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McLean v. Department of Revenue

October 22, 1998


The opinion of the court was delivered by: Chief Justice Freeman

Agenda 38-May 1998.

The Department of Revenue of the State of Illinois (Department) directly appeals, pursuant to Supreme Court Rule 302(a) (134 Ill. 2d R. 302(a)), from a final judgment order of the circuit court of Madison County, which set aside in part and confirmed in part a final administrative decision of the Department. In its final decision, the Department found that Leonard C. Pace (plaintiff) *fn1 , d/b/a 270 Auction Barn, was liable for $110,110.92 in taxes, penalties, and interest pursuant to the Retailers' Occupation Tax Act (Act) (35 ILCS 120/1 et seq. (West 1996)) for the tax years 1990 through 1992. Upon administrative review, the circuit court confirmed the Department's assessment only to the extent of $11,111 in taxes under the Act and set aside the Department's assessment in all other respects. The circuit court also struck down as unconstitutional three statutory provisions and invalidated one administrative regulation pertaining to the Act.

The Department now appeals to this court. The appeal lies directly to this court. We affirm in part and reverse in part and remand with directions.


Plaintiff operated an auction business engaged in the sale of household goods on consignment and personal property obtained primarily from estates, storage lockers, and buildings. In 1993, the Department performed a tax audit of plaintiff's business for the period beginning January 1, 1990, and ending December 31, 1992. The Department's auditor subsequently prepared a "corrected return" assessing plaintiff's tax liability at approximately $65,000 in unpaid tax. The auditor also assessed a 30% penalty equaling approximately $19,500 for plaintiff's failure to file a return. Following the Department's issuance of its notice of tax liability to plaintiff, both parties stipulated that the correct amount of unpaid taxes, if any, was $56,424. This amount was based upon $20,000 in unpaid tax due to the sale of goods that plaintiff had owned and $36,424 in unpaid tax due to the sale of goods on consignment. Based on that stipulated total, the Department calculated a 30% "failure to file" penalty in the amount of $16,927 in addition to $36,759.92 in interest as of April 15, 1997.

Plaintiff subsequently filed a protest for an administrative hearing in order to contest the Department's assessment. In September 1996, an administrative hearing was held, at which the following evidence was adduced. The Department introduced its certified corrected return resulting from the audit of plaintiff's business and stipulated once again that its assessment was based on a total of $56,424 in unpaid taxes. Plaintiff testified at the hearing that he was unable to produce his business' books and records for the audit period due to their destruction caused by the Metro East floods of 1993. Nevertheless, plaintiff acknowledged that he did not file tax returns during the tax years in dispute. Plaintiff also testified that, despite the loss of his sales documentation, he knew the identities of all the consignors with whom he had dealt. He also stated that, although he did not announce to prospective bidders the names and addresses of his consignors, he did announce that such information was available to bidders at his front desk.

The administrative law Judge's findings of fact included the Conclusion that plaintiff hired independent contractors to act as auctioneers on plaintiff's behalf. Additionally, neither plaintiff nor his auctioneers orally announced to prospective purchasers the identities or addresses of the owners of the merchandise sold during the tax years in question. Likewise, plaintiff failed to post any lists or distribute hand bills with the names and addresses of consignors of the property to be sold at auction. The administrative law Judge also found that, in determining his tax liability during the relevant tax years, plaintiff relied upon two of the Department's official, explanatory publications-namely a departmental release dated May 1, 1990, and "Informational Bulletin FY 91-49" dated April 1, 1991.

Based on the foregoing, the administrative law Judge rendered a recommendation for Disposition in March 1997, upholding the Department's stipulated assessment of tax, penalties, and interest totaling $110,110.92. The Department adopted this administrative recommendation and issued a final assessment against plaintiff on April 15, 1997. Thereafter, plaintiff filed a complaint for administrative review as well as a complaint for declaratory judgment in the circuit court. Count I of plaintiff's second-amended complaint sought a declaration that the "bond or lien" and "payment for record" requirements of section 12 of the Act (35 ILCS 120/12 (West 1996)) violate the Illinois and United States Constitutions (Ill. Const. 1970, art. I, §§2, 12; U.S. Const., amend. XIV, §1) and the Taxpayers' Bill of Rights Act (20 ILCS 2520/1 et seq. (West 1996)). In count II, plaintiff sought reversal of the Department's final decision in administrative review, alleging that: the Department's determination was predicated upon an incorrect interpretation of section 130.1915 of the Revenue Regulations (86 Ill. Adm. Code §130.1915 (1996)); the Department exceeded the scope of its authority in promulgating section 130.1915; section 130.1915 violates numerous provisions of the state and federal constitutions; and all tax imposed under section 2 of the Act (35 ILCS 120/2 (West 1996)) is unconstitutional.

In order to effectuate his appeal, plaintiff applied for a surety bond. Due to insufficient net worth, however, plaintiff was denied the surety bond. Immediately thereafter, plaintiff requested that the circuit court impose a lien upon his property, which the circuit court granted in the full amount of the Department's final assessment. On October 15, 1997, the circuit court entered a final judgment order explaining the reasoning behind its rulings.

The circuit court ruled that, while its granting of a lien in lieu of a bond rendered moot plaintiff's argument concerning the constitutionality of that provision, the court would nevertheless consider the allegations in plaintiff's complaint by invoking the "public interest" exception to the mootness doctrine. The circuit court concluded that the "bond or lien" requirement is unconstitutional insofar as it denies taxpayers of limited wealth: (1) "Justice by law, freely [and] completely" and "a certain remedy in the laws for all injuries and wrongs" to taxpayers' property, in contravention of article I, section 12, of the Illinois Constitution (Ill. Const. 1970, art. I, §12); due process and equal protection of the laws in contravention of article I, section 2, of the Illinois Constitution (Ill. Const. 1970, art. I, §2) and the fourteenth amendment to the United States Constitution (U.S. Const., amend. XIV, §1); and adequate procedural protection ensured by the Taxpayers' Bill of Rights Act (20 ILCS 2520/2 (West 1996)). Similarly, the circuit court addressed the admittedly moot issue of the constitutionality of the "payment for record" provision of the Act (35 ILCS 120/12 (West 1996)) and ruled that it violated the same constitutional and Bill of Rights provisions as the "bond or lien" requirement.

With respect to plaintiff's dispute over the Department's final tax determination, the circuit court ruled that the Department erroneously applied its own regulation (86 Ill. Adm. Code §130.1915 (1996)) in assessing taxes for the sale of goods on consignment under the Act. In brief, the court ruled that the Department should not have assessed a tax on plaintiff's sale of consignment goods under section 130.1915 of the revenue regulations, since plaintiff was aware of all of his principals in those transactions. The circuit court, therefore, reversed the Department's entire assessment of taxes, penalties, and interest on plaintiff's consignment sales during the audit period. Additionally, the court ruled that the Department exceeded its authority in creating section 130.1915, because it impermissibly alters and extends the substantive provisions of the Act and violates the Act's mandate requiring "reasonable rules and regulations" (35 ILCS 120/12 (West 1996)). The circuit court, however, declined to rule the taxing provision of the Act (35 ILCS 120/2 (West 1996)) unconstitutional. Next, the circuit court determined that certain of the Department's informational publications provided false advice to taxpayers with respect to the taxation of consignment sales. Consequently, the court ruled that plaintiff's reliance upon such publications justified the court's abatement of all taxes imposed on plaintiff's sale of consignment goods. As for the Department's imposition of taxes upon the sale of goods owned by plaintiff, the circuit court abated all but $11,111 of the $20,000 assessed upon such sales, on the grounds that plaintiff had reasonably relied upon the Department's erroneous informational release for 16 of the 36 months for which plaintiff was audited. The court's upholding of $11,111 in taxes was based upon its determination that, for the remaining 20 months of the audit period, the Department's "Informational Bulletin FY 91-49," dated April 1, 1991, corrected any misleading information published in the Department's May 1, 1990, release.

In addition, the circuit court abated all penalties and interest assessed against plaintiff, including penalties and interest associated with the tax of $11,111 confirmed by the court. Finally, the court awarded plaintiff $70,491 in attorney fees and costs pursuant to section 10-55 of the Illinois Administrative Procedure Act (5 ILCS 100/10-55 (West 1996)), for securing the invalidation of an administrative regulation, and pursuant to the Taxpayers' Bill of Rights Act (20 ILCS 2520/7 (West 1996)), for the Department's imposition of a tax assessment without reasonable cause.


Prior to adjudicating these consolidated appeals, we must dispose of the Department's motion to remand taken with this case. Relying on our decision in Trent v. Winningham, 172 Ill. 2d 420 (1996), the Department argues that remand is necessary due to the circuit court's unnecessary rulings as to the constitutionality of various statutory provisions. We disagree. Our decision in Trent hinged upon the fact that the circuit court in that case based its judgment on three alternative grounds: one being that the applicable statute at issue was unconstitutional; and the other grounds being determined through the application of the relevant provisions of the same statute. Since the circuit court's constitutional ground for denying relief to the plaintiff was unnecessary for the resolution of the relevant issue, in light of the two alternative reasons presented, this court determined that that ground could not properly serve as a basis for direct Supreme Court review under Supreme Court Rule 302(a). Trent, 172 Ill. 2d at 426.

This case is distinguishable from Trent. In the instant case, the circuit court's judgment rendering certain statutory provisions unconstitutional did not serve as additional grounds for granting or denying relief. Indeed, the issues concerning the constitutionality of certain statutory provisions existed independently of those issues relating to the merits of plaintiff's arguments on administrative review. In other words, the resolution of the constitutional issues in this case have no bearing upon the outcome of plaintiff's challenge of the Department's tax assessment. Therefore, in our view, the context in which the circuit court rendered the instant statutory provisions unconstitutional satisfies the jurisdictional requirements of Supreme Court Rule 302(a) and does not erode the "scheme of appellate and supreme court review" which this court cautioned against in Trent, 172 Ill. 2d at 426.

Additionally, we note the Department's argument that Trent should nevertheless apply to the instant case by virtue of the circuit court's unnecessary treatment of moot constitutional issues. We agree that plaintiff's successful procurement of a court-ordered lien in lieu of bond and his proper payment for the administrative record on review made it unnecessary for the circuit court to entertain whether the "bond or lien" and "payment for record" provisions of the Act are constitutional. Nevertheless, due to the public nature of those constitutional issues, the likelihood that the issues will recur, and our desire to render a clear determination on these matters, we choose to invoke the "public interest" exception to the mootness rule as set forth in People ex rel. Wallace v. Labrenz, 411 Ill. 618, 622 (1952). Therefore, the Department's motion for remand is denied, and the merits of the Department's appeal will follow.


The Department first contends that the circuit court erred in declaring unconstitutional the "bond or lien" provisions of the Act (35 ILCS 120/12 (West 1996)) and the Administrative Review Law (735 ILCS 5/3-111(a)(9) (West 1996)). The relevant provision under the Administrative Review Law states in pertinent part:

"(a) The Circuit Court has power:

(9) when the particular statute under authority of which the administrative decision was entered requires the plaintiff to file a satisfactory bond and provides for the dismissal of the action for the plaintiff's failure to comply with this requirement unless the court is authorized by the particular statute to enter, and does enter, an order imposing a lien upon the plaintiff's property, to take such proofs and to enter such orders as may be appropriate to carry out the provisions of the particular statute. However, the court shall not approve the bond, nor enter an order for the lien, in any amount which is less than that prescribed by the particular statute under authority of which the administrative decision was entered if the statute provides what the minimum amount of the bond or lien shall be or provides how said minimum amount shall be determined." 735 ILCS 5/3-111(a)(9) (West 1996). The provision under the Act relating to the above section of the Administrative Review Law states as follows:

"Any person filing an action under the Administrative Review Law to review a final assessment or revised final assessment issued by the Department under this Act shall *** file a bond with good and sufficient surety or sureties *** or, instead of the bond, obtain an order from the court imposing a lien upon the plaintiff's property as hereinafter provided. If the person filing the complaint fails to comply with this bonding requirement ***, the Department shall file a motion to dismiss and the court shall dismiss the action unless the person filing the action complies with the bonding requirement set out in this provision within 30 days after the filing of the Department's motion to ...

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