Appeal from the Circuit Court of Cook County. No. 99 L 51105 Honorable Joanne L. Lanigan, Judge Presiding.
The opinion of the court was delivered by: Justice Greiman
This is an action for administrative review of the Illinois Department of Revenue's (the Department) determination that plaintiff JI Aviation, Inc. (JI Aviation), owed state use tax on its purchase of a corporate jet. The circuit court reversed the Department and subsequently denied reconsideration. The Department now appeals, and no issues are raised on the pleadings. For the reasons that follow, we affirm.
The following undisputed facts have been set forth in the fully stipulated factual record.
On May 25, 1994, JI Aviation and Richland Development Corp. entered into an "Aircraft Acquisition Agreement" (Agreement) regarding a Gulfstream G-II aircraft. Richland is a subsidiary of the Pennzoil Company, which manages Pennzoil's real estate holdings and provides staff support to Pennzoil and its affiliates. In the Agreement, Richland made a representation to JI Aviation that it was a nonretailer, that its sale of the Gulfstream G-II was an isolated or occasional sale, and that it was not engaged in the business of selling airplanes at retail. JI Aviation agreed to pay Richland $3.9 million for the airplane by depositing this sum in an escrow account controlled by Richland. As a deposit on the airplane, JI Aviation transferred $50,000 of the purchase price to the escrow account. Disbursal of funds from the escrow account, transfer of title to JI Aviation, and other actions necessary to close the sale were also controlled by Richland.
Richland agreed to deliver possession of the Aircraft to JI Aviation in Manchester, New Hampshire. JI Aviation agreed to reimburse Richland for certain closing costs, including the expense of flying the airplane from Savannah, Georgia, to Manchester, New Hampshire. According to the Agreement, upon Richland's physical delivery of the airplane to JI Aviation, title to the airplane would pass "from Richland to JI Aviation free and clear."
However, another provision in the Agreement permitted Richland to receive the purchase price and transfer title through the Nationsbanc Leasing Corporation of North Carolina as an accommodation to Richland. Unlike Richland, Nationsbanc is a retailer of aircraft. The entire purpose of that provision was to effectuate a like-kind exchange pursuant to section 1031 of the Internal Revenue Code (the Code) (I.R.C. §1031 (1989)) *fn1 by exchanging the Gulfstream G-II for a Gulfstream G-IV aircraft, which Nationsbanc had acquired on behalf of Richland. In other words, Richland was to transfer legal title to the Gulfstream II through Nationsbanc in return for a Gulfstream G-IV, and then Nationsbanc was to deliver legal title to the Gulfstream G-II to JI Aviation and was to receive the purchase price of $3.9 million.
On June 3, 1994, Richland entered into an assignment and assumption agreement with Nationsbanc whereby it agreed to "transfer full legal and valid title to the Gulfstream G-II aircraft to [Nationsbanc] free and clear of any and all liens, pledges, mortgages, security interests or other encumbrances of any type." On that same date, a Federal Aviation Administration (FAA) Aircraft bill of sale was prepared showing Richland as the "seller" and Nationsbanc as the "purchaser" of the aircraft. Specifically, the bill of sale executed that day shows Richland as the seller and Nationsbanc as the purchaser of the Gulfstream G-II "in consideration of a reduction in the purchase price of the G-IV Aircraft to the extent of $3,900,000 received from the purchaser." Also on that date, Nationsbanc issued a warranty bill of sale for the Gulfstream G-II to JI Aviation. In it, Nationsbanc warranted:
"(i) Seller has received a Warranty Bill of Sale from Richland Development Corporation and an Aircraft Bill of Sale on Federal Aviation Administration Form 8050-2 from Richland Development Corporation purporting to transfer title in the Aircraft to Seller; (ii) Seller has good and lawful right to sell its right title and interest in and to the Aircraft to Purchaser; (iii) such title transferred hereunder is transferred to Purchaser free from any lien, charge or encumbrance created by or through Seller, and (iv) Seller, at its sole cost, will defend said title transferred hereunder forever against the claims of any and all third parties."
Also pursuant to the assignment and assumption agreement, Nationsbanc was at all times contractually bound to transfer legal title to JI Aviation and reconvey the funds it received for the benefit of Richland. Further, Richland fully indemnified Nationsbanc for title it received and reconveyed to JI Aviation, and all of Richland's obligations to JI Aviation under the agreement survived the assignment and transfer of bare legal title from Richland through Nationsbanc to JI Aviation.
Accordingly, on June 3, 1994, once the Gulfstream G-II arrived in Manchester, New Hampshire, JI Aviation directed that a payment be wired to the escrow agent's account for $3,864,141, which consisted of the $3.85 million purchase price balance plus closing costs of $14,141 paid by JI Aviation. Richland then instructed the escrow agent to file the FAA bill of sale, which transferred title from Richland to Nationsbanc, with the FAA at 2:49 p.m., and to file the warranty bill of sale, which transferred title from Nationsbanc to JI Aviation, one minute later at 2:50 p.m.
On October 14, 1997, the Department issued a notice of tax liability, which proposed an assessment of use tax, a late filing penalty, and interest against JI Aviation in the amount of $369,976 for JI Aviation's acquisition of title to the Gulfstream G-II from Nationsbanc. On March 12, 1998, JI Aviation filed a protest and a request for an informal review and hearing, arguing that it was Richland, not Nationsbanc, that had sold the aircraft to JI Aviation, and that the transaction was exempt from use tax as an occasional sale. Under section 1 of the Retailers' Occupation Tax Act (35 ILCS 120/1 (West 1994)):
"The isolated or occasional sale of tangible personal property at retail by a person who does not hold himself out as being engaged (or who does not habitually engage) in selling such tangible personal property at retail, or a sale through a bulk vending machine, does not constitute engaging in a business of selling such tangible personal property at retail within the meaning of this Act ***."
Moreover, under section 3-65 of the Use Tax Act (35 ILCS 105/3-65 (West 1994)):
"If the seller of tangible personal property for use would not be taxable under the Retailers' Occupation Tax Act despite all elements of the sale occurring in Illinois, then the tax imposed by this Act does not apply to the use of the tangible personal property in this State."
JI Aviation further claimed that the late filing penalty and related interest should be withdrawn because JI Aviation had a reasonable basis for failing to file a use tax return on this transaction.
After briefing, the administrative law judge (ALJ) issued a recommendation for disposition, affirming the notice of tax liability. On August 17, 1999, the Director of the Department accepted the ALJ's recommendation, making it a final administrative determination. The Department's decision upheld the proposed use tax assessment against JI Aviation and the ALJ concluded:
"[T]axpayer does not have the right to assert that the substance of the transaction, rather than the form, should prevail. There is no consistency in the taxpayer's characterization of the transaction. This taxpayer should not be allowed to avoid Use Tax, while one of the other parties [Richland] to the transaction prevailed at the federal level by characterizing the transaction differently and with the full knowledge and consent of JI Aviation."
The ALJ also refused to abate for "reasonable cause" the late filing penalty imposed by the Department against JI Aviation for similar reasons.
JI Aviation timely filed a complaint for administrative review in the circuit court of Cook County. In the circuit court, the Department framed the legal issue for the court's determination as follows:
"[T]he only legitimate question that this Court must answer is whether JI Aviation can require the Department to ignore the form of the transaction, and give tax effect to the substance of the transaction, which does appear to be a sale of the aircraft in question from Richland to JI Aviation."
In its decision, the circuit court reasoned that economic realities determine tax consequences and that the "substance over form" doctrine requires that the use of a conduit, Nationsbanc, to transfer property must be ignored for Illinois tax purposes. Specifically, the court held:
"Both parties were consistent in their characterization of this transaction. Richland was the seller both for federal and state tax purposes. There was no economic substance in the transfer of bare legal title by Nationsbanc to JI Aviation."
Accordingly, in determining that the sale of the aircraft occurred from Richland to JI Aviation, the court determined that it was a nontaxable occasional sale under the Illinois Use Tax Act.
Initially, the parties disagree as to the appropriate standard of review. The Department notes that JI Aviation sought judicial review of the Department's final administrative decision under Administrative Review Law (735 ILCS 5/3-101 (West 1998)). On appeal from the circuit court's judgment, this court reviews the administrative agency's decision and not that of the circuit court. XL Disposal Corp. v. Zehnder, 304 Ill. App. 3d 202, 207 (1999). Moreover, under the Administrative Review Law, "[t]he findings and conclusions of the administrative agency on questions of fact shall be held to be prima facie true and correct." 735 ILCS 5/3-110 (West 1998). The agency's factual findings are entitled to deference and will be reversed only if against the manifest weight of the evidence. XL Disposal, 304 Ill. App. 3d at 207; Metropolitan Water Reclamation District of Greater Chicago v. Department of Revenue, 313 Ill. App. 3d 469, 475 (2000), citing Abrahamson v. Illinois Department of Professional Regulation, 153 Ill. 2d 76, 98 (1992) (deference is owed an administrative agency's determination based on its ...