APPEAL FROM THE CIRCUIT COURT OF COOK COUNTY No. 93 L 50050 The Honorable Joanne L. Lanigan Judge Presiding.
The opinion of the court was delivered by: Justice Hall
This case involves a tax protest action in which the plaintiff, E&E Hauling, Inc. (E&E), challenges the Illinois Secretary of State's (Secretary) assessment of approximately $512,000 in franchise taxes, license fees, and penalties. Such taxes and fees are calculated on the basis of a corporation's paid-in capital. Following a stock sale transaction between E&E's former sole shareholder and its acquiring sole shareholder, Browning Ferris Industries of Illinois, Inc. (BFI Illinois), E&E's paid-in capital was increased by nearly $58 million. This increase resulted from BFI Illinois' decision, pursuant to section 338 of the United States Internal Revenue Code (Code)(26 U.S.C. §338 (1994)) and generally accepted accounting principles, to make certain push-down accounting adjustments to E&E's balance sheet. In this case we must decide whether an increase in paid-in capital resulting from push-down accounting adjustments to a corporation's balance sheet following a stock sale and section 338 election constitutes a statutory increase in paid-in capital for franchise tax purposes. We find that it does and affirm the judgment of the circuit court.
On November 7, 1986, BFI Illinois purchased 100% of E&E's stock from a private individual. No cash or assets from the stock sale went to E&E. By virtue of this stock sale, BFI Illinois became E&E's sole shareholder.
Following the stock purchase, BFI Illinois executed a section 338 election form choosing to treat the purchase of E&E stock as an asset purchase for federal income tax purposes. Section 338 of the Code allows a buyer to elect to treat its purchase of stock as an asset purchase and to restate the value of assets, liabilities and equity in the amount of the purchase price. This section 338 election allowed BFI Illinois to assign a value of approximately $58 million to a pre-existing asset owned by E&E. BFI Illinois was able to increase the value of the asset to reflect its fair market value, and then to depreciate the asset for income tax purposes based on this new stepped up value. Applying generally accepted accounting principles, BFI Illinois adjusted E&E's balance sheet to reflect this increase in the value of E&E's pre-existing asset and the corresponding increase in E&E's paid-in capital. On its balance sheet, E&E debited the pre-existing asset and credited paid-in capital. These adjustments are commonly referred to as push-down accounting adjustments.
E&E historically reported a paid-in capital of $400,000 to the Secretary. On June 29, 1992, E&E submitted a 1992 annual report reporting paid-in capital of $58,292,080 as of April 30, 1992. E&E also submitted a section 14.30 form which declared two increases in paid-in capital from 1986 and 1988, totaling $57,892,080. The Secretary calculated E&E's annual franchise tax based upon this reported paid-in capital. On December 22, 1992, the Secretary advised E&E that the total amount due for the franchise tax, license fee, penalty, and 1992 annual report fee was $512,846.88.
On December 31, 1992, E&E made payment under protest to the Secretary in the amount of $512,382.88. On January 15, 1993, E&E filed its verified complaint for injunctive, declaratory and other relief, pursuant to section 230/2a of the Protest Monies Act (30 ILCS 230/2a), alleging that the Secretary unlawfully assessed E&E $512,382.88 in franchise taxes, license fees, and penalties for the period ending December 31, 1992, based upon the Secretary's assertions that E&E's paid-in capital was increased by $57,892,080. E&E alleged that the adjustment to its paid-in capital account was the result of the application of push-down accounting principles used solely for the purpose of financial and tax reporting to persons and agencies other than the Secretary. No additional capital was paid into the corporation, no new shareholders were added, no new stock was issued nor were there any stock dividends, stock splits or other similar increases in E&E's paid-in capital. Therefore, there had been no statutory increase in E&E's paid-in capital. E&E conceded a paid-in capital of $400,000.
On January 31, 1996, E&E filed a motion for summary judgment, arguing that no monetary value was actually added to E&E and that accounting entries made for income tax purposes reflecting an increase in paid-in capital have no bearing on the statutory definition of paid-in capital. The Secretary responded that summary judgment for E&E was inappropriate because E&E's paid-in capital had been increased without issuance of shares, when, through push-down accounting adjustments, a new basis was given to its assets, liabilities, and equity (including paid-in capital).
On October 9, 1996, the circuit court denied E&E's motion for summary judgment in a memorandum opinion, finding that an increase in paid-in capital resulting from push-down accounting adjustments constituted an increase in paid-in capital for franchise tax purposes. On May 27, 1997, the Secretary filed a motion for summary judgment. E&E did not respond. On July 21, 1997, the circuit court adopted its prior memorandum opinion and entered a final judgment in favor of the Secretary.
On appeal E&E contends that the circuit court erred in granting summary judgment in favor of the Secretary, finding that an increase in paid-in capital as a result of push-down accounting adjustments made following a stock sale and section 338 election constituted an increase in paid-in capital within the meaning of section 5/1.80(j) of the Business Corporation Act of 1983 (the Act)(805 ILCS 5/1.80(j) (West 1996)), and that the circuit court's holding created a non-uniform taxing classification in violation of the uniformity clause of the Illinois Constitution (Ill. Const. 1970, art. IX, §2).
This case involves a grant of summary judgment. Our review of the circuit court's grant of summary judgment is de novo. Espinoza v. Elgin, Joliet & Eastern Ry. Co., 165 Ill. 2d 107, 649 N.E.2d 1323 (1995). Furthermore, this case involves an issue of statutory construction and a constitutional issue, both questions of law and both subject to our de novo review. See Lucas v. Lakin, 175 Ill. 2d 166, 676 N.E.2d 637 (1997); Desnick v. Department of Professional Regulation, 171 Ill. 2d 510, 665 N.E.2d 1346 (1996); Swavely v. Freeway Ford Truck Sales, Inc., 298 Ill. App. 3d 969, 700 N.E.2d 181 (1998).
Under section 15.35 of the Act (805 ILCS 5/15.35 (West 1996)), domestic corporations are subject to a franchise tax for the privilege of transacting business in this State. An annual franchise tax based on the amount of the corporation's paid-in capital represented in this State is due when the corporation files its required annual report. 805 ILCS 5/15.35(d), 15.40 (West 1996). The rate of the annual franchise tax is one-tenth of 1% of a corporation's paid-in capital, but not less than $25 or more than $1,000,000 per year. 805 ILCS 5/15.45 (West 1996). Section 1.80(j) of the Act defines paid-in capital, in pertinent part, as:
"the sum of the cash and other considerationreceived, less expenses, including commissions, paid orincurred by the corporation, in connection with theissuance of shares, plus any cash and other consideration contributed to the corporation by or onbehalf of its shareholders, plus amounts added ortransferred to paid-in capital by action of the boardof directors or shareholders pursuant to a share dividend, share split, or otherwise." 805 ILCS5/1.80(j)(West 1996).
This case involves the interpretation of that statutory definition. In interpreting a statute our primary goal is to ascertain and give effect to the true intent and meaning of the legislature. Kraft, Inc. v. Edgar, 138 Ill. 2d 178, 561 N.E.2d 656 (1990); Caterpillar Finance Corp. v. Ryan, 266 Ill. App. 3d 312, 640 N.E.2d 672 (1994). Our search for legislative intent appropriately begins with the language of the statute. In re Liquidations of Reserve Insurance Co., 122 Ill. 2d 555, 524 N.E.2d 538 (1988). The meaning of a specific statutory provision is derived from an examination of the language and purpose of the legislation as a whole. In re Liquidations of Reserve Insurance Co., 122 Ill. 2d at 559.
E&E argues that the increase in it's paid-in capital resulting from push-down accounting adjustments made to it's balance sheet following the stock sale and section 338 election did not create a statutory increase in paid-in capital because no external value was ever added to E&E. E&E ...