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Caveney v. Bower

November 28, 2001

JACK AND MARGARET CAVENEY, PLAINTIFFS-APPELLEES,
v.
GLEN L. BOWER, DIRECTOR OF THE DEPARTMENT OF REVENUE; JUDY BAAR TOPINKA, TREASURER OF THE STATE OF ILLINOIS; AND THE DEPARTMENT OF REVENUE, DEFENDANTS-APPELLANTS.



Appeal from the Circuit Court of Du Page County. No. 98-TX-006 Honorable John W. Darrah, Judge, Presiding.

The opinion of the court was delivered by: Justice McLAREN

UNPUBLISHED

Defendants, Glen L. Bower, Judy Baar Topinka, and the Illinois Department of Revenue (collectively, the State), filed an appeal from the trial court's grant of summary judgment in favor of plaintiffs, Jack and Margaret Caveney. We affirmed the trial court's ruling in Caveney v. Bower, 319 Ill. App. 3d 13 (2001). On June 6, 2001, our supreme court denied defendants' petition for leave to appeal. However, in the exercise of its supervisory authority, our supreme court vacated this court's judgment and remanded the cause to this court for additional consideration in light of its decision in Commonwealth Edison Co. v. Will County Collector, 196 Ill. 2d 27 (2001). After due consideration of the court's decision in Commonwealth Edison Co., we affirm the judgment of the circuit court.

The Caveneys are shareholders in Panduit Corporation. For the tax years ending December 31, 1993, 1994, and 1995, Panduit elected to be treated as a subchapter S corporation for federal and state income tax purposes. See 26 U.S.C.A. §1362 (West 1988); 35 ILCS 5/1501(a)(28) (West 1998). During the tax years in question, the Caveneys claimed a research and development tax credit against their Illinois income tax liability, pursuant to section 201(k) of the Illinois Income Tax Act (the Act) (35 ILCS 5/201(k) (West 1996)), for research and development expenditures made by Panduit. The State disallowed the claims and calculated back taxes and interest owed in the amount of $1,091,131.60. The Caveneys paid this sum under protest, then filed suit under the State Officers and Employees Money Disposition Act, seeking an order requiring defendants to return the sum paid under protest. See 30 ILCS 230/1 et seq. (West 1998). The parties filed cross-motions for summary judgment. The trial court granted the Caveneys' motion and entered judgment for the Caveneys. Defendants appealed the trial court's judgment.

The Caveneys argued that a 1999 amendment to section 201(k), part of Public Act 91--644 (Pub. Act 91--644, eff. August 26, 1999), applied to their case and allowed them to take research and development credits for the tax years 1993-95. At the time the Caveneys claimed the tax credit, the Act provided in relevant part:

"Beginning with tax years ending after July 1, 1990, a taxpayer shall be allowed a credit against the tax imposed by subsections (a) and (b) of this Section for increasing research activities in this State. The credit allowed against the tax imposed by subsections (a) and (b) shall be equal to 6½% of the qualifying expenditures for increasing research activities in this State.

For purposes of this subsection, 'qualifying expenditures' means the qualifying expenditures as defined for the federal credit for increasing research activities which would be allowable under Section 41 of the Internal Revenue Code and which are conducted in this State, 'qualifying expenditures for increasing research activities in this State' means the excess of qualifying expenditures for the taxable year in which incurred over qualifying expenditures for the base period, 'qualifying expenditures for the base period' means the average of the qualifying expenditures for each year in the base period, and 'base period' means the 3 taxable years immediately preceding the taxable year for which the determination is being made." 35 ILCS 5/201(k) (West 1992).

However, in 1999, the General Assembly added the following language to section 201(k) of the Act:

"For partners, shareholders of subchapter S corporations, and owners of limited liability companies, if the liability company is treated as a partnership for purposes of federal and State income taxation, there shall be allowed a credit under this subsection to be determined in accordance with the determination of income and distributive share of income under Sections 702 and 704 and subchapter S of the Internal Revenue Code.

No inference shall be drawn from this amendatory Act of the 91st General Assembly in construing this Section for taxable years beginning before January 1, 1999." 35 ILCS 5/201(k) (West Supp. 1999).

The legislature amended the Act so that the research and development credit clearly applies to shareholders of subchapter S corporations, such as the Caveneys. In this court's opinion in Caveney v. Bower, 319 Ill. App. 3d 13 (2001) (Caveney I), we held that under First of America Trust Co. v. Armstead, 171 Ill. 2d 282, 289 (1996), the applicable law is the law in effect at the time of the court's decision on appeal and that the Department had no "vested right" in the application of the earlier statute.

In Commonwealth Edison, our supreme court settled any conflict concerning the application of statutory amendments to existing controversies by adopting the analysis of the United States Supreme Court in Landgraf v. USI Film Products, 511 U.S. 244, 128 L. Ed. 2d 229, 114 S. Ct. 1483 (1994). The court explained the Landgraf approach as follows:

"Under the Landgraf test, if the legislature has clearly indicated what the temporal reach of an amended statute should be, then, absent a constitutional prohibition, that expression of legislative intent must be given effect. However, when the legislature has not indicated what the reach of a statute should be, then the court must determine whether applying the statute would have a retroactive impact, i.e., 'whether it would impair rights a party possessed when he acted, increase a party's liability for past conduct, or impose new duties with respect to transactions already completed.' [Citation.] If there would be no retroactive impact, as that term is defined by the court, then the amended law may be applied. [Citation.] If, however, applying the amended version of the law would have a retroactive impact, then the court must presume that the legislature did not intend that it be so applied." Commonwealth Edison, 196 Ill. 2d at 38-39.

This approach employs a three-step analysis. Initially, the court must determine whether the legislature has expressly prescribed the statute's proper reach. If there would be no retroactive impact, the amended law may be applied. If it ...


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