Kraft, Inc. v. Edgar, 4-88-0744
| Decision Date | 31 August 1989 |
| Docket Number | No. 4-88-0744,4-88-0744 |
| Citation | 188 Ill.App.3d 46,543 N.E.2d 1316 |
| Court | United States Appellate Court of Illinois |
| Parties | , 135 Ill.Dec. 569 KRAFT, INC., formerly known as Dart & Kraft, Inc., Plaintiff-Appellee, v. Jim EDGAR, as Illinois Secretary of State, and the Department of Corporations of the State of Illinois Secretary of State, Defendants-Appellants. |
Neil F. Hartigan, Atty. Gen., Karen S. Rosenwinkel and Jan E. Hughes, Asst. Attys. Gen., Chicago Ill., Robert J. Ruiz, Sol. Gen., for defendants-appellants.
Don S. Harnack, David J. Duez, Richard A. Hanson, McDermott, Will & Emery, Chicago, Ill., for plaintiff-appellee. Justice KNECHT delivered the opinion of the court:
This case comes to us on appeal from an administrative review in the circuit court of Sangamon County. The plaintiff Kraft, Inc. (Kraft), sought review of the Secretary of State's (Secretary) determination of tax liability. The circuit court reversed the Secretary's refusal to grant the plaintiff an adjustment based on the circuit court's reading of section 1.17 of the Business Corporation Act of 1983 (1983 BCA) and the plaintiff's due process claims. (Ill.Rev.Stat.1985, ch. 32, par. 1.17.) We find the circuit court was in error on both grounds and reverse its decision.
The plaintiff Kraft, Inc., formerly known as Dart & Kraft, Inc., was incorporated in Delaware in 1980. On August 29, 1980, the plaintiff filed an application with the defendant Secretary for a certificate of authority to transact business in this State. Kraft's employee, who completed the application for the certificate, stated the present value of the property owned in Illinois and elsewhere, together with the business activity which had been transacted in Illinois and elsewhere, as of the date of filing. This was done in spite of the fact the application form required the plaintiff to estimate these values for the first year of operation in Illinois. As a result, the application listed $1,000 as the value of plaintiff's property in Illinois and $4,000 as the total of all of its property located everywhere. The estimate of business to be transacted in the first year was stated as zero.
Section 136 of the 1933 BCA governs the computation of the basis for license fees of foreign corporations. It provides in part:
"For the purpose of determining the amount represented in this State of the sum of the stated capital and paid-in surplus of a foreign corporation, the amount represented in this State shall be that proportion of the sum of its stated capital and paid-in surplus which the sum of (1) the value of its property located in this State and (2) the gross amount of business transacted by it at or from places of business in this State bears to the sum of (1) the value of all of its property, wherever located, and (2) the gross amount of its business, wherever transacted." (Ill.Rev.Stat.1981, ch. 32, par. 157.136.)
Section 139 of the 1933 BCA provides for the computation of the basis for franchise taxes in the same manner. (Ill.Rev.Stat.1981, ch. 32, par. 157.139.) (See also Ill.Rev.Stat.1985, ch. 32, pars. 15.55, 15.70.) This ratio of total capital, surplus and business to that located in Illinois is called the allocation factor. The basis on which the fees and taxes on the corporation is calculated is determined by multiplying the allocation factor by the total amount of paid-in surplus and capital. (Ill.Rev.Stat.1981, ch. 32, pars. 157.136, 157.139.) Because the plaintiff stated the actual value instead of the estimated value of the corporation and its projected business, the allocation factor here as determined by the Secretary, a ratio of 1 to 4, a 25% allocation factor, was higher than had Kraft chosen to supply estimated values of business to be transacted on its application for a certificate.
The formation of Dart and Kraft, Inc., was the result of a planned merger between Kraft, Inc., and Dart Industries, Inc. To this end they formed a jointly owned subsidiary, Dart and Kraft, Inc. (DKI), the predecessor corporation of the plaintiff here. DKI then formed two subsidiaries, K Sub. and D Sub. Kraft then merged with K Sub., Dart with D Sub. Stockholders of both corporations received stock in the new parent DKI in return for their stock in Dart or Kraft. As a result, DKI experienced an enormous increase in its capital and paid-in surplus. On September 25, 1980, this stood at $2,657,186,647. Both Dart and Kraft continued to operate separately but as subsidiaries of their new parent DKI. In December of 1980, the plaintiff issued additional shares and increased its capital and paid-in surplus by $509,022. Although required by section 117 of the Business Corporation Act (1933 BCA) (Ill.Rev.Stat.1981, ch. 32, par. 157.117) to report these increases within 60 days of their occurrence, the plaintiff did not report them until almost five years later on August 15, 1985.
Following the 1985 report, on September 12, 1985, the Secretary issued a notice of assessment of tax liability for the year 1980, utilizing the 25% allocation factor. This resulted in an assessment of franchise tax, license fees, and penalties of $1,331,119.84. On November 5, 1985, the plaintiff submitted a petition for review and refund challenging the allocation factor and, the following day, submitted a statement of corrections. On January 16, 1986, the Secretary denied the petition for adjustment on the grounds the statute of limitations had run. The Secretary also refused to accept the statement of corrections, indicating the statements on the application were estimates and could not be factually incorrect under section 1.15 of the 1983 BCA. (Ill.Rev.Stat.1985, ch. 32, par. 1.15.) Subsequently the plaintiff also filed a report following merger on June 16, 1986.
Kraft sought review of the Secretary's refusal to consider the petition for refund and review and a statement of correction. The hearing officer found the plaintiff's petition for refund and review was timely filed and plaintiff was entitled to file a statement of corrections. The Secretary accepted the hearing officer's recommendation regarding the statement of corrections but rejected the recommendation plaintiff was entitled to file a petition for review and refund. The Secretary also found the merger provisions of the 1983 BCA did not apply to the plaintiff. The Secretary entered a final order allowing the plaintiff to file its statement of corrections but denying the petition for refund and review.
The plaintiff then filed its complaint for administrative review in the circuit court of Sangamon County on February 10, 1988. The circuit court determined the Secretary had erred in finding the plaintiff's petition for review was untimely and found the due process rights of the plaintiff were violated by that finding. The circuit court entered judgment ordering the Secretary to reduce the assessment of taxes and fees for 1980 from $1,331,119.84 to $166.66.
The Secretary of State appeals on the grounds that (1) the circuit court erred in interpreting section 1.17(a)(2) of the 1983 BCA as allowing the plaintiff to file a petition for review; and (2) the enactment of the 1983 BCA did not reduce the limitations period such that Kraft's due process rights were diminished. Ill.Rev.Stat.1985, ch. 32, par. 1.17(a)(2).
The 1983 BCA sets out the following scheme for the reporting of any increase of capital or paid-in surplus. Section 1.60 provides the 1983 BCA does not affect rights and liabilities established prior to the 1983 BCA effective date of July 1, 1984, but that all computations and adjustments must take place on the basis prescribed by the 1983 BCA. In this case, Kraft's original liability arose under the 1933 BCA but its filing and petition for adjustment will come under the terms of the 1983 BCA and subsequent amendments, the law in effect at the time of the filing of Kraft's petition. Ill.Rev.Stat.1985, ch. 32, par. 1.60.
Section 14.20 requires corporations to report increases of capital and issuance of shares within 60 days. The Secretary of State must collect the additional license fees (section 15.50) and an additional franchise tax (section 15.65). The basis for the license fees and franchise tax increases with the increase in the paid-in capital disclosed in any report related to the issuance of shares, exchange, or reclassification of shares, or increase of paid-in capital (sections 15.55 and 15.70). Section 15.55 also provides the proportion of paid-in capital attributable to this State is the amount stated in the last annual report on file or, if no annual report is on file on the date of increase, from the information contained in the application for a certificate of authority to transact business in this State. Ill.Rev.Stat.1985, ch. 32, pars. 14.20, 15.50, 15.65, 15.55, 15.70.
Briefly stated, plaintiff filed an application for a certificate of authority on August 29, 1980. It estimated the total of its property at $4,000, $1,000 of which was in Illinois. No estimated business transactions were reported. Under the statutory scheme discussed above, the plaintiff's allocation factor was .25, i.e., it was taxed on .25 of its total property and gross business, because .25 of its property and gross business were located in Illinois. On September 25, 1980, plaintiff engaged in a transaction which increased its capital and paid-in surplus to over $2.5 billion dollars. In December 1980, this was increased by another $500,000. Plaintiff did not report the increase to the Secretary but the increases were reflected in the annual reports filed starting in 1980. Because the plaintiff had not yet filed an annual report at the time of the increase in capital, the allocation factor employed in determining the additional fees and taxes was determined based on the figures supplied in the application on file. This was .25, instead of the .0000049, which plaintiff contends is the appropriate allocation factor. This led to an...
To continue reading
Request your trial