Court Opinion

ID: 7021316
Source: CourtListenerOpinion
Date Created: 2022-07-24 04:45:13.583039+00
Date Added: 2024-06-11T16:10:34.602005
License: Public Domain

JUSTICE McMORROW, dissenting: Because I conclude that the challenged election provision of the Illinois Income Tax Act (Ill. Rev. Stat. 1983, ch. 120, par. 2— 203(e)(2)(E)) is unconstitutional as a denial of equal protection, I respectfully dissent from the decision of the majority. In my view the provision simply bears no rational relation to the justifications relied upon by the majority as the basis for its opinion. Analysis of the preferred reasons for finding the legislation constitutional demonstrates that the legislation achieves none of the objectives it is intended to accomplish. The presumption of the validity of tax legislation upon which, the majority relies is not irrebuttable. Indeed, it is well settled that the “State may not rely upon a classification whose relationship to an asserted goal is so attenuated as to render the distinction arbitrary or irrational.” (City of Cleburne v. Cleburne Living Center (1985), 473 U.S. 432, 446, 87 L. Ed. 2d 313, 324, 105 S. Ct. 3249, 3258; see Zobel v. Williams (1982), 457 U.S. 55, 61-63, 72 L. Ed. 2d 672, 678-80, 102 S. Ct. 2309, 2313-14.) In addition, any classification itself must be reasonable and founded upon valid differences between the groups accorded disparate treatment. Commercial National Bank v City of Chicago (1982), 89 Ill. 2d 45, 71-73, 432 N.E.2d 227; Fiorito v. Jones (1968), 39 Ill. 2d 531, 535-36, 236 N.E.2d 698. The only distinction in the case at bar is between affiliated corporate members which file consolidated Federal tax returns and those which file unconsolidated Federal tax returns. Based upon this distinction alone, the majority reasons that restricting only the former group to carry forward operating losses, while permitting the latter group the luxury to elect either to carry forward or carry back such losses, is a legitimate classification because (1) it eliminates the need to process amended returns; (2) it alleviates difficulties of allocation which would seriously hinder the administration and collection of the tax; and (3) it prevents a taxpayer’s use of the carryback election to reduce his Illinois taxes. In my opinion none of the reasons posited by the majority justifies such disparate treatment of affiliated corporate group members simply on the basis of whether they file consolidated or unconsolidated Federal tax returns. None of the goals offered by the majority to justify the statute is accomplished by this legislative scheme. The contention that the legislation eliminates the need to process amended returns is untenable because unconsolidated Federal tax returns wherein a carryback for a net operating loss is claimed must also be processed by the Department. Thus, the legislative scheme does nothing to eliminate any additional burden of processing amended income tax returns. The statute does not alleviate allocation difficulties because the identical allocation difficulties arise whether an election to carry back or carry forward is made by an affiliated corporate member which files an unconsolidated return. These allocation difficulties are created by the legislative scheme itself. Inasmuch as the present scheme permits an affiliated corporate group member which filed an unconsolidated tax return to carry back its loss for the purpose of reducing taxes, it should not deny an affiliated corporate group member which files a consolidated return the same option, even though an effect of such carry back may be the reduction of taxes. Lastly, I note that the majority makes no effort to specify any legitimate difference between an affiliate which files a consolidated return and one which files an unconsolidated return; my analysis also fails to discern any that would justify the distinction found here. Section 2 — 203(e)(2)(E) confounds and renders interdependent two separate, distinct and wholly unrelated Federal elections available to corporate affiliates: first, the election to file a consolidated or unconsolidated Federal return; second, the election to carry forward or carry back a net operating loss. The majority’s reasoning that the challenged provision is constitutional relies heavily upon statements made by Representative Campbell during the legislature’s debate regarding the adoption of the revision to section 2 — 203(e)(2)(E) at issue here. Yet even these statements were prefaced»with the admission by Representative Campbell, “I’m confused myself.” (80th Illinois General Assembly, Transcript of House Proceedings, June 24, 1977, at 60-61 (statement of Rep. Campbell).) In my view this confusion is carried forward in the majority’s decision today. I The first justification relied upon by the majority is that section 2 — 203(e)(2)(E) is designed to “eliminate the need to process amended returns for a corporate taxpayer suffering a loss if that taxpayer is part of an affiliated group ***.” (140 Ill. App. 3d at 253, citing 80th Illinois General Assembly, Transcript of House Proceedings, June 24, 1977, at 60-61 (statement of Rep. Campbell).) The majority states simply that this objective is “legitimate” without further elaboration. In fact, this objective is illusory. The Department is still required “to process amended returns for a corporate taxpayer suffering a loss if that taxpayer is part of an affiliated group” and files an unconsolidated Federal income tax return. In its brief, the Department of Revenue argues that this objective is one of administrative convenience. According to the Department, in order to audit a member of an affiliated corporate group, it is necessary to compare the State and Federal tax returns filed by the taxpayer. The Department contends that this verification or “tracking” process is rendered more difficult if it must refer to the Federal consolidated return containing financial data from all of the members of the affiliated corporate group. I am not persuaded by this argument for two reasons. First, the Department’s claim overlooks the fact that under the Illinois Income Tax Act, a taxpayer which files a consolidated Federal tax return is also required to file a return for State income tax purposes setting forth its separate Federal taxable income as determined from its Federal income tax return. (See Ill. Rev. Stat. 1981, ch. 120, par. 2— 203(e)(2)(E).) Consequently, Federal consolidated income is immaterial under the Illinois Income Tax Act. More importantly, the Department’s contention that denial of the carryback election is justified because of such “tracking” difficulties is illogical. I find no connection between the form of an affiliated corporate member’s Federal tax return, an election to carry forward or carry back a net operating loss, and any administrative inconvenience in auditing the member’s State tax return. Assuming, arguendo, the Department’s assertion that “tracking” of an affiliate’s tax return is more complicated where the affiliate has filed a consolidated Federal tax return, I see no reason how this could possibly have any bearing on whether the affiliate carries forward or carries back a net operating loss. Instead, any burden of verification arises whenever the State return of a federally consolidated affiliate is audited, without regard to whether the election is made to carry forward or carry back a net operating loss. Indeed, under the present framework a burden of verification could be alleviated only if the Department did not comparatively review the Federal and State returns of affiliated corporate group members which filed a consolidated Federal return and elected to carry forward an operating loss, but did audit the affiliate’s State tax returns when a loss was carried back. I am hard pressed to discern the rationality of such a scheme. The Department claims nevertheless that such “tracking” difficulties arise because “the choice of [an affiliate filing a consolidated federal return] as to whether to carry back or carry forward on the State level for a given year could and often in practice did deviate from the choice made by the affiliated group *** as to whether to carry forward or carry back one’s net operating losses on the Federal consolidated tax return for the same taxable year.” Contrary to the Department’s assertion, however, Illinois law does not permit an affiliate to elect a carryback for State income tax purposes when the election to carry back has not been made by the affiliated group for Federal tax purposes. The Illinois Income Tax Act does not create a separate and parallel set of “Illinois deductions” to those deductions allowed under the Internal Revenue Code for the purpose of determining taxable income. (Bodine Electric Co. v. Allphin (1980), 81 Ill. 2d 502, 510, 410 N.E.2d 828.) Instead, the Act “authorize[s] a refund of State taxes when a change in the Federal taxable income resulting from a loss carry back effects a change in State base income. ***. [A] net-operating-loss deduction [for federal tax purposes] is relevant to the computation of Illinois tax liability only insofar as this deduction enters into the computation of base income under the relevant provisions of the Act.” (Bodine Electric Co. v. Allphin (1980), 82 Ill. 2d 502, 510, 410 N.E.2d 828.) In short, since the Illinois Income Tax Act specifically provides that “taxable income” is that which is “properly reportable for Federal income tax purposes for the taxable year under the provisions of the Internal Revenue Code” (Ill. Rev. Stat. 1981, ch. 120, par. 2 — 203(e)(1)), it necessarily follows that an affiliate which filed a consolidated Federal return could only attempt a loss carryback in its Illinois State tax return if the affiliated group elected a loss carryback in its consolidated Federal return. II The second justification offered by the majority is that the deemed election provision will preserve appropriated financial resources and facilitate budgetary planning. On this point the majority reasons that “loss carrybacks generate refunds from prior tax years that must specifically be appropriated by the State legislature which, unlike the Federal government, may not resort to deficit spending if on-hand resources prove to be inadequate.” 140 Ill. App. 3d at 253. I find this basis insufficient ground upon which to hold the challenged provision constitutional. Difficulties of appropriation and budgetary planning are not alleviated under the present arrangement, as any affiliated corporate group member which files an unconsolidated tax return creates such problems when it elects to carry back an operating loss. Thus, to deny the election to one group but not another simply because of the consolidated form of a Federal tax return is arbitrary and irrational. Furthermore, if the majority’s assumption that refunds “must specifically be appropriated by the State legislature which, unlike the Federal government, may not resort to deficit spending if on-hand resources prove to be inadequate” (140 Ill. App. 3d at 253) is correct, then it would follow that all immediate refunds, not simply those resulting from a loss carryback election, must be specifically appropriated by the legislature, regardless of their natures or sources. None of such appropriation or financial planning bears any direct relation to the form of a taxpayer’s Federal tax return per se. Ill The majority concludes that section 2 — 203(e)(2)(E) is valid because it bears a rational relationship to the legislative objective of preventing a taxpayer’s use of the carryback election to reduce his Illinois taxes “to a maximum extent.” (140 Ill. App. 3d at 254.) In this regard, the majority finds the Illinois Supreme Court’s decision in Caterpillar Tractor Co. v. Lenckos (1981), 84 Ill. 2d 102, 417 N.E.2d 1343, to be analogous. In Caterpillar, the court held that since the Illinois Income Tax Act defines taxable income as that which is properly reported for Federal income tax purposes (Ill. Rev. Stat. 1983, ch. 120, par. 2 — 203(e)(1)), a taxpayer’s election to take taxes paid to a foreign government as a credit for Federal income tax purposes was binding upon its State income tax return. Thus, the taxpayer was precluded from claiming a deduction on its State return. In my view, the majority’s reliance upon Caterpillar is misplaced, as the decision is distinguishable analytically from the instant case. The central issue in Caterpillar was whether an election at the Federal level for taxation purposes was binding upon the taxpayer at the State level. In the case at bar, however, the central issue is whether a taxpayer’s opportunity to make two separate, distinct, and unrelated elections at the Federal level (first, to file a Federal consolidated return, and second, to carry a loss back or carry it forward) can be restricted and limited at the State level though denial of a loss carry back if the taxpayer has elected to file a consolidated Federal return. Caterpillar would be pertinent here if the issue were whether a Federal election to take a loss carryback or carryover were binding upon the taxpayer at the State level. Consequently, the decision provides no guidance to a resolution of the instant cause. Instead of Caterpillar, I find the reasoning of the Illinois Supreme Court in Continental Illinois National Bank v. Lenckos (1984), 102 Ill. 2d 210, 464 N.E.2d 1064, cert. denied (1984), 469 U.S. 918, 83 L. Ed. 2d 231, 105 S. Ct. 296, applicable to the case at bar. In Continental Bank, the court considered whether premiums paid to acquire federally tax exempt State and municipal bonds could be properly included as “interest” subject to Illinois income tax pursuant to section 2 — 203(b)(2)(A) of the Illinois Income Tax Act. (Ill. Rev. Stat. 1981, ch. 120, par. 2 — 203(b)(2)(A).) The court reasoned that its “resolution of this issue must be consistent with the general purpose of the Act to impose a tax measured by net income. [Citation.]” (Continental Illinois National Bank v. Lenckos (1984), 102 Ill. 2d 210, 217, 464 N.E.2d 1064.) Based upon this premise, the court rejected the Department of Revenue’s claim that inclusion of such premiums as income contributed to the “ ‘simple design of the Act.’ ” (102 Ill. 2d 210, 217, 464 N.E.2d 1064.) The court reasoned, “It is arbitrary and unreasonable to discriminate by according different treatment to federally exempt bonds than to federally taxable bonds. The differing treatment bears no relationship to the object of the Illinois Income Tax Act to impose a tax measured by net income.” 102 Ill. 2d 210, 218-19, 464 N.E.2d 1064. The Illinois Income Tax Act has two purposes relevant to the instant cause. One of these is to define Illinois taxable income as that which is “properly reportable for federal income tax purposes for the taxable year under the provisions of the Internal Revenue Code.” (Ill. Rev. Stat. 1981, ch. 120, par. 2 — 203(e)(1).) The second objective of the Act is “to put [affiliated groups which file consolidated returns] on a parity with other affiliated groups which do not file consolidated returns ***.” (Legislative History of the Illinois Income Tax Act, Official Commentary — Technical Explanation, Illinois State Tax Reporter (CCH), vol. 1, sec. 18 — 022, at 1910 (1977); see, e.g., Ill. Rev. Stat. 1981, ch. 120, pars. 2 — 203(b)(2)(O), 2 — 203(e)(2)(E).) In my view, the challenged section is arbitrary and unreasonable, because it fails to determine an affiliate’s State income according to its taxable Federal income, and because it accords different tax treatment to corporate affiliates which file a consolidated Federal tax return and those affiliates which file an unconsolidated Federal return. Thus, the section bears no relationship to the objects of the Act to define State taxable income as that which is properly reportable for Federal income tax purposes and to ensure parity of taxation treatment between affiliates which file consolidated and unconsolidated Federal tax returns. Indeed, section 2 — 203(e)(2)(E) is inherently and directly contrary to both of these goals. In relying upon Caterpillar, the majority reasons that the “real issue here is whether a taxpayer that has made the election of exercising the privilege of filing a consolidated Federal return for the purpose of gaining certain Federal tax advantages may use those advantages to reduce Federal tax liability and then turn around and rescind the election in order to reduce State tax liability.” (140 Ill. App. 3d at 254.) The majority concludes that any injury caused to plaintiff is a result of plaintiff’s voluntary election to file a consolidated return, rather than a result of section 2 — 203(e)(2)(E) itself. In my opinion, this reasoning is disingenuous. At the Federal level, members of an affiliated corporate group may elect to file a consolidated or an unconsolidated tax return. They may also elect to carry forward or carry back any net operating loss. These two elections are separate, distinct, and wholly unrelated. At the State level in Illinois, however, these two Federal elections are linked together and rendered interdependent for State tax purposes by section 2 — 203(e)(2)(E), such that the filing of a consolidated Federal tax return precludes the election to carry back a net operating loss. In fact, the section impermissibly “creates” a separate set of Illinois “deductions” {i.e., the election to carry forward or carry back a net operating loss), and then forecloses to certain taxpayers the exercise of this “election” at the State level because of the taxpayer’s exercise of an unrelated privilege at the Federal level (i.e., the election to file a consolidated return). It is the section itself, not the taxpayer’s election, which causes the taxpayer’s injury. The essential effect of section 2 — 203(e)(2)(E) is to penalize a taxpayer at the State level because of the taxpayer’s exercise of a privilege at the Federal level. I find this arbitrary, irrational, and contrary to the purposes of the Act. The majority’s decision closes with the comment that denial of a loss carryback is “a mere limitation on the time of deduction [which] does not demonstrate the hostile and oppressive discrimination against corporate affiliates filing consolidated returns necessary to overcome the presumed constitutionality of section 2 — 203(e)(2)(E) of the Illinois Income Tax Act. [Citation.]” (Emphasis in original.) (140 Ill. App. 3d at 256.) I find this conclusion to be in error. In my view, section 2 — 203(e)(2)(E) works a much greater hardship than merely limiting the time period in which a deduction may be made. Instead, it works the more onerous burden of a total denial of such deductions all together for a certain group of corporate affiliates. For example, if an affiliate’s losses are substantial in a taxable year and the affiliate is on the verge of bankruptcy, any carry forward may ultimately occur in a future year in which the affiliate has become insolvent or may occur in future years in which the affiliate continues to suffer losses. Since it is possible that an affiliated corporate group member’s financial situation would be such that a carry forward of net loss would be of little or no benefit, the result of the section may be, essentially, a complete denial of a substantial withholding. Lastly, I observe that the majority fails to specify any real and substantial differences between affiliates which file consolidated returns and those which file unconsolidated returns in order to justify the challenged section. My analysis reveals no differences between the two groups which would validate the disparate treatment which section 2 — 203(e)(2)(E) accords them. Such discrimination is not based upon a company’s organizational structure, since both classes of taxpayers are members of an affiliated corporate group. It cannot be based upon a company’s profits or losses, because even if both classes of taxpayers generate identical amounts of taxable income or loss, only the taxpayer which files a consolidated Federal income tax return is denied the opportunity to carry back its net operating loss. Despite the fact that both groups are identically situated in all material respects, the affiliate filing a consolidated Federal income tax return is penalized by being denied the ability to carry back its losses, even though the affiliate which does not file a consolidated return is free to carry back or carry forward such losses. The Department of Revenue does not dispute the contention of Caterpillar Tractor Company in its amicus curiae brief that Illinois is the only State in this country which penalizes an affiliated corporate member’s election of the Federal privilege to file a consolidated Federal tax return by denial of the member’s carryback of net operating loss. In fact, those States which have legislated in this area generally have limited all affiliates to only a carryover. (See, e.g., Colo. Rev. Stat. sec. 39 — 22—504 (1984 supp.); Conn. Gen. Stat. Ann. sec. 12— 217(a) (West 1983); Fla. Stat. Ann. sec. 220.13(b)(1)(c) (West 1985 supp.).) In my view, section 2 — 203(e)(2)(E) arbitrarily singles out certain affiliated corporate group members for disparate and disadvantageous tax treatment merely because they have exercised a Federal election (i. e., the decision to file a consolidated Federal tax return) which is totally unrelated to any valid State administrative, taxation, economic, or budgetary concerns. As such, I conclude that the challenged section is unconstitutional as a denial of equal protection under the law, and would reverse the judgment of the trial court.