Appeal from the Circuit Court of Cook County. No. 07 L 50939 Honorable James C. Murray, Jr., Judge Presiding.
The opinion of the court was delivered by: Justice Rochford
JUSTICE ROCHFORD delivered the judgment of the court, with opinion. Presiding Justice Hoffman and Justice Cunningham concurred in the judgment and opinion.
¶ 1 Defendants-appellants, the Department of Revenue (Department) and Brian A. Hamer, Director of Revenue (Director),*fn1 have appealed from an order of the circuit court reversing the Director's administrative decision to deny a corporate income tax refund to plaintiff-appellee, AT&T Teleholdings, Inc., f/k/a SBC Teleholdings, Inc., f/k/a Ameritech Corporation (Ameritech). For the following reasons, the judgment of the circuit court is affirmed in part and vacated in part.
¶ 3 The matters at issue in this appeal arise out of Ameritech's merger with SBC Teleholdings, Inc. (SBC), on October 8,1999. Prior to that time, Ameritech and its subsidiaries were a part of their own federal consolidated group for purposes of filing federal tax returns. Upon the merger, Ameritech and its subsidiaries became a part of SBC's federal consolidated return group. As such, Ameritech's federal income tax reporting for the 1999 calendar year was spread over two separate federal tax returns. First, Ameritech filed its own federal consolidated return for the premerger period covering January 1, 1999, through October 8, 1999. Second, Ameritech was included as part of SBC's federal consolidated return group with respect to the postmerger period covering October 9, 1999, to December 31, 1999.
¶ 4 Pursuant to federal tax regulations, Ameritech made a "rateable allocation" election to allocate its 1999 federal income between the pre- and postmerger periods. Under this election, Ameritech calculated its total taxable federal income for all of 1999 and then allocated that income on the basis of the number of days in each period. As such, 281/365ths of Ameritech's 1999 income was allocated to the premerger period, while 84/365ths of that income was allocated to the postmerger period.
¶ 5 Ameritech and its subsidiaries similarly allocated their 1999 income between two Illinois combined tax returns, with one covering the premerger period (premerger return) and one accounting for the postmerger period (postmerger return). Notably, Ameritech did not become a part of SBC's Illinois "unitary business group" in 1999, so it filed both Illinois combined returns solely on behalf of itself and its subsidiaries. Once again, Ameritech followed the "ratable allocation" election it made in its federal returns for the purpose of allocating its income between the two 1999 Illinois tax returns. As such, 281/365ths of Ameritech's 1999 income was allocated to the premerger period, with 84/365ths of that income allocated to the postmerger period.*fn2
¶ 6 Because Ameritech earned business income in 1999 from Illinois and other states, Ameritech also had to calculate how much of its total income in each period should be apportioned to Illinois and therefore be subject to Illinois income taxation pursuant to section 304 of the Illinois Income Tax Act (Income Tax Act). 35 ILCS 5/304 (West 2000). This calculation included the use of an "apportionment factor." Id. On both of its 1999 Illinois tax returns, Ameritech calculated its apportionment factor by utilizing the formula described in section 304(h)(2) of the Income Tax Act, applicable to "tax years ending on or after December 31, 1999 and before December 31, 2000." 35 ILCS 5/304(h)(2) (West 2000). Both of Ameritech's 1999 Illinois tax returns were delivered tothe Department on October 13, 2000, in a single envelope.
¶ 7 In processing Ameritech's two Illinois tax returns, the Department changed the apportionment factor for the premerger return to reflect the use of the formula described in section 304(h)(1) of the Income Tax Act, applicable to "tax years ending on or after December 31, 1998 and before December 31, 1999." 35 ILCS 5/304(h)(1) (West 2000). As a result of this change, the amount of Ameritech's tax liability for the premerger period was increased by almost $1.5 million. This in turn reduced the amount of Ameritech's overpayment of estimated income tax for the premerger period by this same amount. As such, the amount of overpayment the Department credited to Ameritech's estimated tax payments for the next tax year, pursuant to Ameritech's request on its premerger return, was similarly reduced.
¶ 8 The Department did not provide Ameritech "notice of deficiency" of this change or provide Ameritech an opportunity to protest the decision beforehand. See 35 ILCS 5/904, 908 (West 2000). Instead, the Department's correction of Ameritech's return was made pursuant to its authority to summarily correct a "mathematical error" on a taxpayer's return. See 35 ILCS 5/903(a)(1) (West ¶ 9 Subsequently, the Department mailed Ameritech a letter dated March 3, 2001. This letter concerned the Department's assertion that Ameritech owed certain penalties for late filing of its tax returns and did not address the issue of the proper apportionment factor in any way.
¶ 10 It was in a letter dated May 13, 2002, addressed to a company affiliated with Ameritech, that the Department first provided any written notice of the change to the apportionment factor with respect to the premerger Illinois tax return. At the request of the affiliated company, the Department had provided worksheets outlining Ameritech's history of overpayment of income tax in proceeding years. In describing these worksheets, the letter stated: "Please note that the income tax liability shown for the tax year ended October 08, 1999 was increased from the amount of tax as originally filed due to the use of incorrect weighted apportionment factors."
¶ 11 Additionally, the Department also completed an audit of several of Ameritech's Illinois tax returns, including the two returns filed for 1999. In reporting the results of the audit of the 1999 returns, the Department again employed the apportionment factor formula described in section 304(h)(1) of the Income Tax Act to the premerger return. Following the Department's audit, Ameritech filed amended Illinois tax returns for both the pre- and postmerger periods of 1999. The amended premerger return contained figures matching Ameritech's originally filed premerger return, and Ameritech therefore sought a refund based upon the Department's improper insistence on using the apportionment formula contained in section 304(h)(1) of the Income Tax Act.
¶ 12 On February 18, 2005, the Department partially granted and partially denied Ameritech's refund request with respect to the premerger return. First, the Department granted Ameritech a nearly $400,000 refund with respect to matters not at issue here. Second, the Department denied a refund of nearly $600,000 with respect to other unrelated issues. Finally, the Department rejected Ameritech's argument that the apportionment factor calculation for the premerger return should be calculated pursuant to the section 304(h)(2) apportionment formula instead of the one outlined in section 304(h)(1). As such, the Department rejected that portion of Ameritech's refund request--nearly $1.5 million--that was attributable to this dispute. The Department also rejected Ameritech's contention that the apportionment factor calculation was improperly corrected as a mathematical error during the processing of the original premerger return. Specifically, the Department rejected the argument that any disagreement about this calculation was substantive and not therefore a mathematical error subject to correction without prior notice and an opportunity to protest. Ameritech filed a timely protest of the Department's partial denial of its refund request and requested an administrative hearing.
¶ 13 Instead of a full administrative hearing, however, the administrative proceedings below proceeded on the basis of a stipulated record consisting of stipulated facts and an agreement as to the admissibility and genuineness of a number of documents. The stipulated facts generally included the factual background outlined above, and the documents admitted included, inter alia, the tax returns, correspondence, audit results, refund denial, and written protest we have previously discussed.*fn3 Ameritech and the Department then provided the administrative law judge (ALJ) with written argument.
¶ 14 In its briefs to the ALJ, Ameritech argued that it had properly utilized the apportionment factor formula contained in section 304(h)(2) for the premerger return. Additionally, Ameritech asserted that, because there was a substantive dispute between it and the Department as to the correct apportionment factor formula applicable to the premerger return, the Department's use of the mathematical error procedure was improper. Moreover, even if that procedure was proper, the Department failed to provide proper notice of the correction it made to the original premerger return. In light of all these arguments, Ameritech contended that it was owed a refund. That argument was further supported, in part, by a contention that the Department was now time-barred by statute from making any further claim for taxes it might claim were owed from the premerger period.
¶ 15 The ALJ rejected Ameritech's arguments in a written recommendation for disposition issued on July 9, 2007. First, the ALJ concluded that the Department properly concluded that Ameritech used the wrong apportionment factor in its premerger return. The ALJ noted that, on its face, that return was filed for a period of time ending on October 8, 1999, and as such was not a return filed for a tax year ending "on or after December 31, 1999 and before December 31, 2000." As such, the ALJ also concluded that the Department properly utilized the mathematical error procedure to correct this plain error on the premerger return. Indeed, the ALJ rejected Ameritech's argument that, because it elected to calculate its income for the premerger period on the basis of a prorated amount of its total 1999 income for purposes of its federal return, Ameritech kept its "books open" until the end of 1999 and the apportionment factor formula contained in section 304(h)(2) of the Income Tax Act was thus properly used for the premerger return. In essence, the ALJ concluded that under applicable Federal and Illinois law, the pre- and postmerger periods represented totally separate tax years to which different apportionment factors applied.
¶ 16 Finally, the ALJ concluded that the Department's May 13, 2002, letter provided Ameritech sufficient notice of the correction of this mathematical error, even if that notice did not fully track certain statutory requirements contained in the Income Tax Act. The ALJ noted that this notice plainly informed Ameritech that "the income tax liability shown for the tax year ended October 08, 1999 was increased from the amount of tax as originally filed due to the use of incorrect weighted apportionment factors." The Department issued a notice of decision adopting the AJL's findings and conclusions on July 13, 2007.
¶ 17 Ameritech filed a request for rehearing, in which it contended: (1) the Department's notice of the mathematical error correction violated the Taxpayers' Bill of Rights Act (20 ILCS 2520/1 et seq. (West 2000)); (2) the Department's interpretation of the section 304(h) of the Income Tax Act violated the uniformity clause of the Illinois Constitution (Ill. Const. 1970, art. IX, § 2); and (3) the ALJ erred in concluding that the Department properly corrected a mathematical error on Ameritech's original premerger return. The ALJ rejected all three of these arguments on the merits in an order entered on August 20, 2007, while also noting that the first two arguments were waived because they had not been previously raised. The Department accepted these findings in a notice of final decision entered the same day.
¶ 18 Thereafter, Ameritech filed a timely complaint for administrative review. In the circuit court, Ameritech essentially restated the arguments it had made during the administrative proceeding and asked that the Department's administrative decision be reversed. In addition to responding to Ameritech's restated arguments, the Department also contended in its written brief that because Ameritech had originally paid more in tax for the premerger period than it owed, irrespective of which apportionment factor actually applied, a request for a refund was Ameritech's sole remedy under the Income Tax Act. Thus, the Department contended that any issue regarding the proprietary of using the mathematical error procedure to correct the original premerger return was irrelevant because Ameritech had in fact filed just such a request for a refund. Indeed, the Department asserted that Ameritech lacked any standing to challenge the mathematical error procedure in light of this record.
¶ 19 The circuit court filed an initial order on October 6, 2010, in which it first rejected the Department's argument with respect to Ameritech's standing to challenge the mathematical error procedure. The circuit court found that this argument had been waived because it was not raised in the administrative proceeding. The circuit court next rejected the AJL's finding that the Department's use of the mathematical error procedure to correct the premerger return was proper. The circuit court concluded that the mathematical error procedure was inapplicable because resolution of the apportionment factor issue would require such extensive analysis of both federal tax law and the Income Tax Act that a notice of deficiency should have been issued instead. Finally, the circuit court rejected the Department's argument that any error in using the mathematical error procedure was harmless because Ameritech finally received a full administrative hearing in the context of its request for a refund. The circuit court concluded that accepting the Department's position would allow it to improperly and without statutory authority offset Ameritech's overpayment of income tax reported on the original premerger return by the additional amount the Department deemed to be actually due.
¶ 20 As a result of these findings and conclusions, the circuit court ordered that the Department's administrative decision be reversed and directed the Department to issue Ameritech a refund with interest. The circuit court also noted that, in light of its decision invalidating the use of the mathematical error procedure in this case, it did not actually need to make any conclusions as to whether the notices issued by the department were sufficient or which apportionment factor formula actually applied to Ameritech's premerger return.
¶ 21 The Department filed a motion to reconsider the circuit court's decision. In that motion, the Department contended that the circuit court's original decision overlooked the Department's statutory authority to offset a taxpayer's overpayments against other tax liabilities, as provided in section 909(a) of the Income Tax Act. 35 ILCS 5/909(a) (West 2000). The circuit court granted the Department's motion for reconsideration to the extent that its prior analysis did not properly account for the authority granted by section 909(a) of the Income Tax Act. However, the circuit court ultimately concluded that this section of the Income Tax Act did not alter its prior conclusion that the Department improperly utilized the mathematical error procedure to correct Ameritech's original premerger return, or its conclusion that the request for a refund was improperly denied on that basis. The circuit court therefore reaffirmed its reversal of the Department's decision and its direction that the Department issue Ameritech a refund with interest. The Department has now appealed.
¶ 23 On appeal, the Department makes a number of attempts to demonstrate why the circuit court's decision should be overturned and the administrative decision in this matter upheld. However, we need not address each of these arguments because we find that the Department: (1) did not properly utilize the mathematical error procedure to correct Ameritech's premerger return; and (2) has forfeited any argument with respect to the applicability of its offset powers under section 909(a) if the Income Tax Act.
¶ 24 A. Standard of Review
¶ 25 As an initial matter, the parties dispute the proper standard of review applicable in this matter.
¶ 26 Our review of the Department's final administrative decision is governed by the Administrative Review Law. 735 ILCS 5/3-101 et seq. (West 2010); 35 ILCS 5/1201(West 2010). While our review extends to all questions of law and fact presented by the record (735 ILCS 5/3-110 (West 2010)),"[i]n administrative cases, our role is to review the decision of the administrative agency, not the determination of the circuit court." Marconi v. Chicago Heights Police Pension Board, 225 Ill. 2d 497, 531 (2006). "The applicable standard of review depends upon whether the question presented is one of fact, one of law, or a mixed question of fact and law." American Federation of State, County & Municipal Employees, Council 31 v. Illinois State Labor Relations Board, State Panel, 216 Ill. 2d 569, 577 (2005).
¶ 27 Specifically, it is well established that an agency's findings and conclusions of fact are deemed to be prima facie true and correct and overturned only if they are against the manifest weight of the evidence. City of Sandwich v. Illinois Labor Relations Board, State Panel, 406 Ill. App. 3d 1006, 1008 (2011) (citing Cinkus v. Village of Stickney Municipal Officers Electoral Board, 228 Ill. 2d 200, 210-11 (2008)). A ...