Borden Chemicals and Plastics v. Zehnder

• Decision Date: 14 February 2000
• Docket Number: No. 1-98-4456.,1-98-4456.
• Citation: Borden Chemicals and Plastics v. Zehnder, 726 N.E.2d 73, 312 Ill. App.3d 35, 244 Ill.Dec. 477 (Ill. App. 2000)
• Parties: BORDEN CHEMICALS AND PLASTICS, L.P., Plaintiff-Appellant, v. Ken ZEHNDER, Director of the Department of Revenue, Defendant-Appellee.
• Court: Appellate Court of Illinois

726 N.E.2d 73

312 Ill. App.3d 35

244 Ill.Dec. 477

BORDEN CHEMICALS AND PLASTICS, L.P., Plaintiff-Appellant, v. Ken ZEHNDER, Director of the Department of Revenue, Defendant-Appellee.

No. 1-98-4456.

Appellate Court of Illinois, First District, First Division.

February 14, 2000.

Horwood Marcus & Berk Chartered, Chicago (Fred O. Marcus, Jordan M. Goodman, David A. Hughes, C. Eric Fader, of counsel), for Appellant.

The Attorney General of the State of Illinois (James E. Ryan, John P. Schmidt, of counsel), and the Solicitor General (Joel D. Bertocchi, of counsel), Chicago, for Appellee.

Justice GALLAGHER delivered the opinion of the court:

This is an action for administrative review of a final decision of Ken Zehnder, the Director of the Department of Revenue of the State of Illinois (the Department). The circuit court entered judgment in favor of the Department and against plaintiff, Borden Chemicals & Plastics, L.P. Plaintiff now appeals.

The issues presented are: (1) whether plaintiff is subject to the replacement tax under the Income Tax Act (replacement tax) (35 ILCS 5/201(c) (West 1996)) and (2) if so, whether plaintiff is entitled to a replacement tax Investment credit (investment credit), as provided by section 201(e) (35 ILCS 5/201(e) (West 1996)), which was generated by certain qualified property owned by the Illinois partnership, of which plaintiff is a limited partner.

The replacement tax, which went into effect in 1979, was a tax imposed on the privilege of earning or receiving income as a resident of Illinois or from Illinois sources. The relevant language provides as follows:

"Beginning on July 1, 1979 and thereafter, in addition to such income tax, there is also hereby imposed the Personal Property Tax Replacement Income Tax measured by net income on every corporation (including Subchapter S corporations), partnership and trust, for each taxable year ending after June 30, 1979. Such taxes are imposed on the privilege of earning or receiving income in or as a resident of this State. The Personal Property Tax Replacement Income Tax shall be in addition to the income tax imposed by subsections (a) and (b) of this Section * * *" 35 ILCS 5/201(c) (West 1996).

The replacement tax was adopted to "replace" the revenues lost as a result of the abolition of the personal property tax by the Illinois Constitution of 1970.

Taxpayers who incur replacement tax liability are also entitled to what is known as an investment credit, under certain circumstances. The relevant provision, during the relevant tax years, stated as follows:

"Investment credit. A taxpayer shall be allowed a credit against the Personal Property Tax Replacement Income Tax for investment in qualified property." 35 ILCS 5/201(e) (West 1996).

The statute further defines the term "qualified property." The definition of "qualified property" states as follows:

"(2) The term "qualified property" means property which:

(A) is tangible, whether new or used, including buildings and structural components of buildings and signs that are real property, but not including land or improvements to real property that are not a structural component of a building such as landscaping, sewer lines, local access roads, fencing, parking lots, and other appurtenances;

(B) is depreciable pursuant to Section 167 of the Internal Revenue Code, except that `3-year property' as defined in Section 168(c)(2)(A) of that Code is not eligible for the credit provided by this subsection (e);

(C) is acquired by purchase as defined in Section 179(d) of the Internal Revenue Code;

(D) is used in Illinois by a taxpayer who is primarily engaged in manufacturing, or in mining coal or fluorite, or in retailing; and

(E) has not previously been used in Illinois in such a manner and by such a person as would qualify for the credit provided by this subsection (e) or subsection (f)." 35 ILCS 5/201(e)(2) (1996).

Plaintiff is a Delaware limited partnership. Plaintiff and Borden Chemicals & Plastics Management, Inc., are the two sole partners of Borden Chemicals & Plastics Operating, L.P. (Operating Partnership), a limited partnership that operates in Illinois. The plaintiff, a limited partner, owns a 98.99% interest in the Operating Partnership; Borden Chemicals & Plastics Management, Inc., is the general partner and owns a 1.01% interest. During the years in issue, 1988 and 1989, the Operating Partnership purchased certain assets that it placed in service in Illinois. This "qualified property" gave rise to replacement tax investment credits of $11,913 and $53,369, respectively, for the years in issue. Nevertheless, the Operating Partnership was not entitled to an investment credit for this qualifying property because it had no replacement tax liability. The Operating Partnership did not have any replacement tax liability for the years 1988 and 1989, because, after subtracting the amount of income that was distributable to the partners, including plaintiff, the Operating Partnership's taxable income was zero. Plaintiff, as a result of the distributable income it received from the Operating Partnership, was subject to the Illinois personal property tax replacement income tax (replacement tax). Plaintiff claimed that, under these circumstances, it was entitled to use the Operating Partnership's replacement tax investment credit. The Department rejected this claim because the assets that generated the investment credit were owned by the Operating Partnership, not the plaintiff, which owned no assets in Illinois.

Plaintiff appeals and raises two separate arguments in a case of first impression in Illinois. Plaintiff contends that it is entitled to an investment credit against its replacement tax liability. Plaintiff, however, has also raised a constitutional argument, contending that the due process clause (U.S. Const., amend. XIV, § 1), and the commerce clause (U.S. Const., art. I, § 8) of the United States Constitution prohibit Illinois in the first instance from assessing any replacement tax on a limited partner, such as plaintiff, which has no connection with the State of Illinois other than investing in a partnership.

Before reaching the merits of these arguments, we point out that a reviewing court should consider a constitutional question only where essential to the disposition of a case. Bonaguro v. County Officers Electoral Board, 158 Ill.2d 391, 396, 199 Ill.Dec. 659, 634 N.E.2d 712, 714 (1994). This is such a case. The nonconstitutional issue of whether plaintiff can take advantage of the investment credit presumes plaintiff is responsible for the replacement tax. Thus, regardless of our determination of this nonconstitutional issue, still unresolved will be the issue of whether plaintiff is subject to the replacement tax in the first instance. Having answered in the affirmative that determination of the constitutional question is required, we shall address it first, since it is also the threshold question. Should we determine that the tax is unconstitutional, that would render moot the nonconstitutional issue.

Before doing so, we note that the Department argues that plaintiff waived this issue by filing tax returns for the years in issue, by stipulating below that it was "subject to the replacement tax," and by failing to raise the issue in its protest to the Department's notice of deficiency. Under the Administrative Review Law (735 ILCS 5/3-110 et seq. (West 1996)), our scope of review encompasses all questions of law and fact presented by the record. Bridgestone/Firestone, Inc. v. Aldridge, 179 Ill.2d 141, 148, 227 Ill.Dec. 753, 688 N.E.2d 90, 93 (1997). We conclude that plaintiff properly raised the constitutional issue during the administrative hearing below by including the issue in its brief. Accordingly, we shall address the merits of plaintiff's contention.

We shall first consider whether the tax levied on plaintiff, as a limited partner, is constitutional under the due process clause of the United States Constitution.

In addition to the requirement that any income attributed to a taxing body must fairly reflect the taxpayer's activities in the taxing body's jurisdiction, due process requires that there must be a minimum connection between the taxpayer and the taxing body. First Access Material Handling v. Wish, 297 Ill.App.3d 396, 404, 232 Ill.Dec. 209, 697 N.E.2d 1139, 1144 (1998), citing Quill Corp. v. North Dakota, 504 U.S. 298, 306, 112 S.Ct. 1904, 1909-10, 119 L.Ed.2d 91, 102 (1992). Plaintiff contends that it lacks the required minimum contacts with Illinois to justify taxation by Illinois. We disagree.

It has long been established that a state may tax income of a nonresident that is attributable to property or transactions in the forum state. International Harvester Co. v. Wisconsin Department of Taxation, 322 U.S. 435, 441-42, 64 S.Ct. 1060, 1064, 88 L.Ed. 1373, 1379 (1944). In International Harvester, the United States Supreme Court rejected a constitutional challenge to a Wisconsin law taxing corporate dividends out of income derived from corporate property and business activities in Wisconsin, and requiring the corporation to withhold the tax from dividend payments. International Harvester argued that it was unconstitutional to tax dividends paid to nonresident stockholders who received their dividends outside the state. International Harvester, 322 U.S. at 443, 64 S.Ct. at 1064, 88 L.Ed. at 1380. The Supreme Court stated, however, that "[p]ersonal presence within the state of the stockholder-taxpayers is not essential to the constitutional levy of a tax taken out of so much of the corporation's Wisconsin earnings as is distributed to them." International Harvester, 322 U.S. at 441, 64 S.Ct. at 1064, 88 L.Ed. at 1379. The court concluded that Wisconsin could constitutionally impose the tax, even as to nonresident stockholders, because the state had afforded protection and benefits to International Harvester's activities and transactions within ...