Lpfc v. Department of Revenue

• Decision Date: 09 January 2008
• Docket Number: No. 2-06-0520.,2-06-0520.
• Citation: 378 Ill. App. 3d 921,881 N.E.2d 598
• Parties: LOMBARD PUBLIC FACILITIES CORPORATION, Plaintiff-Appellant, v. The DEPARTMENT OF REVENUE, Defendant-Appellee.
• Court: United States Appellate Court of Illinois

881 N.E.2d 598

378 Ill. App. 3d 921

LOMBARD PUBLIC FACILITIES CORPORATION, Plaintiff-Appellant, v. The DEPARTMENT OF REVENUE, Defendant-Appellee.

No. 2-06-0520.

Appellate Court of Illinois, Second District.

January 9, 2008.

Lance C. Malina, Donald E. Renner, Allen Wall, Klein, Thorpe & Jenkins, Ltd., Chicago, for Lombard Public Facilities Corporation.

Lisa Madigan, Attorney General, State of Illinois, Gary S. Feinerman, Solicitor General, Timothy K. McPike, Assistant Attorney General, Chicago, for Illinois Department of Revenue.

Justice BOWMAN delivered the opinion of the court:

Plaintiff, Lombard Public Facilities Corporation (LPFC), appeals the decision of defendant, the Department of Revenue (Department), denying its application for exemption from the Retailers' Occupation Tax Act (Retailers' Tax Act) (35 ILCS 120/1 et seq. (West 2004)), pursuant to the exemption provided in section 2-5(11) of the Retailers' Tax Act.¹ On November 10, 2003, LPFC filed its application for exemption from the Retailers' Tax Act, indicating that its purchases were those of a governmental body, namely, the Village of Lombard. On November 7, 2005, the Department issued its decision denying LPFC's application after an administrative hearing was conducted. LPFC filed a complaint for administrative review in the circuit court, and on May 4, 2006, the circuit court affirmed the decision of the Department. LPFC timely appealed, arguing that. (1) this court should review de novo the issue of whether it qualifies for an exemption from the Retailers' Tax Act as a governmental body, and in so doing (2) the court should find that it constitutes a "governmental bony" by applying the "realities of ownership" principle discussed in Southern Illinois University Foundation v. Booker, 98 Ill.App.3d 1062, 1069, 54 Ill.Dec. 600, 425 N.E.2d 465 (1981). We affirm.

I. BACKGROUND

On September 4, 2003, in an effort to develop a parcel of land near Yorktown Shopping Center into a hotel and convention hall, the Village of Lombard (Village) passed Ordinance Number 5351. Lombard, Ill., Ordinance No. 5351 (eff. September 4, 2003). That ordinance approved the incorporation of LPFC to assist the Village in securing financing for the construction of the convention hall and hotel facility. The formation of LPFC was necessary because the cost of the project exceeded the Village's statutory bonding limitations. The ordinance specified that the purpose of LPFC, a not-for-profit corporation, was to "assist in the financing and construction of a convention hall and hotel facility" in the Village. The ordinance further stated that upon redemption of the bonds issued for the project, LPFC would transfer title of the property to the Village free of any encumbrances. LPFC was granted authority to issue, sell, and deliver its bonds, encumber any real property or equipment acquired by it for the purpose of financing the project, and enter into contracts for the sale of bonds and the construction and acquisition of the convention hall and hotel facility. The ordinance named five individuals as directors of LPFC.

The articles of incorporation for LPFC provided the following. They listed Leonard J. Flood as the registered agent, with the, Village's address as the corporation's address. The purpose of LPFC was "to assist the Village of Lombard in its essential governmental purposes." Articles IV and V allowed the Village to remove any director or officer with or without cause by the majority vote of the president and board of trustees of the Village. The Village appointed the initial directors and retained the, right to fill any vacancies. Per article VII, no amendments were allowed to be made to article IV without the apprdval of the Village. Further, section 4.8 anti section 6.3 of the articles made the Opien Meetings Act (5 ILCS 120/1, et seq. (West 2004)), the State Gift Ban Act (5 ILCS 425/1 et seq. (West 2004)), and the conflict of interest statute (50 ILCS 105/3 (West 2004)) applicable to LPFC. Article X provided that LPFC "shall not sell, transfer or otherwise convey title to the Hotel and Convention Facility to a third party without the prior consent" of the Village in the form of a resolution adopted by the Village and filed with LPFC. If the Village were to consent to the sale of the property to third persons, title would first transfer from LPFC to the Village.

The Village and LPFC entered into an agreement entitled the "Tax Rebate Agreement" dated April 1, 2005. In that agreement, LPFC agreed to.obtain a surety bond in the amount of $ 1.1 million, enter into a master development agreement with Harp Lombard, LLC, submit construction plans to the Village for approval, and oversee the construction of the project in accordance with Village Ordinance Nos. 5396 and 5397. LPFC was to enter into agreements with suitable third parties, such as construction companies and consultants, in order to complete the project. Pursuant to the agreement, the Village agreed to provide funds to make debt service payments on the bonds only if income from the project was insufficient. However, the agreement contained a $2 million cap on what the Village would pay on bond debt for the senior bonds. Further, the Village's taxing power and full faith and credit would not be pledged as security for any of the bonds. On September 29, 2005, construction of the convention hall and hotel facility commenced after LPFC issued bonds in the amount of $183,710,000 and acquired title to the property.

On November 10, 2003, LPFC filed its application for exemption from the Retailers' Tax Act on the principle that its purchases made for the construction and furnishing of the hotel and convention center project were those of a governmental body (the Village). On March 5, 2004, the Department denied LPFC's request for a sales tax exemption number, concluding that LPFC was not a governmental body within the meaning of section 2-5(11) of the Retailers' Tax Act. LPFC filed a complaint for administrative review in the circuit court on April 8, 2004, but it was dismissed because LPFC did not exhaust all administrative remedies, including requesting a hearing. LPFC then requested an administrative hearing.

On July 28, 2005, a hearing was held before an administrative law judge (ALJ). At the hearing, counsel for the Department admitted that the issue of whether an organization like LPFC qualified for a tax exemption as a "governmental body" was one that was rarely confronted. The Department argued that LPFC did not present any evidence that a governmental body owned the convention center and hotel property or that LPFC was a governmental body itself. LPFC argued that if the Department applied the "realities of ownership" test as the court in Southern Illinois did, it would find that LPFC was a governmental body under the Retailers' Tax Act. We examine Southern Illinois in the analysis section of this opinion.

At the outset of the hearing, LPFC's articles of incorporation and bylaws, a copy of Village Ordinance No. 5351, and the Tax Rebate Agreement were all entered into evidence. Next, Leonard Flood, director of finance and treasurer for the Village, testified on behalf of LPFC. Flood was involved with the convention center and hotel facility project from its beginning. The total cost of the project was estimated at $192 million. LPFC would be issuing $182 million in tax-exempt revenue bonds to cover the cost of the project, because of the Village's bonding limitations. Pursuant to section 8-5-1 of the Illinois Municipal Code (Municipal Code) (65 IL CS 5/8-5-4 (West 2004)), the Village could not become indebted for an amount greater than 8.625% of the value of taxable property therein, which would allow the Village approximately $106 million available to issue in bonds. That amount was wholly insufficient for the convention center project in light of its total anticipated costs and the Village's other expenses and needs. Flood identified a copy of Ordinance No. 5351 and explained that the ordinance provided for the creation of LPFC for the purpose of financing, constructing, and equipping the proposed development. Other municipalities in the nation have used such corporations in order to finance large projects, and the Village determined that this would be a suitable option for the convention center project. Flood further acknowledged that LPFC's articles of incorporation provided that: (1) the Village would appoint LPFC's directors and retain the authority to remove any officer at any time; (2) the Village must approve any change to LPFC's, bylaws; (3) per the Tax Rebate Agreement, the Village pledged to rebate to LPFC all of the sales tax revenue generated from the project and place it into the project revenue stream to assist in the retirement of the debt; (4) the Village will take title of the property free and clear of any encumbrances upon the retirement of the bonds; and (5) LPFC has no authority to sell the property without consent of the Village. Flood further explained that under the terms of the Tax Rebate Agreement, the Village had the ultimate risk because if there were a shortfall in the revenue from the project, the Village would be responsible for providing a backstop guaranty to pay the debt service expense once all available reserves had been exhausted. Under the agreement, in any given year, the Village could be required to pay up to $2 million to cover debt service expense. If revenue were insufficient, LPFC had no resources itself to utilize. LPFC was staffed by Village employees, and meetings were held at the Village in accord with the Open Meetings Act.

On cross-examination, Flood admitted that LPFC did not have the ability to impose taxes, maintain a police force, or provide water or sewage treatment, and had not received any charter from the State of Illinois recognizing it as a governmental body. On redirect, he acknowledged that the bylaws included a requirement that...