Ford Motor Co. & Affiliates v. Dep't of Revenue

• Court: Appellate Court of Illinois
• Writing for the Court: JUSTICE GRIFFIN delivered the judgment of the court, with opinion.
• Citation: Ford Motor Co. & Affiliates v. Dep't of Revenue, 2019 IL App (1st) 172663, 142 N.E.3d 280, 436 Ill.Dec. 177 (Ill. App. 2019)
• Decision Date: 13 May 2019
• Docket Number: No. 1-17-2663,1-17-2663
• Parties: FORD MOTOR CO. & AFFILIATES, Plaintiff-Appellant, v. The DEPARTMENT OF REVENUE, Defendant-Appellee.

2019 IL App (1st) 172663

142 N.E.3d 280

436 Ill.Dec. 177

FORD MOTOR CO. & AFFILIATES, Plaintiff-Appellant,

v.The DEPARTMENT OF REVENUE, Defendant-Appellee.

No. 1-17-2663

Appellate Court of Illinois, First District, Fifth Division.

May 13, 2019

Fred O. Marcus, David S. Ruskin, and Christopher T. Lutz, of Horwood Marcus & Berk Chtrd., of Chicago, for appellant.

Lisa Madigan, Attorney General, of Chicago (David L. Franklin, Solicitor General, and Aaron T. Dozeman, Assistant Attorney General, of counsel), for appellee.

JUSTICE GRIFFIN delivered the judgment of the court, with opinion.

¶ 1 In 2004, plaintiff Ford Motor Co. & Affiliates amended its tax returns for taxable years 1992 and 1994-2000 to reflect what it claimed were nonbusiness income deductions based on interest income it earned as a partner in three investment accounts. The Department of Revenue (Department) audited the amended tax returns and issued a notice of denial (denying the claimed deductions) and two notices of deficiency (proposing to assess additional tax liabilities). Plaintiff timely filed a protest and the matter proceeded to an administrative hearing.

¶ 2 After an evidentiary hearing, the administrative law judge recommended that the director of the Department (Director) finalize the notice of denial and notices of deficiency as issued. It concluded that plaintiff failed to present competent evidence supported by its books and records that it was entitled to the nonbusiness interest deductions claimed in its amended tax returns. The Director accepted the recommendation. The circuit court on administrative review confirmed the Director's decision. Plaintiff appeals, and we affirm the circuit court's judgment and confirm the Director's decision.

¶ 3 BACKGROUND

¶ 4 Though plaintiff is a nonresident corporation and foreign to Illinois, it operates its business in Illinois and earns income here. Therefore, plaintiff must pay Illinois incomes taxes.

¶ 5 A. Illinois Income and Replacement Taxes.

¶ 6 Section 201(a) of the Illinois Income Tax Act ( 35 ILCS 5/201(a) (West 2016)) imposes upon every corporation a tax, measured by net income, on the privilege of earning or receiving income in Illinois. Section 201(c) of the Income Tax Act imposes an additional personal property replacement tax, measured by net income, upon every corporation based upon the same privilege. Id. § 201(c). Net income is defined as that portion of the taxpayer's base income that is allocable to Illinois, subtracted by the standard exemption (id. § 204) and allowable deductions (id. § 207). Id. § 202.

¶ 7 When a nonresident corporation earns income in Illinois and other states throughout the country, as plaintiff does here, the question is how much of that income is subject to Illinois income taxes. Section 304(a) of the Income Tax Act contains an apportionment formula that Illinois uses to identify that portion of a nonresident corporation's business income that is attributable to its business operations in Illinois and, thus, taxable. Id. § 304(a). Business income is defined as all income that is properly apportionable under the United States Constitution. Id. § 1501(a)(1).

¶ 8 Pertinent here, nonbusiness income is all income other than business income (or compensation). Id. § 1501(a)(13). It does not factor into the Illinois apportionment formula and is deducted from the amount of a taxpayer's base income allocable to Illinois.

¶ 9 B. Plaintiff's Amended Tax Returns

¶ 10 In 2004, plaintiff amended its tax returns for 1992 and 1994-2000 to reflect purported nonbusiness income deductions it failed to deduct from its original tax returns for 1994-96 and 1998-2000. Amendments to the 1992 and 1997 returns were the result of losses created by the claimed deductions that plaintiff carried back to those years. If correct, the claimed deductions resulted in a refund of $ 9,716,452.

¶ 11 The source of plaintiff's claimed deductions was three investment accounts opened at State Street Bank (State Street Accounts) that allegedly earned nonbusiness interest income during the taxable years in question. Plaintiff was one of three partners in the accounts and used them to manage cash flow, improve its balance sheet, and support day-to-day automotive operations.

¶ 12 The Department audited plaintiff's amended tax returns and, on April 26, 2010, issued a notice of denial denying its claim for a refund (Notice of Denial) and two notices of deficiency (Notices of Deficiency) proposing to assess additional tax owed for 1997 and 1999 in the amounts of $ 609,950.42 and $ 852,067.42, respectively.

¶ 13 Plaintiff timely protested the Notice of Denial and Notices of Deficiency. The matter proceeded to an administrative hearing.

¶ 14 C. The Administrative Hearing

¶ 15 At the evidentiary hearing, the Notice of Denial and Notices of Deficiency were introduced into evidence by way of the parties' stipulation. Plaintiff's business records were also admitted into evidence by way of stipulation. Three witnesses testified: Dennis Tosh, Meredith Alexander, and Bernard Pump.

¶ 16 At the time of his testimony, Dennis Tosh served as plaintiff's director of global trading. He explained that during the 1990s plaintiff had more cash than it believed necessary to run the daily operations of its automotive business. As a result, a plan was devised to invest a portion of the excess cash in securities to earn interest income. Tosh was involved in the decision to create State Street Accounts and managed them.

¶ 17 He testified that plaintiff used the State Street Accounts to purchase and sell securities. The securities in those accounts included the following: "U.S. Treasury bills, U.S. Treasury notes, some municipal notes, some federal agency note[s], such as short-term issued by organizations such as Fannie Mae, Freddie Mac, the Home Loan Bank and so forth, high quality investment grade corporate commercial paper."

¶ 18 One of the State Street Accounts, referred to as TI51 (or Ford Enhanced Partnership), "absorbed all of the day-to-day changes in cash that result from running a global automotive company." Tosh explained that if there was a net positive for the day, cash would be transferred into a State Street Account and invested in securities. Conversely, a net negative for the day would result in the liquidation of securities in TI51 to cover expenses.

¶ 19 Each of the State Street Accounts held securities with different terms of maturity. TI51 contained short-term investments with "maturities well inside six months." The other investment accounts, TI41 (or Ford Investment Partnership) and TI81 (or Ford Super Enhanced Return Partnership), had maturities that were "about one year" and "about two years," respectively. The accounts operated "like an in-house mutual fund."

¶ 20 Tosh "was responsible for leading the team that made the individual investment decisions" and received a "daily report" prepared by his staff "during that time period" that showed daily balances in each of the accounts and the breakdown of cash held in the accounts by partner. There were three partners in the State Street Accounts and Tosh recalled that two of them were Ford International Capital Corporation and the Ford Motor Company Fund, a not-for-profit corporation. He estimated that plaintiff's share "of the invested cash" was between "80 and 95 percent."

¶ 21 Meredith Alexander testified on behalf of plaintiff as one of plaintiff's senior audit analysts. She was hired by plaintiff in 2008 and sometime during that year was tasked to "gather the documents in regards to the calculation of whether the interest [income from the State Street Accounts] was unitary or non-unitary" (taxable or nontaxable).

¶ 22 She gathered information ("monthly cash balances, interest for the federal return along with detail for that interest") from plaintiff's computer networks and physical files, and factored that information into what she referred to as the AHP calculation (AHP Calculation).¹ Alexander explained that she included the results of the AHP Calculation, and all the information she factored into it, on a spreadsheet (Spreadsheet). She created the Spreadsheet in 2008 and updated it in 2011.

¶ 23 When plaintiff attempted to introduce the Spreadsheet into evidence, the Department objected. It argued that plaintiff failed to (1) show the Spreadsheet was "relevant to this case; i.e. , failed to show how these numbers tie to the amended returns filed in this case. In fact, they don't," and (2) establish that the Spreadsheet "was made on or near the time that the amended returns were filed in this case, which was 2004."

¶ 24 Plaintiff responded as follows: "[i]t's not our position that the spreadsheet supports the amended returns. In fact, it doesn't * * * [w]hen we're done with this hearing and you rule in our favor, at that point, we'll have to determine what the actual numbers are, and that's set out in this document."

¶ 25 The administrative law judge (ALJ) asked plaintiff what the Spreadsheet purported to show if the numbers could not be "tied to the amended return." Plaintiff responded that the Spreadsheet was a "business record that was created by Ford, Ms. Alexander, to support the AHP calculation * * *. It was never intended to support * * * the numbers on the amended return."

¶ 26 When the ALJ asked whether the amount of nonbusiness interest income indicated on the Spreadsheet was "less than or greater than the amount sought to be refunded on the amended return," plaintiff replied, "[i]t's actually more conservative and less than." The ALJ reserved its ruling on the admissibility of the Spreadsheet as a business record. Alexander continued to testify.

¶ 27 Alexander admitted the Spreadsheet did not contain the actual amount of "interest earned on the cash investment" in the State Street Accounts because she "had not located those records." She also did not have the partnership agreements for the States Street Accounts. As a result, she was unable to determine each...