Superior Coal Co. v. Dep't of Finance

• Citation: 377 Ill. 282,36 N.E.2d 354
• Decision Date: 15 September 1941
• Docket Number: No. 26166.,26166.
• Parties: SUPERIOR COAL CO. v. DEPARTMENT OF FINANCE.
• Court: Supreme Court of Illinois

377 Ill. 282

36 N.E.2d 354

SUPERIOR COAL CO.

v.DEPARTMENT OF FINANCE.

No. 26166.

Supreme Court of Illinois.

June 17, 1941.

Rehearing Denied Sept. 15, 1941.

Certiorari proceeding by the Superior Coal Company against the Department of Finance. From a judgment of the Superior Court of Cook County quashing its return, defendant appeals.

Reversed and remanded, with directions.Appeal from Superior Court, Cook County; Francis B. Allegretti, judge.

George F. Barrett, Atty. Gen. (Albert E. Hallett, Jr., of Chicago, of counsel), for appellant.

Nelson Trottman, of Chicago (William T. Faricy, of Chicago, of counsel), for appellee.

WILSON, Justice.

The defendant, the Department of Finance, prosecutes this appeal from a judgment of the superior court of Cook county quashing its return is a certiorari proceeding instituted by the plaintiff, the Superior Coal Company, conformably to section 12 of the Retailers' Occupation Tax Act, Ill.Rev.Stat.1939, c. 120, § 451.

Plaintiff, a domestic corporation, is a wholly-owned subsidiary of the Chicago and Northwestern Railway Company, a corporation of Wisconsin, Michigan, and Illinois, and sells the entire output of its mines, except inconsequential sales to its own employees for their personal use, to the parent corporation. A tax has been paid on the sales to employees. Plaintiff resists payment of $102,730.75 in tax and penalties for the period from July 1, 1933, through May, 1935. The principal question presented for decision is whether the parent and subsidiary corporation are to be deemed as so integrated that the transactions involved in this proceeding are not taxable sales within the contemplation of our Retailers' Occupation Tax Act. Defendant contends that the companies are not only separate corporations in form and in the eye of the law but, further, that the distinction between them is real and practical; that the parent corporation has enjoyed substantial advantages accruing from the separate corporate existences of the companies; that, in particular, the separate identity of the subsidiary has been an important factor in the financing of the railway company, and that to give effect to the separate identities of the two corporations is merely to recognize a distinction existing between them in fact. On the other hand, although admitting it has a separate existence for all purposes, plaintiff maintains that it is, in fact, but a department or branch of the railway company; that it is merely an agent or instrumentality of the parent corporation; that coal mined by the plaintiff for use in the railway company's business is, in reality, mined by the railway company itself, and that the transactions in question between the plaintiff and its parent are no more ‘sales' than would be any interdepartmental transfer, or the direct mining by the railway company of coal for its own use through an agent, under any circumstances to which the law of agency is applicable. The determination of the decisive issue thus made requires a review of the relevant facts.

Plaintiff was incorporated in 1903, its corporate object being ‘to mine and sell coal, and for that purpose to acquire, own and lease such lands and acquire and hold such coal rights, and such other real and personal estate as may be necessary.’ Previously, the executive committee of the railway company had adopted a resolution authorizing the purchase of coal lands in Macoupin county and the board of directors had approved the transaction. The authorized capital stock, originally $1,500,000, has since been increased to $2,000,000, all of which is issued and outstanding. From the beginning, all of the stock, excepting only five directors' qualifying shares, has been owned by the railway company. Since 1903, every director of the plaintiff has been an officer or an employee of the railway company. Similarly, the officers of the plaintiff, with a single exception, have been officers of the railway company.

So far as we are able to ascertain, there is no inhibition in the general laws or special acts under which the railway company was organized forbidding it to engage in coal mining operations, incident and necessary to the operation of its business as a common carrier. When the mine properties were acquired, the railway company was obliged to purchase its coal commercially and pay, in addition to the usual seller's profit, the freight and transportation costs. Subsequent to the acquisition of the land in Macoupin county, the railway company extended its lines and was thus enabled to reach its mines with its own rails. The purchase of the land, the formation of the coal company and the extension of the railway's lines were in accordance with its general plan to secure for itself cheaper locomotive fuel. Plaintiff has no independent income, except for limited amounts received from royalties, rents from unimportant properties, and interest from investments of accumulated funds derived originally from ‘sales' of coal to the railway company in the past. In short, plaintiff has no income except as the railway company supplies it with funds for the coal supplied to or purchased by it. Coal produced by the plaintiff is solely for the railway company's use and that of the latter's almost but not wholly-owned subsidiary, the Chicago, St. Paul, Minneapolis and Omaha Railway Company.

It appears that the plaintiff's office has always been maintained at the general offices of the railway company. Fred S. Pfahler, president of the coal company, during the period involved in this litigation, was coal traffic manager of the railway company. Pfahler occupies offices immediately adjacent to the railway company's statistician and near the railway company's law offices. The corporate records of the plaintiff are kept in the office of the secretary, who is also the secretary of the railway company, and are part of the regular files in the office of the secretary of the railway company. Records relating to lands are kept in the office of the railway company's land commissioner. Records relative to taxes are kept by, and in, the office of the railway company's tax commissioner. Likewise, the accounting records of the coal company are kept in the office of the controller of the railway company. The controller holds the same position in both companies and neither his salary nor the salary of the accountants, bookkeepers, and clerks are paid by the plaintiff, with the exception of one accountant paid by the coal company for ‘special work’ at the mines. Plaintiff pays, in addition, $225 per month out of its funds for accountants' traveling expenses. The chief clerk of the coal company's president at Gillespie is an employee of the coal company and paid by it. Attorneys representing the coal company are members of the law department of the railway company. An attorney at Gillespie is employed independently for the purpose of representing the coal company in workmen's compensataion proceedings. We observe, in this connection, that claims for compensation by injured employees are made against the plaintiff coal company, and not against the railway company. Superior Coal Co. v. Industrial Comm., 326 Ill. 584, 158 N.E. 209, 54 A.L.R. 634;Id., 304 Ill. 320, 136 N.E. 762. There are other instances in which the two companies are intimately affiliated but which need not be narrated. In general, the coal company does not reimburse the expenses of the railway company departments incurred in its behalf. The plaintiff coal company orders material and supplies from third parties in its own name and on its own stationery, apparently obtaining credit as a separate corporation and incurring a liability chargeable against its own assets. In communications among the officers of the two companies stationery without letterheads is used, the practice which obtains in interdepartmental correspondence of the railway company, but which is not the practice of either company concerning outside correspondence. The fact remains that the records, inventory, property and funds of the two companies are kept separately, although often in the same offices and by the same individuals.

The railway company has long been in bankruptcy in the United States District Court for the Northern District of Illinois, Eastern Division, and its assets are held by a trustee. Plaintiff coal company is, so far as the record discloses, a solvent corporation, has never been adjudicated a bankrupt and is presently operating as a going concern. In 1932, the railway company borrowed money from the Reconstruction Finance Corporation and, as security, made an assignment of the dividends to be declared upon its stock of the coal company. The financing contemplated the repayment of the loan to the extent of $400,000 per year, the railway company agreeing to make a contract with the plaintiff coal company to take 2,000,000 tons of coal per year at a price twenty cents per ton in excess of the cost of production. By an agreement between the two corporations, the coal company agreed to declare dividends to the extent of $400,000 per year. The contract was assigned by the railway company to the Reconstruction Finance Corporation. A formal direction was given to the plaintiff coal company to pay dividends to the Federal agency so long as the railway company was indebted to the latter and the plaintiff executed an acquiescence. Upon the foregoing basis, the railway company obtained the desired loan. The contract with respect to the declaration and payment of dividends was abrogated in the latter part of 1934 at the request of the railway company. Thereafter, coal was sold to the buyer at cost of operation.

It also appears that prior to December, 1934, the railway company made a pledge of equity in the stock of the plaintiff to the Railroad Credit Corporation to secure a debt. In 1934, the railway company borrowed money from banks in New York City. At the request of the railway company, the plaintiff...