Panhandle E. Pipeline Co. v. Hamer

• Decision Date: 07 December 2012
• Docket Number: Docket No. 1–11–3559.
• Citation: 2012 IL App (1st) 113559,981 N.E.2d 1107,367 Ill.Dec. 379
• Parties: PANHANDLE EASTERN PIPELINE COMPANY, a Delaware Corporation, and Texas Eastern Transmission Corporation, a Delaware Corporation, Plaintiffs–Appellees, v. Brian A. HAMER, as Director of the Department of Revenue, and the Department of Revenue, Defendants–Appellants.
• Court: United States Appellate Court of Illinois

2012 IL App (1st) 113559

981 N.E.2d 1107

367 Ill.Dec. 379

PANHANDLE EASTERN PIPELINE COMPANY, a Delaware Corporation, and Texas Eastern Transmission Corporation, a Delaware Corporation, Plaintiffs–Appellees,

v.Brian A. HAMER, as Director of the Department of Revenue, and the Department of Revenue, Defendants–Appellants.

Docket No. 1–11–3559.

Appellate Court of Illinois, First District, Fifth Division.

Dec. 7, 2012.

Lisa Madigan, Attorney General, of Chicago (Michael A. Scodro, Solicitor General, and Laura Wunder, Assistant Attorney General, of counsel), for appellants.

Craig B. Fields and Mitchell A. Newmark, both of Morrison & Foerster LLP, and Fred O. Marcus and David A. Hughes, both of Horwood Marcus & Berk Chtrd., both of Chicago, for appellees.

OPINION

Presiding Justice McBRIDE delivered the judgment of the court, with opinion.

[367 Ill.Dec. 381]¶ 1 Defendants, Brian Hamer, as Director of the Illinois Department of Revenue (the Director) and the Illinois Department of Revenue (the Department), appeal from the circuit court's order reversing the Department's denial of refunds for corporateincome tax and interest to plaintiffs, Panhandle Eastern Pipeline Company and Texas Eastern Transmission Corporation. Plaintiffs had filed amended tax returns seeking a refund of income tax paid under section 304(d)(2) of the Illinois Income Tax Act (Tax Act) (35 ILCS 5/304(d)(2) (West 2010)) on its gas pipelines that traverse Illinois, but neither begin nor end within Illinois.

¶ 2 The Department argues that its decision denying the tax refunds should be reinstated because the miles that plaintiffs' gas flowed through Illinois were includable in the numerator of section 304(d)(2)'s apportionment formula and plaintiffs failed to establish that section 304(d)(2) violated the commerce clause.

¶ 3 No evidentiary hearing or trial was held in this case. The parties submitted a joint stipulation of facts to the administrative law judge (ALJ).

¶ 4 Duke Energy Corporation (Duke), through its subsidiaries, was engaged in the receipt, transportation, storage and delivery of natural gas in various states, including Illinois. The time periods at issue are the tax years ending December 31, 1997, December 31, 1998, December 31, 1999, and December 31, 2000 (tax years). During these time periods, three natural gas pipelines systems owned and operated by subsidiaries of Duke traversed Illinois: the Panhandle system, the Texas Eastern Transmission system, and the Trunkline Gas Transmission system. These three pipeline systems transported natural gas owned by others.

¶ 5 During tax years 1997 and 1998, Panhandle Eastern Pipeline Company (Panhandle) was engaged in the business of transporting natural gas by pipeline and was a wholly owned subsidiary of PanEnergy Corporation, which was owned by Duke. The Panhandle pipeline system began in Kansas and terminated in Michigan. Panhandle operated approximately 1,228 miles out of the approximately 6,334 total miles of the pipeline in Illinois. Panhandle owned and operated four compressor stations in Illinois. These compressor stations operated a total of 49 engines.

¶ 6 During the tax years, Texas Eastern Transmission Corporation (TETCO) was engaged in the business of transporting natural gas by pipeline and was a wholly owned subsidiary of PanEnergy. The TETCO pipeline system began in Texas and terminated in New Jersey. TETCO operated approximately 110 miles in Illinois out of the approximately 9,000 total miles of the pipeline. TETCO operated two compressor stations in Illinois with nine engines, though one of the stations was idle during the tax years.

¶ 7 During tax years 1997 and 1998, the Trunkline Gas Company (Trunkline) was engaged in the business of transporting natural gas and was a wholly owned subsidiary of Panhandle. The Trunkline pipeline system began in Texas and Louisiana and terminated in Michigan. Trunkline operated 725 miles of the approximately 4,142 total miles of pipeline in Illinois. Trunkline operated three compressor stations with 22 total engines.

¶ 8 All of the compressor stations owned by Panhandle, Trunkline and TETCO were staffed 24 hours per day, 365 days a year. However, the compressor stations did not operate 24 hours a day. The compressor stations recompressed the natural gas to move the gas through the pipelines and the gas could not move without the pressure generated by the compressor stations. Duke and its subsidiaries owned the land on which the compressor stations were located and had obtained permanent easements for the pipelines.

¶ 9 Plaintiffs do not dispute that they had a physical presence in Illinois and were subject to Illinois income tax. However, plaintiffs contest the computation of the amount of income tax due for the tax years.

¶ 10 Duke's transportation unitary business group operated pipelines that transported natural gas. Panhandle was the designated agent for Duke's unitary group of companies in the tax years 1997 and 1998. In 1999, Duke sold Panhandle and Trunkline to another energy company. TETCO became the designated agent for the tax years after 1998. Panhandle and TETCO, as the designated agents, were the named plaintiffs in this case.

¶ 11 For the 1997 and 1998 tax years, Panhandle filed Illinois income tax returns for the unitary business group, paying $506,541 and $1,422,195, respectively. In October 2001, Panhandle filed an amended return claiming a tax refund of $247,624 for the 1997 tax year. In October 2002, Panhandle also filed an amended tax return for the 1998 tax year, seeking a tax return of $1,044,522.

¶ 12 TETCO filed income tax returns for tax years 1999 and 2000, initially paying Illinois income tax of $3,480,942 and $54,230, respectively. In March 2003, TETCO filed amended tax returns for both tax years, claiming a tax refund of $2,713,162 for tax year 1999, and $47,874 for tax year 2000.

¶ 13 The amended tax returns excluded miles traveled by natural gas in pipelines through Illinois from the numerator of its apportionment factor, set forth in section 304(d)(2) of the Tax Act (35 ILCS 5/304(d)(2) (West 2010)), where the natural gas did not originate or terminate within Illinois. The claims for refunds were the difference paid prior to the change in the calculation.

¶ 14 Section 304(d)(2) provides:

“Such business income derived from transportation by pipeline shall be apportioned to this State by multiplying such income by a fraction, the numerator of which is the revenue miles of the person in this State, and the denominator of which is the revenue miles of the person everywhere. For the purposes of this paragraph, a revenue mile is the transportation by pipeline of 1 barrel of oil, 1,000 cubic feet of gas, or of any specified quantity of any other substance, the distance of 1 mile for a consideration.” 35 ILCS 5/304(d)(2) (West 2010).

¶ 15 In November 2005, the Department denied Panhandle's claims for refunds for tax years 1997 and 1998 and TETCO's claims for refunds for tax years 1999 and 2000. Both companies filed a protest to the denial.

¶ 16 In the stipulation of facts, the parties agreed that if the ALJ adopted the plaintiffs' position that the miles traveled by natural gas transported in pipelines through Illinois did not constitute revenue miles in the state that were includable in the numerator of the plaintiffs' Illinois apportionment factor where the gas neither originates nor terminates in Illinois, the notice of denial would be reversed and the refunds for the tax years would be processed.

¶ 17 The parties further agreed that if the ALJ adopted the Department's position that miles traveled by natural gas transported in pipelines through Illinois that neither originates nor terminates in Illinois constituted revenue miles in the state that were includable in the numerator of the plaintiffs' apportionment factor, plaintiffs were not entitled to refunds for the tax years unless such revenue miles were excludable from the numerator of the plaintiffs' apportionment formula under an alternative method of apportionment.

[367 Ill.Dec. 384]¶ 18 In August 2009, the ALJ issued a recommended decision affirming the Department's denial of the claims for tax refunds. The ALJ disagreed with plaintiffs' position that the “flow-through” miles, the miles that the natural gas traveled in Illinois as part of plaintiffs' interstate pipeline that neither originated nor terminated in Illinois, were not considered revenue miles “in this State” as provided in section 304(d)(2). The ALJ found that the record was “replete with evidence of physical and economic contacts between Illinois and the flow-through miles the state seeks to include in the numerator of the taxpayers' apportionment formula.” The ALJ also concluded that the statutory language was clear and if the legislature had intended for the narrow construction urged by plaintiffs, then it would have included such limiting language. Further, the ALJ observed that plaintiffs' construction of section 304(d)(2) “would result in the assignment of less than 100% of the taxpayers' income to the states in which the taxpayers are subject to tax.” The ALJ held that the Department's interpretation of section 304(d)(2) “best effectuates the legislative intent of this section in accordance with the dictates of the Illinois Supreme Court.” The ALJ also rejected plaintiffs' contention that including the flow-through miles in the apportionment factor would violate the commerce clause.

¶ 19 In August 2009, the Director issued a notice of decision that the recommendation of the ALJ had been accepted by the Director as “dispositive of the issues therein.” In September 2009, plaintiffs filed a complaint for administrative review of the Department's decision in the circuit court.

¶ 20 In November 2011, the trial court issued its memorandum decision and judgment order. The court reversed the Director's notice of decision and held that plaintiffs were entitled to the tax refunds...