Appeal from the Circuit Court of Cook County, Honorable James Murray, Jr., Judge Presiding.
The opinion of the court was delivered by: Justice Howse
JUSTICE HOWSE delivered the judgment of the court, with opinion.
Presiding Justice McBride and Justice Taylor concurred in the judgment and opinion.
¶ 1 Plaintiff, AT&T Teleholdings, Inc., formerly known as Ameritech Corporation (Ameritech), appeals from a judgment of the circuit court affirming an administrative decision of the Director of the Illinois Department of Revenue (Director) denying, in part, a corporate tax refund. The refund was based on Ameritech's request to carry back a net capital loss suffered in 2002 by its parent company, SBC Teleholdings, Inc. (SBC), to offset a capital gain that only Ameritech reported in 1999. While the parties agree that Ameritech may carry back a portion of SBC's 2002 net capital loss to offset an earlier capital gain, they disagree over the methodology used in determining how much of the 2002 net capital loss is attributable to Ameritech.*fn1
¶ 3 The record indicates, and the parties do not dispute, that on October 8, 1999, SBC acquired all of Ameritech's stock. For federal income tax purposes, the two companies at that time became members of SBC's federal consolidated group, which is simply a group of companies whose stock is owned by the same entity. In contrast, for Illinois income tax purposes, Ameritech and SBC remained distinct businesses until December 31, 1999. Under both federal and Illinois law, Ameritech was required to file two tax returns for 1999: one for the preacquisition short tax period and one for the postacquisition short tax period. After the acquisition, but before December 31, 1999, Ameritech sold its "overlapping wireless assets" and reported a capital gain of $2.7 billion from the sale. Once Ameritech combined the capital gains and losses for the postacquisition period, it reported a net capital gain of $1,582,653,052.
¶ 4 On January 1, 2000, for the purposes of Illinois income tax, Ameritech and its subsidiaries became part of SBC's unitary business group, which, unlike a consolidated group, is a group of companies that are not only related by common ownership, but whose business activities are integrated with, dependent on, and contribute to each other (35 ILCS 5/1501(a)(27) (West 2000)). Thus, from 2000 forward Ameritech and its subsidiaries were included in the Illinois combined income tax returns that SBC filed each year.
¶ 5 On its 2002 Illinois income tax return, the SBC unitary group
reported a net combined capital loss of $3,634,691,714.*fn2
At that time, the SBC unitary group included the
former members of the Ameritech unitary group, which apparently
consisted of Ameritech and its subsidiaries whose business activities
were sufficiently integrated to be part of that unitary business
group. The net capital loss was part of SBC's business income, which
could be carried back to both Ameritech's postacquisition tax period
in 1999 as well as SBC's 1999 tax year. The capital loss had to be
divided, however, because in 1999, Ameritech and SBC were not part of
the same unitary business group. Thus, Ameritech then filed an amended
income tax return for the postacquisition period in 1999, which
carried back a portion of the 2002 loss to offset Ameritech's capital
gain, and claimed a refund of $38,204,008 for that period. The method
used by Ameritech to allocate the portion of the 2002 SBC net capital
losses to Ameritech is not pertinent to this appeal.
¶ 6 The Illinois Department of Revenue (Department) audited Ameritech's amended income tax return to determine the portion of SBC's 2002 net capital loss that could be carried back by Ameritech's postacquisition tax period. In determining the carry back amount, the auditor excluded the capital losses of the members of the SBC consolidated group in 2002 that were not members of the SBC unitary group in 2002. Since companies need only be related by common ownership in order to be members of a federal consolidated group, not all members of the 2002 SBC consolidated group were members of its unitary business group, which included only those companies whose businesses are integrated. The auditor then allocated a portion of the net capital loss to each member of the 2002 SBC unitary group that reported a loss on the 2002 SBC consolidated federal income tax return. The share of the loss allocated to each member of the 2002 SBC unitary group was determined by multiplying the total net capital loss by a fraction, the numerator of which was that member's capital loss in 2002 and the denominator of which is the total capital loss of the SBC unitary business group in 2002. From the members who were allocated a share of the 2002 net capital loss, the auditor then identified those who were members of the Ameritech unitary business group in the postacquisition tax period in 1999. Those two members, Ameritech and Ameritech Development, were the only ones eligible to carry back the 2002 net capital losses to the Ameritech's 1999 postacquisition tax period. As a result of the auditor's adjustments, the Department allocated 2.089%, or $83,920,965, of the net capital loss to Ameritech, which resulted in a refund of $1,969,436 for Ameritech's postacquisition tax period. Since the method used by the Department allocates a portion of the net capital loss only to those members that actually reported a loss, this method is consistent with the separate-company accounting method, which apportions to each company its separate and identifiable earnings and reports to the state the earnings of the companies within the state.
¶ 7 Ameritech protested the partial denial of its refund and proposed a revised methodology to determine the share of the net capital loss which could be used to offset Ameritech's gain during that period. In that protest, Ameritech relied on the combined apportionment method, which consists of attributing a share of the net capital loss to each member of the SBC unitary group based on each member's sales or gross receipts. Under that method, each member's share of the net capital losses was based on the proportion of that member's gross receipts to the sum of all members' gross receipts. As Ameritech noted, section 304(e) of the Illinois Income Tax Act
(Act) requires this method to be used by unitary business groups to apportion their business income between Illinois and other states, where members of those business groups operate in other states. See 35 ILCS 5/304(e) (West 2002). Thus, unlike the method used by the Department, Ameritech included the loss reported by members of the 2002 SBC consolidated group that were not members of the 2002 SBC unitary business group and attributed shares of that capital loss to all members of the 2002 SBC unitary group, regardless of whether they had actually incurred a loss in 2002. Under this method, 28.2903% of the 2002 net capital loss would be apportioned to Ameritech, which would result in a carry back of $1,028,264,669 of the net capital loss and a refund of $36,234,572.
¶ 8 After an administrative hearing, the administrative law judge (ALJ) upheld the Department's partial denial of Ameritech's refund. In doing so, the ALJ noted that "section 304(e) *** contains no language authorizing or even addressing, the allocation of capital losses to members of a unitary business group for purposes of determining net capital loss carrybacks." He rejected Ameritech's claim that "every aspect of the determination of income taxable to Illinois derived by a member of a multicorporate unitary business group must be determined using formulary apportionment." He then found that the separate accounting method, which allocates shares of a loss to the members of a unitary group which actually incurred it, is expressly authorized by the Act, and that section 100.5270 of Title 86 of the Illinois Administrative Code (86 Ill. Adm. Code 100.5270 (2002) provides a method for allocating net capital losses, which was appropriately used by the Department. In addition, the ALJ rejected Ameritech's reliance on sections 100.2340 and 100.2350 of Title 86 of the Administrative Code, which govern the attribution of "combined Illinois net losses," which is not the same as capital losses, among members of a unitary business group for carry back to a separate return year.
¶ 9 Furthermore, the ALJ rejected Ameritech's attack on the validity of section 100.5270 of title 86 of the Administrative Code as waived. Similarly, the ALJ rejected, on procedural grounds, Ameritech's other alternative argument, based on section 304(f) of the Act, that the application of the Department's method of allocating the 2002 net capital loss would lead to a "distorted result" in this case. Lastly, the ALJ declined to address Ameritech's constitutional arguments because he lacked authority to adjudicate the constitutionality of the Act. The Director accepted the ALJ's recommendations in his final order.
¶ 10 The circuit court affirmed the Director's decision, and upheld the Department's reliance on section 100.5270 as authority for the Department's method of allocating the 2002 net capital loss to Ameritech. In doing so, the circuit court noted that the Department's method "focuses on 2002 capital losses experienced by Ameritech entities within AT&T." On the other hand, under Ameritech's proposed method, "a substantial part of the capital loss would come from SBC entities in 2002," which would result in a windfall to Ameritech. According to the circuit court, preventing a windfall would not "raise a constitutional issue." As to Ameritech's other arguments, the circuit court adopted the ALJ's conclusions of law by reference.
¶ 11 On appeal, Ameritech now contends that the Director erred in upholding the Department's method of computing the portion of the 2002 net capital loss that was attributable to Ameritech because that net capital loss must be distributed among the members of the 2002 unitary group in accordance with the combined apportionment method mandated by section 304(e) of the Act.
According to Ameritech, section 304(e), which requires unitary business groups to apportion their business income using the combined apportionment method described above, governs the manner in which such unitary business groups must apportion their net capital losses.
¶ 13 We first note that when an appeal is taken from the entry of a judgment by the circuit court on administrative review, it is the decision of the administrative agency, not the judgment of the circuit court, which is under review. See, e.g., Provena Covenant Medical Center v. Department of Revenue, 236 Ill. 2d 368, 386 (2010). Further, the parties do not dispute that the applicable methodology to calculate the portion ...