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TTX Co. v. Whitley

March 13, 1998


Appeal from the Circuit Court of Cook County. Honorable Alexander P. White, judge Presiding.

The opinion of the court was delivered by: Justice Hartman

William T. Lundeen, in his capacity as chief counsel of the Illinois Department of Revenue (Department), appeals the circuit court's order finding him in contempt of court after he refused to comply with a discovery order requiring the Department to disclose information found in income tax returns belonging to other State taxpayers. On appeal, Lundeen raises as issues whether: (1) the Illinois Income Tax Act (35 ILCS 5/917(a) (West 1994) (section 917(a)) prohibited him from producing the information requested in the discovery order; (2) the information was discoverable as relevant to the cause of action; (3) the scope of the circuit court's order to produce was overly burdensome; and (4) the circuit court's order finding him in contempt should be vacated.

Plaintiff, TTX Company (TTX), is a Delaware corporation with its principal place of business in Chicago, Illinois. On its federal income tax returns, TTX listed its business activity as "Leasing Railroad Cars." The company, originally named Trailer Train Company, was formed by national railroads in 1956, which pooled their resources to establish a nationwide fleet of flatcars, to help them lower costs and compete more effectively with the trucking industry for the shipping of freight. By 1991, TTX and its subsidiaries operated and maintained a fleet of almost 100,000 rail cars, which are leased to railroads pursuant to a pooling agreement approved by the Surface Transportation Board (STB) (previously known as the Interstate Commerce Commission). The company's objective is to "provide standardized railroad equipment and related services to the nation's railroads at the lowest possible car hire rates."

All railroads in possession of TTX cars pay charges set by TTX's rate policy, which provides that TTX will charge only what it needs to pay its expenses. TTX made no attempt to maximize its profits or pay a dividend to its shareholders during the period audited by the Department. Although the STB does not regulate TTX as a common carrier, the agency monitors the company's pooling activities pursuant to 49 U.S.C. sec. 11322 (1997).

TTX calculated its Illinois income taxes for the calendar year 1984 using a three-factor apportionment formula pursuant to section 304(a) of the then applicable Illinois Income Tax Act (Ill. Rev. Stat. 1983, ch. 120, par. 3-304(a)) (section 3-304(a)). On January 9, 1986, after reviewing TTX's 1984 income tax return, the Department sent TTX a notification requesting more information. A handwritten note at the bottom of the notice *fn1 stated: "It appears you should be filing and apportioning your income as a transportation company. Please explain why a three factor formula is used ***. Please respond within 60 days." After reading this notation, and examining the relevant statutes, TTX began calculating its Illinois income taxes using a single factor transportation formula, pursuant to section 304(d) of the Illinois Income Tax Act (Ill. Rev. Stat. 1983, ch. 120, par. 3-304(d)) (section 304(d)), which applies to business income derived from furnishing transportation services.

In 1991, the Department audited the combined tax returns of TTX and its subsidiaries for 1987, 1988, and 1989 (audit period), and concluded that TTX was not furnishing transportation services within the meaning of section 304(d) and incorrectly used the single factor transportation formula to calculate its income taxes. The Department informed TTX that it should have used the three-factor formula. Applying this formula, on July 21, 1992, the Department issued a Notice of Deficiency to TTX in the amount of $852,508. The Department also assessed a penalty against TTX for failing to pay its entire tax liability for the audit period by the due date.

TTX filed a notice of payment under protest and deposited the entire amount due, $1,104,150, which included the alleged deficiency plus interest and penalties, into a protest fund. See 30 ILCS 230/1 et seq. (West 1992). TTX then filed the present action, requesting a declaration that TTX is a transportation company as defined by section 304(d), and a Judgement in favor of TTX in the amount of the protest payment. In an agreed preliminary injunction order, defendants were prohibited from transferring TTX's payment out of the protest fund.

In its second set of interrogatories, TTX requested defendants to "identify each taxpayer who apportioned income to Illinois using the single factor transportation formula" during the audit period. Defendants objected to the request, arguing that it sought confidential information about other taxpayers, was unduly burdensome, and did not seek information reasonably calculated to lead to the discovery of admissible evidence.

Defendants also moved for summary judgment, arguing that as a matter of law TTX was required to use the three-factor formula when calculating its state income taxes during the audit period. Defendants asserted that TTX did not qualify for the single-factor formula because it did not transport passengers or freight. In response, TTX argued that because it was at least indirectly involved in furnishing transportation services, questions of fact existed as to whether it qualified for application of the single-factor formula, precluding summary judgment.

TTX moved to compel defendants to answer the second set of interrogatories. The circuit court continued defendants' summary judgment motion pending TTX's motion to compel. Subsequently, in a written order, the court denied the motion to compel "in so far as it would require the Department to produce a list of taxpayers who file income tax returns in Illinois using the single factor transportation apportionment formula." The court found that TTX "has not made any allegations in its complaint with respect to disparate treatment, violation of due process and/or equal protection." Nonetheless, the court wanted to "satisfy itself" that the Department applied section 304(d) to other taxpayers in the same manner it applied that section to TTX during the audit years.

The circuit court ordered TTX to produce a list of 200 taxpayers it believed might be using the single factor formula when filing their income tax returns. From that list, the Department was ordered to compile a second list identifying which of those taxpayers actually used the single factor formula; and a third list identifying taxpayers from the second list who were audited during the audit period. The Department would give these lists to the court for review. The court further required the Department to prepare an affidavit explaining the criteria used to determine if a taxpayer may use the single factor formula, and whether the criteria were applied in an equal manner to all taxpayers being audited during the audit period. Lastly, the court ordered the Department to furnish for in camera inspection any documentation necessary to support the facts alleged in the affidavit.

After the Department indicated that it would not comply with the order, the circuit court ordered it to "provide a detailed affidavit" explaining its position. In response, Lundeen prepared an affidavit in which he asserted that the discovery order violated the Income Tax Act, and the information being requested was irrelevant to TTX's claim. Lundeen also detailed how complying with the Act would place an enormous burden on the Department's resources.

The circuit court held Lundeen in contempt for refusing to comply with the discovery order and fined him $25 per day until he complied. The court stayed the contempt sanctions pending resolution of the Department's appeal.

I Lundeen argues that the circuit court abused its discretion in finding him in contempt of court for refusing to comply with the discovery order. The circuit court retains great latitude in defining the scope of discovery. In re Marriage of Daniels, 240 Ill. App. 3d 314, 324, 607 N.E.2d 1255 (1992). A discovery order will not be disturbed absent abuse of discretion, although the court does not have discretion to compel disclosure ...

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