Caveney v. Bower

• Decision Date: 08 May 2003
• Docket Number: No. 92963.,92963.
• Citation: 278 Ill.Dec. 1,207 Ill.2d 82,797 N.E.2d 596
• Parties: Jack CAVENEY et al., Appellees, v. Glen L. BOWER, Director of Revenue, et al., Appellants.
• Court: Illinois Supreme Court

797 N.E.2d 596

207 Ill.2d 82

278 Ill.Dec. 1

Jack CAVENEY et al., Appellees, v. Glen L. BOWER, Director of Revenue, et al., Appellants.

No. 92963.

Supreme Court of Illinois.

May 8, 2003.

Rehearing Denied September 29, 2003.

James E. Ryan, Attorney General, Springfield (Joel D. Bertocchi, Solicitor General, A. Benjamin Goldgar, Assistant Attorney General, Chicago, of counsel), for appellants.

Richard A. Hanson, Theodore R. Bots, of McDermott, Will & Emery, Chicago, for appellees.

Gino L. DiVito, Michael I. Rothstein, and Michael Grant, of Tabet, DiVito & Rothstein, L.L.C., Chicago, for amicus curiae Appellate Lawyers Association.

Justice THOMAS delivered the opinion of the court:

Plaintiffs, Jack and Margaret Caveney, are shareholders in Panduit Corporation. For the tax years ending December 31, 1993, 1994, and 1995, Panduit elected to be treated as a subchapter S corporation for federal and state tax purposes. During the tax years in question, plaintiffs claimed a credit against their Illinois income tax liability, pursuant to section 201(k) of the Illinois Income Tax Act (the Act) (35 ILCS 5/201(k) (West 1996)), for research and development expenditures incurred by Panduit. The State disallowed the claims and calculated back taxes and interest in the amount of $1,091,131.60, which plaintiffs paid under protest.

Seeking a return of the amounts paid under protest, plaintiffs filed suit under the State Officers and Employees Money Disposition Act (30 ILCS 230/1 et seq. (West 2000)). Plaintiffs first argued that they qualified for the tax credit under the version of section 201(k) that was in force during the tax years in question. In the alternative, plaintiffs argued that, if they did not so qualify, section 201(k) violated the uniformity clause of the Illinois Constitution (Ill. Const.1970, art. IX, § 2). The circuit court of Du Page County agreed with both of plaintiffs' arguments and entered summary judgment in plaintiffs' favor. The State appealed.

Before the appellate court, plaintiffs not only repeated their previous arguments but also argued for the first time that they qualified for the research and development tax credit under a 1999 amendment to section 201(k), which was enacted as part of Public Act 91-644 (Pub. Act 91-644, eff. August 20, 1999). The appellate court affirmed solely on the basis of the 1999 amendment. Citing this court's decision in First of America Trust Co. v. Armstead, 171 Ill.2d 282, 215 Ill.Dec. 639, 664 N.E.2d 36 (1996), the appellate court explained that retroactive application of the 1999 amendment was appropriate because the State had failed to identify any "vested right" that would be compromised by such an application.

The State filed a petition for leave to appeal (177 Ill.2d R. 315(a)), and this court issued a supervisory order vacating the appellate court's judgment and remanding the cause for reconsideration in light of Commonwealth Edison Co. v. Will County Collector, 196 Ill.2d 27, 37, 255 Ill.Dec. 482, 749 N.E.2d 964 (2001). Caveney v. Bower, 195 Ill.2d 549, 257 Ill.Dec. 887, 754 N.E.2d 1282 (2001) (supervisory order). On remand, and with one justice dissenting, the appellate court again affirmed the entry of summary judgment in plaintiffs' favor. 326 Ill.App.3d 1, ___ Ill.Dec. ___, ___ N.E.2d ___. We granted the State's petition for leave to appeal. 177 Ill.2d R. 315(a).

ANALYSIS

Motion to Strike

At the outset, we must address plaintiffs' motion to strike certain portions of the State's opening brief. In that brief, the State argued not only that the 1999 amendment to section 201(k) does not apply retroactively but also that (1) plaintiffs do not qualify for the research and development tax credit under the previous version of section 201(k), and (2) the previous version of section 201(k) does not violate the uniformity clause of the Illinois Constitution. Citing Supreme Court Rule 315(b)(3) (177 Ill.2d R. 315(b)(3)), plaintiffs argue that we must strike those portions of the State's brief that address the latter two arguments, as those arguments were neither addressed by the appellate court nor asserted in the State's petition for leave to appeal as a basis for reversing the appellate court's judgment.

Plaintiffs' motion is utterly without merit. First, the State clearly preserved these issues for review. The contested arguments were fully briefed and argued in both the trial court and the appellate court. The appellate court's decision to affirm on other grounds does not amount to a procedural default by the State. Second, the State could not have asserted the contested arguments as a basis for reversing the appellate court's judgment because, as plaintiffs concede in their motion, the appellate court did not reach these issues. Although these issues formed the basis for the trial court's decision, the appellate court affirmed on a wholly different basis, namely, the retroactive application of the 1999 amendment. Given that the retroactive application of the 1999 amendment was the only issue addressed in the appellate court's decision, it is only natural that that issue constituted the State's sole basis for reversing that decision. Finally, and contrary to representations contained in plaintiffs' motion, the State did raise the contested arguments in its petition for leave to appeal. The following footnote appears on page 15 of the State's petition for leave to appeal:

"The Caveneys, of course, have maintained that they were entitled to the tax credits even under the pre-amendment version of section 201(k). The petitioners have taken the opposite position. The appellate court has never reached the issue, twice deciding the case on the ground that the 1999 amendment was retroactive. If this court grants leave to appeal, the petitioners would naturally raise the tax issue in addition to the issue of retroactivity. The petitioners do not raise the tax issue as a ground for leave to appeal because the appellate court never decided the issue." (Emphasis added.)

In this footnote, the State did all it reasonably could be expected to do with respect to the contested arguments, which were unavailable to the State as bases for reversing the appellate court's judgment yet remained wholly available to plaintiffs as bases for affirming the appellate court's judgment. See Schultz v. Northeast Illinois Regional Commuter R.R. Corp., 201 Ill.2d 260, 281, 266 Ill.Dec. 892, 775 N.E.2d 964 (2002) (appellate court's judgment may be affirmed on any basis in the record). Plaintiffs' motion to strike is denied.

Section 201(k): Original Version

Turning to the merits, we first address whether plaintiffs qualify for the research and development tax credit under the version of section 201(k) that existed prior to the 1999 amendment. Relying upon the statute's plain language, the State insists that, as Panduit's shareholders, plaintiffs may not personally claim a tax credit for research and development expenses actually incurred by Panduit. Plaintiffs counter that, given both the nature of subchapter S corporations and the clear public policy underlying section 201(k), the legislature must have intended to make the research and development tax credit available to S corporation shareholders. We agree with the State.

The fundamental rule of statutory construction is to ascertain and give effect to the legislature's intent. Michigan Avenue National Bank v. County of Cook, 191 Ill.2d 493, 503-04, 247 Ill.Dec. 473, 732 N.E.2d 528 (2000). The best indication of legislative intent is the statutory language, given its plain and ordinary meaning. Illinois Graphics Co. v. Nickum, 159 Ill.2d 469, 479, 203 Ill.Dec. 463, 639 N.E.2d 1282 (1994). Where the language is clear and unambiguous, we must apply the statute without resort to further aids of statutory construction. Davis v. Toshiba Machine Co., America, 186 Ill.2d 181, 184-85, 237 Ill.Dec. 769, 710 N.E.2d 399 (1999). The construction of a statute is a question of law that is reviewed de novo. In re Estate of Dierkes, 191 Ill.2d 326, 330, 246 Ill.Dec. 636, 730 N.E.2d 1101 (2000).

Prior to the 1999 amendment, section 201(k) provided:

"Beginning with tax years ending after July 1, 1990, a taxpayer shall be allowed a credit against the tax imposed by subsections (a) and (b) of this Section for increasing research activities in this State. The credit allowed against the tax imposed by subsections (a) and (b) shall be equal to 6½% of the qualifying expenditures for increasing research activities in this State." 35 ILCS 5/201(k) (West 1998).

For purposes of section 201(k), "qualifying expenditures" are defined as "the qualifying expenditures as defined for the federal credit for increasing research activities which would be allowable under Section 41 of the Internal Revenue Code and which are conducted in this State." 35 ILCS 5/201(k) (West 1998). Section 41 of the Internal Revenue Code, in turn, defines "qualified research expenses" as those that "are paid or incurred by the taxpayer during the taxable year in carrying on any trade or business of the taxpayer." (Emphasis added.) 26 U.S.C. § 41(b)(1) (2000). The "tax imposed by subsections (a) and (b)" is the Illinois income tax. 35 ILCS 5/201(a), (b) (West 1998). We find no ambiguity in the foregoing statute and conclude that plaintiffs are ineligible for the research and development tax credit that existed prior to the 1999 amendment. Prior to that amendment, section 201(k) authorized a credit only against the taxpayer's Illinois income tax liability and only for research and development expenses actually incurred by the taxpayer. Here, there is no question that the expenses in question were incurred by Panduit and not by plaintiffs personally. Panduit, however, may not claim a credit for these expenses, as Panduit is a subchapter S corporation and therefore exempt from the Illinois income tax. See 35 ILCS 5/205(c) (West 2000). By the same token, plaintiffs are ineligible for...