $1,000 as the value of plaintiff's property in Illinois and $4,000 as the total of all of its property located everywhere. The estimate of business to be transacted in the first year was stated as zero.

Section 136 of the 1933 BCA governs the computation of the basis for license fees of foreign corporations. It provides in part:

"For the purpose of determining the amount represented in this State of the sum of the stated capital and paid-in surplus of a foreign corporation, the amount represented in this State shall be that proportion of the sum of its stated capital and paid-in surplus which the sum of (1) the value of its property located in this State and (2) the gross amount of business transacted by it at or from places of business in this State bears to the sum of (1) the value of all of its property, wherever located, and (2) the gross amount of its business, wherever transacted." (Ill. Rev. Stat. 1981, ch. 32, par. 157.136.)

Section 139 of the 1933 BCA provides for the computation of the basis for franchise taxes in the same manner. (Ill. Rev. Stat. 1981, ch. 32, par. 157.139. See also Ill. Rev. Stat. 1985, ch. 32, pars. 15.55, 15.70.) This ratio of total capital, surplus and business to that located in Illinois is called the allocation factor. The basis on which the fees and taxes on the corporation is calculated is determined by multiplying the allocation factor by the total amount of paid-in surplus and capital. (Ill. Rev. Stat. 1981, ch. 32, pars. 157.136, 157.139.) Because the plaintiff stated the actual value instead of the estimated value of the corporation and its projected business, the allocation factor here as determined by the Secretary, a ratio of 1 to 4, a 25% allocation factor, was higher than had Kraft chosen to supply estimated values of business to be transacted on its application for a certificate.

The formation of Dart and Kraft, Inc., was the result of a planned merger between Kraft, Inc., and Dart Industries, Inc. To this end they formed a jointly owned subsidiary, Dart and Kraft, Inc. , the predecessor corporation of the plaintiff here. DKI then formed two subsidiaries, K Sub. and D Sub. Kraft then merged with K Sub., Dart with D Sub. Stockholders of both corporations received stock in the new parent DKI in return for their stock in Dart or Kraft. As a result, DKI experienced an enormous increase in its capital and paid-in surplus. On September 25, 1980, this stood at $2,657,186,647. Both Dart and Kraft continued to operate separately but as subsidiaries of their new parent DKI. In December of 1980, the plaintiff issued additional shares and increased its capital and paid-in surplus by $509,022. Although required by section 117 of the Business Corporation Act (1933 BCA) (Ill. Rev. Stat. 1981, ch. 32, par. 157.117) to report these increases within 60 days of their occurrence, the plaintiff did not report them until almost five years later on August 15, 1985.

Following the 1985 report, on September 12, 1985, the Secretary issued a notice of assessment of tax liability for the year 1980, utilizing the 25% allocation factor. This resulted in an assessment of franchise tax, license fees, and penalties of $1,331,119.84. On November 5, 1985, the plaintiff submitted a petition for review and refund challenging the allocation factor and, the following day, submitted a statement of corrections. On January 16, 1986, the Secretary denied the petition for adjustment on the grounds the statute of limitations had run. The Secretary also refused to accept the statement of corrections, indicating the statements on the application were estimates and could not be factually incorrect under section 1.15 of the 1983 BCA. (Ill. Rev. Stat. 1985, ch. 32, par. 1.15.) Subsequently the plaintiff also filed a report following merger on June 16, 1986.

Kraft sought review of the Secretary's refusal to consider the petition for refund and review and a statement of correction. The hearing officer found the plaintiff's petition for refund and review was timely filed and plaintiff was entitled to file a statement of corrections. The Secretary accepted the hearing officer's recommendation regarding the statement of corrections but rejected the recommendation plaintiff was entitled to file a petition for review and refund. The Secretary also found the merger provisions of the 1983 BCA did not apply to the plaintiff. ...


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