Appeal from Circuit Court of Sangamon County. No. 93CH0027. Honorable Richard J. Cadagin, Judge Presiding.
As Corrected March 13, 1997. As Corrected March 21, 1997.
Honorable Frederick S. Green, J., Honorable Rita B. Garman, J. - Concur, Honorable Robert W. Cook, J. - Dissent. Justice Green delivered the opinion of the court.
The opinion of the court was delivered by: Green
The Honorable Justice GREEN delivered the opinion of the court:
This case concerns the question of whether the format for determining the annual franchise taxes of foreign corporations doing business in Illinois, as provided for by section 15.65(d) of the Business Corporation Act of 1983 (Business Act) (Ill. Rev. Stat. 1989, ch. 32, par. 15.65(d)), at times pertinent, violated the uniformity clause set forth in section 2 of article IX of the Illinois Constitution of 1970, which states:
"In any law classifying the subjects or objects of non-property taxes or fees, the classes shall be reasonable and the subjects and objects within each class shall be taxed uniformly. Exemptions, deductions, credits, refunds and other allowances shall be reasonable." Ill. Const. 1970, art. IX, § 2.
At all times pertinent, (1) section 15.70 of the Business Act provided that the annual franchise tax upon foreign corporations doing business in the state be based upon that corporation's "paid-in capital" (Ill. Rev. Stat. 1989, ch. 32, par. 15.70)), and (2) section 1.80(j) of the Business Act stated, "paid-in capital of a foreign corporation shall be determined on the same basis and in the same manner as paid-in capital of a domestic corporation, for the purpose of computing *** franchise taxes" (Ill. Rev. Stat. 1989, ch. 32, par. 1.80(j)). Section 1.80(j) also stated:
"'Paid-in capital' means the sum of the cash and other consideration received, less expenses, including commissions, paid or incurred by the corporation, in connection with the issuance of shares, plus any cash and other consideration contributed to the corporation by or on behalf of its shareholders, plus amounts added or transferred to paid-in capital by action of the board of directors or shareholders pursuant to a share dividend, share split, or otherwise, minus reductions from that sum effected by an acquisition of its own shares, to the extent of the amount of paid-in capital represented by such acquired shares. " (Emphasis added.) Ill. Rev. Stat. 1989, ch. 32, par. 1.80(j).
The record shows that plaintiff, Venture Stores, Inc. (Venture), is a Delaware corporation which, consistent with the laws of that state, reduced its capitalization by the distribution to its sole shareholder, May Department Stores, Inc. (May), of $262,500,000. Venture maintains that the foregoing format to determine the basis for franchise taxes violates the uniformity clause because the tax scheme unreasonably prevents corporations such as it from reducing the basis for the franchise tax by this kind of capital reduction, while corporations that do so by buying in their own shares are permitted to reduce that basis. Venture contends that the resulting classification is unreasonable within the meaning of the uniformity clause. We disagree.
In October 1992, Venture reported a reduction in paid-in capital in the amount of the capital distribution to the office of defendant, the Secretary of State (Secretary), and attempted to pay its 1993 franchise tax based upon its paid-in capital reduced by the amount of the distribution. Following the express terms of the statutory format, the Secretary's office refused to reduce Venture's paid-in capital and refused to accept the payment as being in full for the franchise tax. Pursuant to section 2a of the State Officers and Employees Money Disposition Act (Money Act) (30 ILCS 230/2a (West 1992)), on January 11, 1993, Venture paid its 1993 franchise tax under protest. The tax paid was based on paid-in capital without a reduction for the capital distribution. Subsequently, Venture also paid its 1994 and 1995 franchise taxes under protest based upon no reduction in the paid-in capital basis. In March 1993 it also filed a petition with the Secretary for a refund of portions of its 1990, 1991, and 1992 franchise taxes which had been based upon paid-in capital that had no reduction for the capital distribution.
Acting pursuant to section 2a of the Money Act, on February 8, 1993, Venture filed a three-count complaint in the circuit court of Sangamon County. The only count before us is count II, which charged that the statutory format applied by the Secretary in assessing annual franchise tax fees violated the uniformity clause. The Secretary, the State Treasurer, and the Illinois Department of Business Services (Department) were joined as defendants. Distribution of the money by the State Treasurer was temporarily enjoined. Both sides requested summary judgments. On June 22, 1995, the circuit court entered summary judgment as to count II in favor of defendants and denied Venture's request for summary judgment. That judgment is now final as to all claims and parties, and Venture has appealed. We affirm.
The uniformity clause case most analogous to the instant case is Searle Pharmaceuticals, Inc. v. Department of Revenue, 117 Ill. 2d 454, 512 N.E.2d 1240, 111 Ill. Dec. 603 (1987). There, the supreme court held that section 203(e)(2)(E) of the Illinois Income Tax Act (Ill. Rev. Stat. 1979, ch. 120, par. 2-203(e)(2)(E)) violated the uniformity clause when it allowed corporate taxpayers, in an affiliated group of corporations which had not elected to file a federal consolidated income tax return, to carry their net operating losses back to arrive at their state base income, while those corporations in an affiliated group which had elected to file a consolidated federal return were required to carry their net operating losses forward. At issue was the disparity in tax treatment between two classes of otherwise identically situated corporations of an affiliated group-one class electing to file a consolidated return, the other class not electing to file a consolidated return. The Searle court articulated the test to determine whether taxpayer classifications met the requirements of the uniformity clause as follows:
"The classification must be based on a real and substantial difference between the people taxed and those not taxed, and that the classification must bear some reasonable relationship to the object of the legislation or to public policy. " (Emphasis in original.) Searle, 117 Ill. 2d at 468, 512 N.E.2d at 1246.
The Searle court rejected the Department of Revenue's justification for the disparity in tax treatment, that being to (1) clarify an ambiguity, (2) further administrative convenience and budgeting concerns, and (3) generate state income. The court held the Department could not maximize the state income in an arbitrary and capricious manner by classifying corporate taxpayers where there was "no real and substantial difference between these two classes rationally related to this stated objective." Searle, 117 Ill. 2d at 478, 512 N.E.2d at 1250.
The posture of a taxpayer such as Venture and that of the state, in a proceeding where the taxpayer challenges a tax on the basis of a claimed violation of the uniformity clause, is explained in Allegro Services, Ltd. v. Metropolitan Pier & Exposition Authority, 172 Ill. 2d 243, 665 N.E.2d 1246, 216 Ill. Dec. 689 (1996), and Geja's Cafe v. Metropolitan Pier & Exposition Authority, 153 Ill. 2d 239, 606 N.E.2d 1212, 180 Ill. Dec. 135 (1992). Both cases involved uniformity clause challenges to nonproperty taxes imposed by the Metropolitan Pier and Exposition Authority based upon the proximity of the taxpayer's property to the McCormick Place exposition building.
In Geja's Cafe, the supreme court stated: "We preface this discussion by noting the relatively narrow scope of the court's inquiry when a tax has been challenged on uniformity grounds. Statutes are presumed constitutional, and broad latitude is afforded to legislative classifications for taxing purposes. A plaintiff challenging such a classification has the burden of showing that it is arbitrary or unreasonable; if a state of facts can be reasonably conceived that would sustain it, the classification must be ...