Appeal from the Circuit Court of Cook County. No. 92-L-50767. Honorable John A. Ward, Judge Presiding.
Released for Publication November 10, 1997.
The Honorable Justice Theis delivered the opinion of the court. Greiman, P.j., and Zwick, J., concur.
The opinion of the court was delivered by: Theis
The Honorable Justice THEIS delivered the opinion of the court:
Taxpayer appeals the trial court's order affirming a decision by the Illinois Department of Revenue (Department). The Department ruled that sales shipped from Illinois by a member of a unitary business group to purchasers located outside Illinois should be "thrown back" to Illinois for inclusion in the numerator of the taxpayer's combined Illinois sales factor, where the taxpayer was not separately subject to tax in the destination State. The trial court affirmed the ruling based upon this court's holding in Dover Corp. v. Department of Revenue, 271 Ill. App. 3d 700, 648 N.E.2d 1089, 208 Ill. Dec. 167 (1995). We affirm.
The Illinois Department of Revenue issued notices of deficiencies to Beatrice Companies, Inc. (BCI), and several of its subsidiaries. BCI filed protests, contending that certain corporate income liabilities were taxable outside of Illinois. Specifically, BCI disputed the Department's calculation of the apportionment formula applied toward BCI's Illinois subsidiaries. The formula established the percentage of business income subject to taxation in Illinois. The Department ruled that, under the "throwback rule," Illinois was statutorily authorized to include in the sales factor of the apportionment formula those sales of property shipped from Illinois to purchasers in States where that specific subsidiary was not taxable. See 35 ILCS 5/304(a)(3)(B) (West 1994).
BCI sought administrative review of the Department's ruling, arguing that the throwback of these foreign destination sales was inappropriate, because other subsidiary members of their unitary business group were taxable in the other jurisdictions. The circuit court affirmed the Department's ruling, finding that this court's decision in Dover Corp. v. Department of Revenue, 271 Ill. App. 3d 700, 648 N.E.2d 1089, 208 Ill. Dec. 167 (1995), directly supported the Department's position.
On appeal, BCI takes issue with the application of the throwback rule to members of unitary business groups, contending that the Dover decision was wrongly decided. BCI claims that: (1) as a matter of statutory construction, sales shipped by an Illinois member of a unitary business group to a foreign destination cannot be "thrown back" to Illinois if any other member of the unitary group pays taxes in the foreign destination; and (2) adoption of the Department's position is contrary to the concept of unitary tax policy.
Under the Administrative Review Law, the factual determinations of an administrative agency are deemed prima facie true and correct. 735 ILCS 5/3-110 (West 1994). However, we will review the agency's conclusions of law under a de novo standard. Envirite Corp. v. Illinois Environmental Protection Agency, 158 Ill. 2d 210, 632 N.E.2d 1035, 198 Ill. Dec. 424 (1994). In order to fully address BCI's arguments on appeal, we will first discuss unitary business groups and the history of the Illinois Income Tax Act.
When applied to a corporation, the term unitary business group describes a corporation with interrelated subsidiaries located in various States and countries. Subsidiaries in a unitary business group are so interdependent, however, that it becomes relatively impossible for one State to determine the net income generated by a particular subsidiary's activities within the State. Caterpillar Tractor Co. v. Lenckos, 84 Ill. 2d 102, 417 N.E.2d 1343, 49 Ill. Dec. 329 (1981). The difficulty in determining the portion of income attributable to a particular State translates into difficulty in allocating income for purposes of taxation. Caterpillar, 84 Ill. 2d 102, 417 N.E.2d 1343, 49 Ill. Dec. 329. The Uniform Division of Income for Tax Purposes Act (UDITPA), adopted in 1957 as a model act, sets forth guidelines for apportioning income when a business entity conducts business in different States. 7A U.L.A. 331 (1985). UDITPA was designed to enable States to apportion the income of a multistate corporation based upon the distribution of the corporation's property, sales, and payroll. UDITPA provides that sales, which occur in States where the group member is not taxable, are thrown back to the State of origination. 7A U.L.A. 331 (1985).
In 1969, the Illinois General Assembly enacted the Illinois Income Tax Act (Tax Act), modeling the apportionment portion of the Tax Act after the UDITPA. See Caterpillar Tractor Co. v. Lenckos, 84 Ill. 2d 102, 417 N.E.2d 1343, 49 Ill. Dec. 329 (1981). The Illinois apportionment provision provides that when an entity conducts business in more than one State, a three-factor formula is utilized to determine what proportion of income is attributable to the various States. 35 ILCS 5/304(a) (West 1994). Specifically, the statute provides that:
"If a person other than a resident derives business income from this State and one or more other states, then, except as otherwise provided by this Section, such person's business income shall be apportioned to this State by multiplying the income by a fraction, the numerator of which is the sum of the property factor (if any), the payroll factor (if any) and 200% of the sales factor (if any), and the denominator of which is 4 reduced by the number of factors other than the sales factor which shall have a denominator of zero ***.
(A) The sales factor is a fraction, the numerator of which is the total sales of the person in this State during the taxable year, and the denominator of which is the total sales of ...