Court Opinion

ID: 7021315
Source: CourtListenerOpinion
Date Created: 2022-07-24 04:45:13.580131+00
Date Added: 2024-06-11T16:10:34.598881
License: Public Domain

PRESIDING JUSTICE LINN delivered the opinion of the court: Plaintiff, member of an affiliated corporate group that voluntarily elected to exercise the privilege of filing a Federal consolidated tax return (26 U.S.C. sec. 1501 (1984)), filed an amended Illinois tax return seeking a refund arising from carrying back a net operating loss. Defendant, Illinois Department of Revenue, denied plaintiff’s claim for refund, finding that the clear and literal language of section 2— 203(e)(2)(E) of the Illinois Income Tax Act (Ill. Rev. Stat. 1983, ch. 120, par. 2 — 203(e)(2)(E)) requires that any member of an affiliated corporate group electing to file a consolidated return be deemed to have made the carryback relinquishment election set forth in section 172 of the Internal Revenue Code (26 U.S.C. sec. 172(b)(3)(C) (1984)), such that net operating losses may only be carried forward for purposes of State tax liability. Upon denial of its claim for refund, plaintiff filed a complaint for administrative review in the circuit court of Cook County, challenging the constitutionality of section 2 — 203(e)(2)(E) as a denial of equal protection and uniformity of treatment. The circuit court upheld the statute, and plaintiff now appeals. We affirm the decision of the circuit court. Background Plaintiff, Searle Pharmaceuticals, Inc., formerly Searle Diagnostics, Inc. (Searle), is a 100% owned subsidiary of G.D. Searle & Company of Skokie that consented to the filing of its United States Income Tax Return on a consolidated basis pursuant to the election to exercise that privilege set forth in section 1501 of the Internal Revenue Code. 26 U.S.C. sec. 1501 (1984). For the taxable year ending December 31, 1977, G.D. Searle and its consolidated subsidiaries, including plaintiff, filed a Federal consolidated return reporting a loss of $22,919,533, later amended to $23,935,337. Searle prepared a pro forma Federal income tax return for 1977, reporting for State tax purposes $7,005,123 of the consolidated loss as its income loss. On April 9, 1981, plaintiff filed an amended Illinois corporate income tax return for 1974, attempting to carry back its 1977 pro forma income loss to reduce its 1974 Federal taxable income for State tax purposes from $4,951,137 to zero, and seeking a State tax refund of $103,193. On that same date, plaintiff filed an amended Illinois corporate income tax return for 1975, attempting to carry back the remainder of its 1977 pro forma loss to reduce its 1975 Federal taxable income for State tax purposes from $4,946,610 to $2,892,624, and seeking a State tax refund of $44,032. On July 23, 1981, defendant, the Illinois Department of Revenue (Department), denied plaintiff’s claims for refunds for the taxable years 1974 and 1975 on the ground that section 2 — 203(e)(2)(E) of the Illinois Income Tax Act (Ill. Rev. Stat. 1983, ch. 120, par. 2— 203(e)(2)(E)) requires an affiliate that consents to filing a consolidated Federal income tax return to carry forward net operating losses to adjust separately determined Federal taxable income in future years. Plaintiff filed a complaint for administrative review in the circuit court of Cook County, challenging the constitutionality of section 2— 203(e)(2)(E) on the basis of equal protection and lack of uniformity. The circuit court affirmed the decision of the Department, upholding the constitutionality of section 2 — 203(e)(2)(E) of the Illinois Income Tax Act and affirming the denial of plaintiff’s claims for tax refunds. Plaintiff now appeals. Opinion On appeal, plaintiff challenges the constitutionality of section 2— 203(e)(2)(E) of the Illinois Income Tax Act on the ground that it unfairly discriminates against affiliated corporations that voluntarily choose to take advantage of the privilege offered in section 1501 of the United States Internal Revenue Code (26 U.S.C. sec. 1501 (1984)) of filing a consolidated Federal tax return. Section 2 — 203(e)(2)(E) of the Illinois Income Tax Act (Ill. Rev. Stat. 1983, ch. 120, par. 2— 203(e)(2)(E)) reads as follows: “(E) Consolidated corporations. In the case of a corporation which is a member of an affiliated group of corporations filing a consolidated income tax return for the taxable year for federal income tax purposes, taxable income determined as if such corporation had filed a separate return for federal income tax purposes for the taxable year and each preceding taxable year for which it was a member of an affiliated group. For purposes of this subparagraph, the taxpayer’s separate taxable income shall be determined as if the elections provided by Section 243(b)(2) and Section 172(b)(3)(C) of the Internal Revenue Code had been in effect for all such years', ***.” (Emphasis added.) The election referred to in section 2 — 203(e)(2)(E) with which plaintiff takes issue is that provided by section 172(b)(3)(C) of the Internal Revenue Code, which provides that any taxpayer entitled to a net operating loss carryback period, in which losses may be carried back to reduce taxable income for the three taxable years preceding the taxable year of such loss, may elect to relinquish the entire carry-back period, thereby electing to carry forward the losses to reduce taxable income in future years. (26 U.S.C. sec. 172(b)(3)(C) (1984).) The effect of section 2 — 203(e)(2)(E) is that affiliated corporations that voluntarily consent to file consolidated Federal tax returns are deemed to have made the election to relinquish the carryback period and are consequently required to carry forward net operating losses. Such is not the case with affiliated corporations that do not choose to file consolidated Federal tax returns; they are not deemed to have made the election to relinquish the carryback period and may, accordingly, choose to carry back net operating losses to reduce taxable income from prior taxable years. Plaintiff asserts that the disparity of treatment arising from the “deemed” election of carryback relinquishment made for those affiliate corporations that choose to file consolidated Federal tax returns renders section 2 — 203(e)(2)(E) discriminatory as an unconstitutional denial of equal protection. Plaintiff maintains that (1) this difference in treatment of affiliates that file consolidated Federal tax returns and affiliates that file separate Federal tax returns violates the constitutional requirement that taxpayer classifications be rationally based and related to a proper legislative purpose, and (2) that the difference in treatment of the two corporate groups has no rational basis and no logical relation to any legitimate purpose.  The Department, on the other hand, posits that section 2— 203(e)(2)(E) is not unconstitutional as a denial of equal protection since a set of facts, namely administrative convenience and fiscal planning, can be conceived to sustain the classification. Defendant further asserts that section 2 — 203(e)(2)(E) is not unconstitutional due to the voluntary nature of the election made at the Federal level that determines whether plaintiff is included or excluded from the classification set forth therein. The trial court,- finding that (1) there was a set of facts that justified the classification and (2) that the classification bears a rational relationship to a legislative purpose, affirmed the decision of the hearing officer and upheld the constitutionality of section 2 — 203(e)(2)(E). Based on the following analysis, we agree with the decision of the trial court. I  The power of the legislature to make classifications, particularly in the field of taxation, is very broad, and the fourteenth amendment to the Federal Constitution imposes no iron rule of equal taxation. (Department of Revenue v. Warren Petroleum Corp. (1954), 2 Ill. 2d 483, 119 N.E.2d 215.) Legislation which does not create a suspect classification or infringe upon a fundamental right, but rather involves economic and social welfare policy, will be upheld against equal protection challenges if it is rationally related to the achievement of a legitimate State interest. (Clayton v. Village of Oak Park (1983), 117 Ill. App. 3d 560, 453 N.E.2d 937.) In taxation, even more than in other fields, legislatures possess the greatest freedom in classification. (Madden v. Kentucky (1940), 309 U.S. 83, 84 L. Ed. 590, 60 S. Ct. 406.) There is a presumption of constitutionality which can be overcome only by the most explicit demonstration that a classification is a hostile and oppressive discrimination against particular persons and classes. (Williams v. City of Chicago (1977), 66 Ill. 2d 423, 362 N.E.2d 1030.) The burden is on the one attacking the legislative arrangement to negate every conceivable basis that might support it. Lehnhausen v. Lake Shore Auto Parts Co. (1972), 410 U.S. 356, 35 L. Ed. 2d 351, 93 S. Ct. 1001. When the classification in a State law is called into question on the ground that it is a violation of the equal protection clause, if any-stated facts reasonably can be conceived that would justify it, the existence of that state of facts at the time the law was enacted must be assumed. (Lindsley v. Natural Carbonic Gas Co. (1911), 220 U.S. 61, L. Ed. 369, 31 S. Ct. 337.) The statement of facts presented by plaintiff that justify the passage of section 2 — 203(e)(2)(E) (Ill. Rev. Stat. 1983, ch. 120, par. 2 — 203(e)(2)(E)) by the Illinois legislature in 1977 focus on the fiscal and administrative problems facing the State at that time and the exacerbation of those problems due to the distinctive and complex nature of the Federal consolidated tax return and the regulations by which such returns are governed. That this statement of facts existed at the time Senate Bill 1295, later enacted as section 2 — -203(e)(2)(E), was introduced is suggested by its legislative history and the remarks of Representative Campbell, in which the fiscal and administrative problems facing the State and the attempt to alleviate the exacerbation of those problems by the deeming of a carryback relinquishment are evident: “*** Senate Bill 1295 will accomplish two things. First, it will eliminate the need to process amended returns for a corporate taxpayer suffering a loss if that taxpayer is part of an affiliated group. Second, it will prevent such a taxpayer from using the election otherwise provided for in the Internal Revenue Code simply to reduce his Illinois taxes to the maximum extent possible. And finally, I would like to say that without this change, the corporate taxpayer who is a member of affiliated group has the best of two worlds.” 80th Illinois General Assembly Transcript of House Proceedings, June 24, 1977, at 60-61 (statement of Rep. Campbell). The objectives outlined by Representative Campbell, namely, (1) the elimination of the need to process amended returns and (2) the prevention of a taxpayer using the carryback period election to reduce his Illinois taxes are legitimate ones. As the Department points out in its brief, 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. The State is therefore adversely affected by any refund of a substantial size, such as that likely to be claimed by corporate affiliates filing consolidated returns, which becomes due whenever a sizable carryback generates an immediate refund where the funds to make such refunds have not been appropriated. Carry-forwards, on the other hand, affect only future State tax returns and revenue can readily be allocated for such refunds in budgetary projections. It is therefore fiscally as well as administratively desirable for the State, in terms of a drain on readily available monetary resources, budgetary planning and allocation, and administrative convenience, to minimize the number of amended returns filed.  In enacting tax legislation, a legislature may consider difficulties of allocation which would seriously hinder the administration and collection of the tax, and such considerations of administrative convenience furnish a justification for legislative classification. (Department of Revenue v. Warren Petroleum Corp. (1954), 2 Ill. 2d 483, 119 N.E.2d 215.) Where, as here, the statute at issue does not create a suspect classification nor infringe upon a fundamental right, but rather involves economic considerations, it will be upheld against equal protection challenges if it is rationally related to the achievement of a legitimate State interest. (Illinois Housing Development Authority v. Van Meter (1980), 82 Ill. 2d 116, 412 N.E.2d 151.) Section 2 — 203(e)(2)(E), which impacts upon the economic policy of the State, by denying corporate affiliates that file consolidated returns a carryback period, is rationally related to the legitimate State interests of preserving appropriated financial resources, facilitating budgetary planning, and aiding in administrative convenience. Whether section 2 — 203(e)(2)(E) was the best means available to achieve these desired objectives is not subject to judicial inquiry. Garcia v. Tully (1978), 72 Ill. 2d 1, 377 N.E.2d 10. II The second State interest proposed to be furthered by the passage of section 2 — 203(e)(2)(E) was the prevention of a taxpayer using the carryback period election to reduce his Illinois taxes to a maximum extent. The classification of affiliates that elect to file consolidated returns bears a rational relationship to this legislative object. 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. The Illinois Supreme Court, in Caterpillar Tractor Co. v. Lenckos (1981), 84 Ill. 2d 102, 417 N.E.2d 1343, has said it may not. The court in Caterpillar was presented with the issue of whether domestic corporations that had elected to claim a tax credit on their Federal returns for income taxes paid to foreign governments could have deducted the amount of these foreign taxes from the taxable incomes reported on their Illinois returns such as to reduce State tax liability. (Caterpillar Tractor Co. v. Lenckos (1981), 84 Ill. 2d 102, 126, 417 N.E.2d 1343, 1355.) The Director of Revenue, the defendant in Caterpillar, maintained that if a domestic corporation elected to take a tax credit on its Federal return as opposed to claiming a deduction from taxable income, it was then bound by this election for State tax purposes and could not deduct the credit from the amount of Federal taxable income reported on the State tax return. The court agreed, reasoning as follows: “The taxpayer had the election of taking a tax credit or a deduction on its Federal return. The election was binding. It would not be permitted to take a tax credit to reduce the Federal tax liability and also take a deduction from the Federal taxable income reported on the State return so as to reduce State taxable income.” Caterpillar Tractor Co. v. Lenckos (1981), 84 Ill. 2d 102, 126, 417 N.E.2d 1343, 1356. The reasoning in Caterpillar may be analogized to the instant case. Here, Searle elected, on the Federal level, to exercise the privilege of filing a consolidated tax return in order to obtain certain Federal tax advantages. (See American Standard, Inc. v. United States (U.S. Ct. Cl. 1979), 602 F.2d 256.) The privilege extended to a corporate affiliate by section 1501 of the Internal Revenue Code (26 U.S.C. sec. 1501 (1984)) is permissive, not mandatory and is for the benefit of all the affiliated corporations; any corporation in the group may object to the filing of a consolidated return, if such filing is detrimental to that affiliate. However, once an affiliate makes the voluntary election to file a consolidated return, that election, like the election made in Caterpillar, is binding on the group member. In the instant case, as in Caterpillar, plaintiff made an election at the Federal level, an election which necessarily preceded the determination of State tax liability, in order to receive privileged treatment. The making of this Federal election automatically placed plaintiff in a privileged classification, that of members of an affiliated group filing Federal consolidated returns. After receiving the Federal benefits yielded by the election, plaintiff now attempts to rescind the election and renounce the classification in order to reduce State taxable income. We find, as did the court in Caterpillar, that the Federal election voluntarily made by plaintiff is binding for State tax purposes. Moreover, it was the voluntary election made by plaintiff pursuant to the provisions of the United States tax laws that created the classification which plaintiff now finds discriminatory. That classification was formed by Federal law and merely adopted by reference in the Illinois Income Tax Act. Article IX, paragraph 3(b), of the Illinois Constitution explicitly provides that State laws imposing taxes on income may adopt by reference provisions of the laws and regulations of the United States for the purpose of arriving at the amount of income upon which the tax is imposed. (Ill. Const. 1970, art. IX, sec. 3(b).) Section 2 — 203(e)(2)(E) of the Illinois Income Tax Act (Ill. Rev. Stat. 1983, ch. 120, par. 2 — 203(e)(2)(E)) adopts by reference the voluntary classification created by an affiliated group member’s election to take advantage of the privilege offered in section 1501 of the Internal Revenue Code. 26 U.S.C. sec. 1501 (1984).  Section 2 — 203(e)(2)(E) adopted this Federal classification and related it to legitimate legislative objectives. Plaintiff, however, while finding nothing unconstitutional about the classification and the special tax treatment afforded the class on the Federal level, now finds the classification and the special tax treatment afforded it on the State level to be unfairly discriminatory. Plaintiff cannot enjoy the privileges inuring to its chosen classification on the Federal level and reject the consequences attached to that classification by the State. Lehnhausen v. Lake Shore Auto Parts Co. (1972), 410 U.S. 356, 362, 35 L. Ed. 2d 351, 356, 93 S. Ct. 1001, 1005. Ill  The granting of a deduction for net operating losses is a privilege created by statute as a matter of legislative grace. (Bodine Electric Co. v. Allphin (1980), 81 Ill. 2d 502, 410 N.E.2d 828.) Here, plaintiff concedes that it has not been denied the privilege of a net operating loss deduction and complains only that the time of deduction, i.e., a carry-forward rather than a carryback, to which the loss may be carried has been restricted by the legislature. Thus, the privilege of the deduction has not been withheld, and members of the class to which plaintiff belongs, those corporate affiliates filing consolidated returns, may carry forward net operating losses to deduct them from future taxable income. Such a mere limitation on the time of deduction 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. Williams v. City of Chicago (1977), 66 Ill. 2d 423, 362 N.E.2d 1030. For all of the reasons set forth above, we conclude that the classification made by section 2 — 203(e)(2)(E) (Ill. Rev. Stat. 1983, ch. 120, par. 2 — 203(e)(2)(E)) is neither arbitrary nor unreasonable and that it bears some reasonable relationship to the object of the legislation. Accordingly, we affirm the decision of the trial court, upholding the constitutionality of the statute and denying to plaintiff the claims for refund. Affirmed. JOHNSON, J., concurs.