McGinley v. Madigan

• Decision Date: 01 June 2006
• Docket Number: No. 1-04-3517.,1-04-3517.
• Citation: 851 N.E.2d 709
• Parties: James W. McGINLEY, Margaret J. McGinley, and Robert R. McGinley, as Executors of the Estate of Jane R. McGinley, and Jay M. Goldstein, as Executor of the Estate of Nancy L. Goldstein, Plaintiffs-Appellees and Cross-Appellants, v. Lisa MADIGAN, as Attorney General of the State of Illinois, Judy Baar Topinka, as Treasurer of the State of Illinois, and Maria Pappas, as Treasurer of Cook County, Illinois, Defendants-Appellants and Cross-Appellees.
• Court: United States Appellate Court of Illinois

851 N.E.2d 709

James W. McGINLEY, Margaret J. McGinley, and Robert R. McGinley, as Executors of the Estate of Jane R. McGinley, and Jay M. Goldstein, as Executor of the Estate of Nancy L. Goldstein, Plaintiffs-Appellees and Cross-Appellants, v. Lisa MADIGAN, as Attorney General of the State of Illinois, Judy Baar Topinka, as Treasurer of the State of Illinois, and Maria Pappas, as Treasurer of Cook County, Illinois, Defendants-Appellants and Cross-Appellees.

No. 1-04-3517.

Appellate Court of Illinois, First District, Fourth Division.

June 1, 2006.

COPYRIGHT MATERIAL OMITTED

Lisa J. Madigan, Attorney General, Chicago, for Madigan and Topinka.

Gary Feinerman, Solicitor General, Brian F. Barov, Assistant Attorney General, for Lisa Madigan.

Richard A. Devine, State's Attorney, Cook County, for Pappas.

Steven H. Hoeft, Steven F. Pflaum, Mark Altschul, of McDermott, Will & Emery LLP, for Appellees.

Justice GREIMAN delivered the opinion of the court:

This appeal concerns the application and constitutionality of Public Acts 93-30 (Pub. Act 93-30, eff. June 20, 2003) (amending 35 ILCS 405/2, 3 (West 2002)) and 94-419 (Pub. Act 94-419, eff. August 2, 2005) (amending 35 ILCS 405/3 (West 2004)) which amended sections 2 and 3 of the Illinois Estate and Generation-Skipping Transfer Tax Act (the Estate Tax Act). Plaintiffs James W. McGinley, Margaret J. McGinley and Robert R. McGinley, the executors of the estate of Jane R. McGinley (the McGinley estate), and Jay M. Goldstein, the executor of the estate of Nancy L. Goldstein (the Goldstein estate), filed a complaint in the trial court against defendants Lisa Madigan, the Attorney General of the State of Illinois, and Judy Baar Topinka, the Treasurer of the State of Illinois, alleging that the legislature did not intend for Public Act 93-30 to apply retroactively to their estates, that retroactive application violated Illinois constitutional law and that Public Act 93-30 was invalid because it violated Illinois and federal constitutional law and requesting an award of attorney fees.

The trial court found that the legislature did not intend the amendment to be applied retroactively and that, because it was substantive, the amendment applied prospectively only. Accordingly, the trial court entered summary judgment in favor of plaintiffs on the issue of retroactivity. Having found that the amendment did not retroactively apply to plaintiffs, the trial court dismissed the remaining counts of plaintiffs' complaint as moot. Defendants appealed and plaintiffs cross-appealed. On appeal, the parties contest the retroactive application and constitutionality of Public Acts 93-30 and 94-419, the latter statute being enacted during the pendency of this appeal, and whether plaintiffs are entitled to attorney fees.

We will begin our discussion of this case with a review of the interplay between Illinois estate tax law and federal tax law.

Federal law has historically allowed an estate to take a federal tax credit for the taxes the estate pays to the state. See 26 U.S.C. § 2011 (2000). Accordingly, since 1983, Illinois law has taxed an estate at the maximum rate allowable by the federal tax credit. Specifically, section 2 of the Estate Tax Act formerly provided:

"`State tax credit' means the credit for state tax allowable under Section 2011 or Section 2604 of the Internal Revenue Code." 35 ILCS 405/2 (West 2002).

Section 3 of the Estate Tax Act provided:

"Illinois estate tax. (a) Imposition of Tax. An Illinois estate tax is imposed on every taxable transfer involving transferred property having a tax situs within the State of Illinois.

(b) Amount of tax. The amount of the Illinois estate tax shall be the maximum state tax credit allowable with respect to the taxable transfer reduced by the lesser of:

(1) the amount of the state tax credit paid to any other state or states; and

(2) the amount determined by multiplying the maximum state tax credit allowable with respect to the taxable transfer by the percentage which the gross value of the transferred property not having a tax situs in Illinois bears to the gross value of the total transferred property." 35 ILCS 405/3 (West 2002).

In 2001, the federal Economic Growth and Tax Relief Reconciliation Act of 2001 (Pub.L. No. 107-16, 2001 U.S.C.C.A.N. (115 Stat.) 38) (the Reconciliation Act) came into effect. The Reconciliation Act gradually eliminated the state tax credit.

Recognizing that the Reconciliation Act would have the effect of decreasing the revenue the State of Illinois gained in estate taxes, the legislature endeavored to "decouple" Illinois estate tax from the federal estate tax credit. In 2003, with Public Act 93-30, the legislature amended sections 2 and 3 of the Estate Tax Act. Amended section 2 of the Estate Tax Act provided:

"`State tax credit' means:

(a) For persons dying on or after January 1, 2003 and through December 31, 2005, an amount equal to the full credit calculable under Section 2011 or Section 2604 of the Internal Revenue Code as the credit would have been computed and allowed under the Internal Revenue Code as in effect on December 31, 2001, without the reduction in the State Death Tax Credit as provided in Section 2011(b)(2) or the termination of the State Death Tax Credit as provided in Section 2011(f) as enacted by the Economic Growth and Tax Relief Reconciliation Act of 2001, but recognizing the increased applicable exclusion amount through December 31, 2005." 35 ILCS 405/2 (West 2004).

Public Act 93-30 also amended section 3(b) of the Estate Tax Act as follows:

"(b) Amount of tax. The amount of the Illinois estate tax shall be the state tax credit, as defined in Section 2 of this Act, with respect to the taxable transfer reduced by the lesser of:

(1) the amount of the state tax credit paid to any other state or states; and

(2) the amount determined by multiplying the maximum state tax credit allowable with respect to the taxable transfer by the percentage which the gross value of the transferred property not having a tax situs in Illinois bears to the gross value of the total transferred property." 35 ILCS 405/3(b) (West 2004).

Public Act 93-30 took effect on June 20, 2003. In assessing an estate's Illinois tax, Public Act 93-30 did not differentiate between estate property located in Illinois and that located outside of Illinois.

Most recently, while this appeal was pending, section 3 of the Estate Tax Act was further amended by Public Act 94-419, which took effect on August 2, 2005. Public Act 94-419 amended subsection (b) of section 3 to read:

"(b) Amount of tax. On estates of persons dying before January 1, 2003, the amount of the Illinois estate tax shall be the state tax credit, as defined in Section 2 of this Act, with respect to the taxable transfer reduced by the lesser of:

(1) the amount of the state tax credit paid to any other state or states; and

(2) the amount determined by multiplying the maximum state tax credit allowable with respect to the taxable transfer by the percentage which the gross value of the transferred property not having a tax situs in Illinois bears to the gross value of the total transferred property." Pub. Act 94-419, eff. August 2, 2005 (amending 35 ILCS 405/3 (West 2004)).

Public Act 94-419 also added subsection (c) of section 3, which provides:

"(c) On estates of persons dying on or after January 1, 2003, the amount of the Illinois estate tax shall be the state tax credit, as defined in Section 2 of this Act, reduced by the amount determined by multiplying the state tax credit with respect to the taxable transfer by the percentage which the gross value of the transferred property not having a tax situs in Illinois bears to the gross value of the total transferred property." Pub. Act 94-419, eff. August 2, 2005 (amending 35 ILCS 405/3 (West 2004)).

Pursuant to section 3(b) as amended by Public Act 93-30, the value of the entire estate, including both in-state and out-of-state property, was considered in calculating the Illinois estate tax to be levied. The amount of Illinois tax was then reduced by the taxes paid to another state. However, as a practical effect, if the other state had a lower tax rate, Illinois would, in effect, collect taxes on the out-of-state property in the amount of the difference between Illinois's tax rate and the other state's lower tax rate. Accordingly, Public Act 93-30 allowed an Illinois tax to be levied against the property of an estate located in another state. With section 3(c), added by Public Act 94-419, the legislature purportedly remedied the possible constitutional problem created by section 3(b) as amended by Public Act 93-30 because section 3(c) first determines what percentage of an estate is located in Illinois and then levies a tax on that property with a situs in Illinois.

We turn now to the facts of the present case. Jane R. McGinley (McGinley) died on February 16, 2003. Pursuant to the Estate Tax Act as amended by Public Act 93-30, her estate paid defendants $2,340,392.17. McGinley held property in Illinois, Wisconsin and Florida. Nancy L. Goldstein (Goldstein) died on February 22, 2003. Pursuant to the Estate Tax Act as amended by Public Act 93-30, her estate paid defendants $1,661,537.96. Goldstein held property in Illinois.

On December 9, 2003, plaintiffs filed a five-count verified complaint for declaratory and injunctive relief pursuant to the State Officers and Employees Money Disposition Act (the Protest Monies Act) (30 ILCS 230/1 et seq. (West 2002)). Count I of plaintiffs' complaint alleged that the amendment to section 2 of the Estate Tax Act effected by Public Act 93-30 could not be applied retroactively to persons, like McGinley and Goldstein, dying after January 1, 2003, and before the effective date of the amendment; count II alleged that retroactive application of the amendment violated the due process clause of the Illinois Constitution; count III alleged that the amendment...