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January 17, 1997


Appeal from the Circuit Court of Cook County. No. 93-L-50312. Honorable Alexander P. White, Judge Presiding.

Rehearing Denied February 20, 1997. Released for Publication February 28, 1997.

The Honorable Justice Theis delivered the opinion of the court. Cahill and O'brien, JJ., concur.

The opinion of the court was delivered by: Theis

JUSTICE THEIS delivered the opinion of the court:

The trial court ruled that proceeds from a taxpayer's sale of pipeline constituted business income to be apportioned under the Illinois Income Tax Act's general three-factor formula. On appeal, the taxpayer challenges the trial court's classification of the proceeds as business income, and the defendant challenges the trial court's apportionment determination. We affirm in part and reverse in part.

Texaco, a nonresident corporation, owned and operated pipeline which ran through various states, including Illinois. Texaco transported crude oil and other petroleum products through this pipeline, which serviced various oil refineries. During the 1983 tax year, Texaco sold major segments of pipeline, including the pipeline which serviced refineries in Lockport and East Chicago, Illinois. The sale accounted for nearly 90% of Texaco's total pipeline holdings.

On its 1983 tax return, Texaco reported the sale of the pipeline and associated real estate as nonbusiness income. Texaco apportioned the remainder of its business income under the one-factor apportionment formula found in section 304(d)(2) of the Illinois Income Tax Act. 35 ILCS 5/304(d)(2) (West 1994).

Upon audit, the Department of Revenue determined that the proceeds from the sale constituted business income. The department issued a timely notice of deficiency. On March 8, 1990, Texaco filed a protest to the notice. The parties submitted the dispute to an administrative law judge (ALJ) to determine: (1) whether the income was business income; and (2) whether the general three-factor formula or the special one-factor formula should apply for apportioning business income. The ALJ concluded that the income was business income subject to apportionment under the special one-factor formula applicable to the transportation industry.

Texaco sought administrative review, arguing that, under the plain language of the Illinois Income Tax Act (IITA) (35 ILCS 5/304(d)(2) (West 1994)), the proceeds constituted nonbusiness income. In the alternative, Texaco claimed that the general three-factor formula for apportioning business income should apply to the proceeds. The trial court entered judgment in accordance with the ALJ's determination that the proceeds constituted business income. However, the trial court rejected the ALJ's ruling that the special one-factor formula for apportioning business income should apply. The trial court reasoned that the one-factor formula applied only to business income derived from actual pipeline transportation activity. The trial court further found that the application of the one-factor formula would be unconstitutional. The department appealed and Texaco cross-appealed the adverse determinations.

We will review these disputed legal issues under a de novo standard. Skokie Gold Standard Liquors, Inc. v. Joseph E. Seagram & Sons, Inc., 116 Ill. App. 3d 1043, 452 N.E.2d 804, 72 Ill. Dec. 551 (1983). Because a finding that the proceeds constitute nonbusiness income would render the issues raised in the Department's appeal moot, we will address Texaco's cross-appeal first.

Section 1501(a)(1) of the Illinois Income Tax Act defines business income:

"(1) Business Income. The term business income means income arising from transactions and activity in the regular course of the taxpayer's trade or business, net of the deductions allocable thereto, and includes income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer's regular trade or business operations. Such term does not include compensation or the deductions allocable thereto." (Emphasis added.) 35 ILCS 5/1501(a)(1) (West 1994).

Nonbusiness income is all income not classified as business income. 35 ILCS 5/1501(a)(13) (West 1994). The taxpayer bears the heavy burden of demonstrating that income is not business income. Dover Corp. v. Department of Revenue, 271 Ill. App. 3d 700, 712, 648 N.E.2d 1089, 1097, 208 Ill. Dec. 167 (1995).

Texaco argues that a plain reading of the IITA demonstrates that only income arising from transactions within the regular course of its business constitutes business income. Because Texaco is in the business of transporting by pipeline, not selling the actual pipeline itself, Texaco claims that the ...

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