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Northwest Airlines Inc. v. Department of Revenue

March 20, 1998

NORTHWEST AIRLINES, INC. AND REPUBLIC AIRLINES, INC., PLAINTIFFS-APPELLEES,
v.
THE DEPARTMENT OF REVENUE OF THE STATE OF ILLINOIS, DEFENDANT-APPELLANT.



Appeal from the Circuit Court of Cook County. No. 93 L 50535 The Honorable Randye A. Kogan, Judge, Presiding.

The opinion of the court was delivered by: Justice Hourihane

Plaintiffs, Northwest Airlines, Inc. (Northwest) and Republic Airlines, Inc. (Republic) (collectively referred to as taxpayers), filed a complaint for administrative review, challenging a decision of the Illinois Department of Revenue (Department) which found that "flyover miles" must be included in the numerator of the apportionment fraction applicable to transportation services set forth in section 304(d) of the Illinois Income Tax Act (Act) (35 ILCS 5/304(d) (West 1996)). Flyover miles are miles accrued by "overflights"--flights which do not depart from or land in Illinois, but whose normal route is over Illinois.

The circuit court concluded that flyover miles are not properly included in the apportionment numerator and reversed the Department's decision. The Department appeals. We affirm.

BACKGROUND

Northwest is a Minnesota corporation with its principal place of business in Minneapolis. Republic was a Wisconsin corporation with its principal place of business in Minneapolis which was merged into Northwest. During the relevant tax years, both commercial airlines operated in various states, including Illinois, and were required to apportion their business income to Illinois using the one-factor apportionment formula for transportation companies set out in section 304(d) of the Act. This section states, in relevant part:

"Business income derived from furnishing transportation services *** 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 purposes of this paragraph, a revenue mile is the transportation of 1 passenger or 1 net ton of freight the distance of 1 mile for a consideration." (Emphasis added.) 35 ILCS 5/304(d)(1) (1996). *fn1

The Department issued notices of deficiency for tax years 1983 through 1987 in the aggregate amount of approximately $750,000. The deficiencies reflect several adjustments to the taxpayers' returns. In particular, the Department adjusted each tax year to include flyover miles in the Illinois apportionment fraction numerator.

The taxpayers timely protested the Department's adjustment based on its inclusion of flyover miles. The parties proceeded before the administrative law Judge (ALJ) on a joint stipulation of facts, exhibits, and testimony. In his recommended decision, the ALJ concluded that section 304(d) of the Act authorized the inclusion of flyover miles in the numerator of Illinois' apportionment fraction. Specifically, the ALJ rejected the taxpayers' contention that flyover miles are not in Illinois, but rather are in federal air space. The ALJ further found that the inclusion of flyover miles in the Illinois numerator facilitates 100% apportionment, is not preempted by federal law, and does not run afoul of the Commerce Clause. Finally, the ALJ found that penalties were proper. On May 4, 1993, the Director of the Department adopted the ALJ's recommended decision.

On administrative review, the circuit court looked to the statutory language and concluded that flyover miles are not "in" Illinois. The circuit court also found that Illinois case law requires a nexus between the overflights and this state. See GTE Automatic Electric, Inc. v. Allphin, 68 Ill. 2d 326, 369 N.E.2d 841 (1977) (hereafter GTE); Lakehead Pipe Line Co. v. Department of Revenue, 192 Ill. App. 3d 756, 549 N.E.2d 598 (1989). On October 4, 1994, the court issued its memorandum and decision reflecting its findings, but remanded the matter to the Department for a determination of whether flyover miles should be included in the apportionment formula pursuant to section 304(f) of the Act. Section 304(f) provides for alternative methods of apportionment in certain circumstances. 35 ILCS 5/304(f) (West 1996).

On remand, the ALJ found that the Department had not satisfied the prerequisites in order to invoke an alternative apportionment method under section 304(f). The ALJ also revisited the penalties issue and recommended that penalties be abated. On June 19, 1996, the Director adopted the ALJ's recommended decision on remand and the matter was returned to the circuit court for final Disposition.

On November 4, 1996, the circuit court entered its final judgment order reversing the Department's May 4, 1993, decision. The Department appeals. 735 ILCS 5/3-112 (1996); 155 Ill. 2d R. 301.

ANALYSIS

Interpretation of a statute is a question of law. Branson v. Department of Revenue, 168 Ill. 2d 247, 254, 659 N.E.2d 961 (1995). As the agency charged with administration and enforcement of the Act, the Department's interpretation of the Act is relevant and will receive some deference on review. However, the Department's interpretation is not binding on this court and review proceeds de novo. Branson, 168 Ill. 2d at 254; Thomas M. Madden & Co. v. Department of Revenue, 272 Ill. App. 3d 212, 215, 651 N.E.2d 218 (1995).

Tax laws must be strictly construed; they must be given a reasonable construction, without bias or prejudice against either the State or the taxpayer, in order to effectuate the intent of the legislature. Van's Material Co. v. Department of Revenue, 131 Ill. 2d 196, 202, 545 N.E.2d 695 (1989); United Legal Foundation v. Department of Revenue, 272 Ill. App. 3d 666, 677, 650 N.E.2d 1064 (1995). Where there is doubt, tax statutes will be ...


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