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TTX Company v. Whitley

March 31, 2000


Appeal from Circuit Court of Cook County.

Honorable Alexander P. White, Judge Presiding.

JUSTICE HARTMAN delivered the opinion of the court:

Plaintiff TTX Company (TTX) appeals from the circuit court's order granting summary judgment to defendants Douglas L. Whitley, former Director of the Illinois Department of Revenue, and Patrick Quinn, former Treasurer of the State of Illinois (collectively "Department"). TTX's suit against defendants sought, among other things, to recover state income taxes paid under protest for calendar years 1987 through 1989. TTX asserts that the court erred in granting summary judgment in favor of defendants and against TTX, because a genuine issue of material fact exists as to whether the single factor apportionment formula for companies "furnishing transportation services," set forth in section 304(d) of the Illinois Income Tax Act (IITA) (Ill. Rev. Stat. 1987, ch. 120, par. 3-304(d)) (recodified as 735 ILCS 5/304(d)(West 1996)), *fn1 may be used only by companies that directly haul at least one passenger or one ton of freight for one mile.

This court previously decided the Department's chief counsel's appeal of a contempt order entered against him by the circuit court because of his noncompliance with a discovery request in this case. TTX Co. v. Whitley, 295 Ill. App. 3d 548, 692 N.E.2d 790 (1998). Some of the facts set forth in that decision are reiterated below for purposes of clarity.

On October 9, 1992, TTX filed a verified complaint against defendants pursuant to the State Officers and Employees Money Disposition Act ("Protest Act") (Ill. Rev. Stat. 1987, ch. 127, par. 170 et seq., recodified as 30 ILCS 230/1-230 (West 1996)), asking to recover income tax, interest and penalty remittances assessed against it by the Department for tax years 1987 through 1989, and seeking declaratory judgment, injunction and other relief. TTX had timely filed a notice of protest with the Department and paid $1,104,150 into the protest fund on September 16, 1992. On October 14, 1992, the circuit court entered an agreed preliminary injunction order to prevent the transfer of said sum out of the protest fund described in the Protest Act, among other things.

TTX, formerly known as Trailer Train Company, is owned by and provides a fleet of rail cars to the nation's railroads, its "members," pursuant to a pooling agreement and car contracts authorized by the Interstate Commerce Commission (ICC). TTX and its subsidiaries, Railbox Corporation and Railgon Corporation (collectively "TTX"), provide rail cars primarily for intermodal service, which is the movement of freight from origin to destination, using more than one mode of transportation. TTX designs equipment to facilitate the transportation of intermodal freight, in conjunction with railroads and motor carriers. Under the terms of a car contract, the member railroad using the cars is referred to as the "carrier," which pays TTX for use of the car based both on a per diem and on the mileage of movement of the car, loaded or empty. The carrier's fees are reduced 50% (a reclaim of per diem charges) when a TTX car is not in "transportation service." Under the car contract, a car is not in transportation service when "it is neither under load nor in movement (loaded or empty) at any time during the day."

TTX also consults with railroads, motor carriers, and shippers to estimate how much intermodal freight will be transported by rail each year and what share of that freight will be carried in TTX equipment, then ensuring that it will have the right number and type of equipment in the right place to move the freight in the most efficient and cost-effective manner possible. Most of the goods transported in trailers and containers are finished goods, such as clothing, packaged foods and household furnishings. These trailers and containers are freely interchanged from motor carriers to rail and back. When traveling by rail, those trailers and containers are carried on TTX equipment most of the time. TTX owns 76 to 80% of the rail cars that haul containers and trailers. TTX equipment carries approximately 20% of all rail car loads in the country. TTX is considered an integral part of the intermodal freight distribution system in the United States.

Under the interchange rules of the Surface Transportation Board (formerly the ICC), railroads must provide "through rates and joint routes." Under these rules, freight cars are moved freely between railroads. When a freight car belonging to one railroad is transferred onto the line of a different railroad, the owning railroad is compensated for the use of its car by hour and mileage. Where, however, the cars are owned by private car line companies (companies not owned by the railroads or operating under pooling agreements), compensation, or car hire, is paid for each loaded mile used. TTX, although not a railroad, is compensated for the use of its cars in the same manner as a railroad would be, rather than as a non-railroad rail car owner. The Department maintains, however, that TTX is a "private car line."

Under the terms of the pooling agreement between TTX and its member railroads, as approved by the ICC, TTX is compensated only when its cars are actually in "transportation service." If a car is not used for five days, the railroad may return it to TTX. TTX therefore directly benefits from the hauling of freight, where it receives compensation only when its cars are actually in use. TTX does not lease cars and does not have individual contracts with railroads or shippers, where the use of its cars is governed by a pooling agreement. Even railroads that are not members of the pooling agreement must compensate TTX for the use of its cars in the same manner and amount as do member railroads. TTX's mission "is to provide standardized railroad equipment and related services to the nation's railroads at the lowest possible car hire rates while providing for proper maintenance, allowing for growth and modernization of the fleet and permitting financing of equipment on reasonable terms."

Prior to 1986, TTX apportioned its income to Illinois for state income tax purposes using the standard three factor formula. On about January 9, 1986, TTX received correspondence from the Department regarding its tax return for tax year 1984. That correspondence stated, in part, "It appears you should be filing and apportioning your income as a transportation company. Please explain why a three factor formula is used on the IL-1120, Part III."

On February 13, 1986, TTX wrote a letter to the Department, the only communication between TTX and the Department prior to the audit, asking it to substantiate its reason for suggesting it should apportion its income as a transportation company. Thereafter, beginning with the 1985 tax year, TTX began filing and apportioning its income using the single factor formula.

In a letter dated July 21, 1992, following its audit of TTX's returns for the 1987, 1988 and 1989 tax years, the Department notified TTX of a deficiency in the amount of $852,508 covering taxes and penalties for those years, much of which was based on the Department's determination that TTX must use the three factor formula rather than the single factor formula. It also indicated interest was owed on that deficiency. The auditor, in a report dated August 26, 1991, also concluded that TTX should have used the multi-factor apportionment formula of property, payroll and sales for the audit period. In computing the proper amount of taxes owed under the multi-factor apportionment method, the auditor relied on the ratio of in-state to out-of-state miles traveled by TTX's railcars in computing the sales and property factors, because TTX did not provide records of the time its mobile property was in and out-of-state, the usual basis for computing the sales and property factors of mobile property under Department regulations. The auditor determined that using "miles traveled" was the best available method for computing the apportionment factors for TTX's railcars.

On February 1, 1996, the Department filed its motion for summary judgment arguing that, because TTX did not haul freight or carry passengers, it did not meet the statutory requirement for single factor apportionment under section 304(d). TTX responded that, as an integral part of the railroad industry, it indirectly, if not directly, provided transportation services. TTX argued there was a question of material fact as to whether it provided transportation services, within the meaning of section 304(d). During the pendency of the case, TTX sought discovery concerning the Department's actual interpretation of section 304(d). On January 5, 1996, TTX posed an interrogatory that read: "For the tax years 1987, 1988, and 1989, please identify each taxpayer who apportioned income to Illinois using the single factor transportation formula provided for in 35 ILCS 5/304(d)(1)." The Department objected to this interrogatory on the grounds that TTX did not seek relevant information, the information sought would be unduly burdensome for the Department to produce, and it sought confidential taxpayer information. On July 11, 1996, following a hearing, the circuit court denied TTX's motion. Nevertheless, the court expressed a need to satisfy itself that the Department was applying section 304(d) to other taxpayers in the same manner that it applied to TTX for the years at issue, and ordered TTX to give the Department a list of 200 taxpayers that TTX believed might be using the formula, which the Department was to review and from its records provide the court a second list of those taxpayers on the first list who did in fact use the single factor formula. The Department was also to prepare a third list for the court of taxpayers on the second list who had been audited for any of the tax years at issue. Finally, the Department was to prepare an affidavit, stating what criteria were applied to determine if a taxpayer could use the single factor formula and whether those criteria were applied in an equal manner to those taxpayers audited by the Department.

On August 15, 1996, the circuit court entered an order directing the Department to provide a detailed affidavit as to why the Department would not be able to comply with the July 11, 1996 order. In an affidavit by William Lundeen, chief counsel, dated August 20, 1996, the Department refused to comply with the order, averring that obeying the order would violate section 917(b) of the IITA, which states, in part, that all income tax information received from tax returns or from an investigation shall be confidential and that any person who divulges information received by the Department from returns shall be guilty of a Class A misdemeanor. The court held Lundeen in contempt for his refusal to comply with the order. Lundeen filed a notice of appeal to this court, which reversed the contempt order, holding that the circuit court could not order production of any information that was ...

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