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09/29/89 Lakehead Pipe Line Company v. the Department of Revenue

September 29, 1989

LAKEHEAD PIPE LINE COMPANY, INC., PLAINTIFF-APPELLEE

v.

THE DEPARTMENT OF REVENUE, DEFENDANT-APPELLANT

AT ALL TIMES PERTINENT TO THIS APPEAL, SECTION 304(D)(2) OF THE ILLINOIS INCOME TAX ACT (ACT) (ILL. RE

v.

STAT. 1977, CH. 120, PARS. 1-101 THROUGH 17-1701) PROVIDED:



APPELLATE COURT OF ILLINOIS, FIRST DISTRICT, FIFTH DIVISION

549 N.E.2d 598, 192 Ill. App. 3d 756, 139 Ill. Dec. 872 1989.IL.1561

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

APPELLATE Judges:

JUSTICE LORENZ delivered the opinion of the court. PINCHAM and COCCIA, JJ., concur.

DECISION OF THE COURT DELIVERED BY THE HONORABLE JUDGE LORENZ

This appeal follows reversal of the administrative decision of the Illinois Department of Revenue denying plaintiff corporate income tax refunds for years 1973 through 1977, inclusive.

We reverse.

Lakehead Pipe Line Company, Inc. (Lakehead), is a Delaware corporation with its principal office located in Superior, Wisconsin. Lakehead is wholly owned by Interprovincial Pipe Line, Ltd. (Interprovincial), a Canadian corporation. Lakehead owns and operates, as an interstate and foreign common carrier subject to Federal regulation, a pipeline system which transports crude petroleum and other liquid hydrocarbons owned by others.

Lakehead began operations in 1950. At that time, Lakehead's pipeline extended to North Dakota, Minnesota, and Wisconsin. In 1954, the pipeline system was extended into Michigan, and, in 1962, a branch line was constructed into New York. The portion of the pipeline directly at issue in this appeal was added in 1968 and extends from Superior, Wisconsin, through Illinois, to Griffith, Indiana. The length of pipeline in Illinois is 115.6 miles long. In 1969, the pipeline was extended from Griffith to Sarnia, Canada. The total length of Lakehead's pipeline in the United States is 2,600 miles.

"usiness income derived from transportation by pipeline shall be apportioned to this State by multiplying such income by a fraction, the numerator of which is the revenue miles of the person in this State, and the denominator of which is the revenue miles of the person everywhere. For the purposes of this paragraph, a revenue mile is the transportation by pipeline of 1 barrel of oil . . . the distance of 1 mile for a consideration." *fn1 (Ill. Rev. Stat. 1977, ch. 120, par. 3-304(d)(2).)

Section 304(e) further provided:

"If the allocation and apportionment provisions of subsections (a) through (d) do not fairly represent the extent of a person's business activity in this State, the person may petition for, or the Director may require, in respect of all or any part of the person's business activity, if reasonable:

(1) Separate accounting;

(2) The exclusion of any one or more factors;

(3) The inclusion of one or more additional factors which will fairly represent the person's business activities in this State; or

(4) The employment of any other method to effectuate an equitable allocation and apportionment of the person's business income." Ill. Rev. Stat. 1977, ch. 120, par. 3-304(e) (now Ill. Rev. Stat. 1987, ch. 120, par. 3-304(f)). 2

In June of 1970, the Illinois Director of Revenue, pursuant to the alternative allocation provision of section 304(e), permitted Lakehead to apply a two-factor formula for apportioning Illinois corporate income tax instead of the statutory one-factor barrel mile apportionment formula of section 304(d). In addition to the number of barrel miles, the two-factor apportionment formula incorporated a property factor based on a ratio of the Illinois based assets used by Lakehead in its business in Illinois to the total used by Lakehead throughout its system. Lakehead had sought permission to use the two-factor formula for Illinois apportionment purposes because, at that time, it was using the two-factor formula in all other States in which it did business.

In 1973, the Wisconsin Department of Revenue required Lakehead to use a three-factor apportionment formula for corporate income tax purposes. In addition to the factors contained in the two-factor formula, the three-factor formula incorporated a factor for Lakehead's payroll. Lakehead was required to apply the three-factor formula in Wisconsin retroactively to 1969.

Lakehead thereafter sought permission, in each State in which it did business, to apply the three-factor formula in order to achieve uniformity and to eliminate the possibility of double taxation. Commencing with the 1976 tax year, all States in which Lakehead did business, with the ...


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