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Blessing/White, Inc. v. Zehnder

March 29, 2002


The opinion of the court was delivered by: Justice Cerda.


Appeal from the Circuit Court of Cook County. Honorable Joanne L. Lanigan, Judge Presiding.

In this administrative review action, defendants, the Illinois Department of Revenue and its director, Kenneth E. Zehnder *fn1 (Director) (collectively the Department), appeal the order of the circuit court reversing its determination that certain income realized by plaintiffs, Blessing/White, Inc. (BWI), a former New Jersey corporation, its sole shareholders, Norbert Blessing and Stroller White, and Stroller's wife, Linda White (collectively plaintiffs), through the sale of substantially all of BWI's business assets qualified as taxable "business income" under section 1501(a)(1) of the Illinois Income Tax Act (the IITA) (35 ILCS 5/1501(a)(1) (West 2000)). The principal issue raised by the Department's appeal concerns the proper tax classification of income realized by a non-resident corporation that conducts business activities within Illinois, from a sale of substantially all its business assets where, subsequent to the sale, the corporation ceases its operations and distributes all the sale proceeds to its shareholders. The Department contends such gain classifies as "business income" under section 1501(a)(1) and is, thus, taxable by the state. Plaintiffs, on the other hand, claim such gain constitutes nonbusiness income and, as such, falls outside the scope of income taxable under the IITA. O'Connor Partners, a private partnership, and Nicor, Inc., a private holding company, have been permitted to file an amicus curiae brief in support of plaintiffs' position. We agree with plaintiffs and, for the following reasons, affirm the order of the circuit court.


The following facts were stipulated to by the parties during the administrative proceedings.

At all times prior to May 1989, BWI was a New Jersey corporation with its principal place of business in Princeton, New Jersey, engaged in the human resource consulting business, providing services mainly to major private businesses and governmental entities. Specifically, BWI provided instructional programs directed at enhancing the managerial and motivational abilities of its clients' personnel. As part of its operations, BWI maintained a sales office in Chicago.

On May 31, 1989, BWI sold substantially all of its assets to an unrelated third party for $25,996,758. The assets involved in the sale consisted primarily of intangible assets, particularly client relationships, customer lists and a variety of proprietary curricula that had been developed by the company over the years. Per the parties' stipulation, the foregoing assets had been used by BWI in its regular course of business and as part of its income-producing activities in Illinois.

Following the sale, BWI ceased its business activities, including those conducted in Illinois, and distributed nearly all of the sale proceeds to Blessing and White. Only a small amount of cash and a note retained for collection remained as assets.

On its Illinois income tax return for the tax year ending January 30, 1990, BWI classified the gain realized from the May 1989 sale as nonbusiness income not subject to tax by the State and allocated the gain to its corporate domicile of New Jersey. Given BWI's classification of the sale proceeds, Blessing and White, both New Jersey residents, did not file Illinois income tax returns for 1990. *fn2

Upon conducting an audit of BWI's 1990 tax filing, the Department reclassified BWI's gain as business income apportionable to Illinois. The Department thereafter issued notices of tax deficiency to BWI, Blessing and the Whites *fn3 .

Plaintiffs timely protested the Department's reclassification of BWI's gain. During the administrative proceedings, the parties stipulated to all material facts and exhibits. In pertinent part, plaintiffs expressly acknowledged that if the Department's classification of the sale proceeds as business income was accurate, the proceeds were apportionable to Illinois and had to be reported to the State as taxable income.

The case was heard and considered by an administrative law judge (ALJ) in mid-1996. In a written ruling, the ALJ recommended that the Department's classification of BWI's gain be upheld. The Director agreed with the ALJ's assessment and fully adopted the ALJ's ruling as his decision on February 14, 1996. *fn4

Following the Director's ruling, the Department notified plaintiffs of their respective income tax arrearages. According to the Department's calculations, BWI owed $31,211, Blessing owed $27,105, and the Whites owed $30,506.

On April 19, 1996, plaintiffs filed a complaint with the circuit court for review of the Department's decision under the Administrative Review Law (Review Law) (735 ILCS 5/3-101 et seq.). By agreement of the parties, the circuit court allowed the case to remain idle while our supreme court considered the case of Texaco-Cities Service Pipeline Co. v. McGaw, 182 Ill. 2d 262, 695 N.E.2d 481 (1998). Following resolution of that matter, the circuit court concluded BWI's gain realized from the 1989 asset sale constituted nonbusiness income and, hence, was not taxable in Illinois. Accordingly, the circuit court reversed the Department's decision.

The Department's timely appeal ...

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