Zunamon v. Zehnder

• Decision Date: 16 September 1999
• Docket Number: No. 1-98-1459.,1-98-1459.
• Citation: 719 N.E.2d 130,308 Ill. App.3d 69,241 Ill.Dec. 269
• Parties: Simon ZUNAMON, as Trustee of Oregon Trusts Nos. 1-208 and Washington Trusts Nos. 1-16, Marshall E. Eisenberg, as Trustee of A.N.P. Trusts Nos. 1-42 and R.A. Trusts Nos. 1-25, and Charles Evans Gerber, as Trustee of F.L.P. Trusts Nos. 10-17 and 19-21, Plaintiffs-Appellants, v. Kenneth E. ZEHNDER, Director of the Illinois Department of Revenue, and the Illinois Department Of Revenue, Defendants-Appellees.
• Court: United States Appellate Court of Illinois

719 N.E.2d 130

308 Ill. App.3d 69

241 Ill.Dec. 269

Simon ZUNAMON, as Trustee of Oregon Trusts Nos. 1-208 and Washington Trusts Nos. 1-16, Marshall E. Eisenberg, as Trustee of A.N.P. Trusts Nos. 1--25, and Charles Evans Gerber, as Trustee of F.L.P. Trusts Nos. 10--21, Plaintiffs-Appellants, v. Kenneth E. ZEHNDER, Director of the Illinois Department of Revenue, and the Illinois Department Of Revenue, Defendants-Appellees.

No. 1-98-1459.

Appellate Court of Illinois, First District, Fourth Division.

September 16, 1999.

Michael D. Sher and Diane M. Anderson, Neal, Gerber & Eisenberg, Chicago, for Appellant.

James E. Ryan, Attorney General, Brian F. Barov, Assistant Attorney General, Chicago, for Appellees.

Justice HOURIHANE delivered the opinion of the court:

Plaintiffs, the trustees of certain taxpayer trusts, appeal an order of the circuit court affirming a decision of the Illinois Department of Revenue (Department), which determined that the trusts are not entitled to a foreign tax credit under section 601(b)(3) of the Illinois Income Tax Act (Act) (Ill.Rev.Stat.1987, ch. 120, par. 1-101 et seq.) against their Illinois income tax liability for tax years prior to 1988, or against their replacement tax liability.

We reverse in part and affirm in part.

BACKGROUND

The underlying facts are undisputed. Each trust is a "resident" of Illinois for purposes of the Act. See Ill.Rev.Stat.1987, ch. 120, par. 15-1501(a)(20). Only tax years ending on or before December 31, 1987 are in issue. For each such year in which the trusts earned income from a state other than Illinois, i.e., from a "source state", they paid income tax to the source state on the income earned there.

On their federal income tax returns, the trusts each took a section 164 deduction for income taxes paid to a source state. See 26 U.S.C.A. § 164 (1986). On their Illinois returns for the same years, the trusts added back the federal deduction when calculating their "base income" under the Act, and then claimed a foreign income tax credit for taxes paid to a source state. The trusts also claimed a credit against their replacement tax liability.¹

The Department disallowed both credits. It determined that, for the tax years in issue, the trusts were not permitted to add back the federal deduction taken for source state taxes to their Illinois base income in order to preserve their ability to take the foreign tax credit. The Department also determined that the foreign tax credit applies only to income tax calculations and not to replacement tax calculations. The Department further rejected the trusts' arguments that disallowing the tax credits runs afoul of the uniformity clause of the Illinois Constitution (Ill. Const.1970, art. IX, § 2), the federal due process clause (U.S. Const., amend.XIV, § 1), or the commerce clause (U.S. Const., art. I, § 8). On administrative review, the circuit court affirmed the Department's decision, and this appeal followed.

ANALYSIS

Because the facts are undisputed and only questions of law are raised on appeal, review of the Department's decision proceeds de novo. Nokomis Quarry v. Department of Revenue, 295 Ill.App.3d 264, 267, 229 Ill.Dec. 866, 692 N.E.2d 855 (1998)

.

Foreign Tax Credit

Under section 601(b) of the Act, the amount of income tax payable shall be the balance due after giving effect to, among other things, the following:

"(3) Foreign tax. The aggregate amount of tax which is imposed upon or measured by income and which is paid by a resident for a taxable year to another state or states on income which is also subject to the tax imposed by subsections 201(a) and (b) of this Act shall be credited against the tax imposed by subsections 201(a) and (b) otherwise due under this Act for such taxable year. * * * The credit provided by this paragraph shall not be allowed if any creditable tax was deducted in determining base income for the taxable year." (Emphasis added.) Ill.Rev.Stat.1987, ch. 120, par. 6-601(b)(3).

The "base income" of a trust is its federal taxable income. Ill.Rev.Stat.1987, ch. 120, par. 2-203(c), (e)(1). In computing its federal taxable income, a trust is entitled to a deduction for state income taxes. 26 U.S.C.A. § 164 (1986). Thus, a trust's base income necessarily reflects the federal deduction. Accordingly, a trust is precluded from taking the foreign tax credit unless it either forgoes the federal deduction for state income taxes, or adds back the federal deduction when calculating its base income. However, prior to the passage of Public Act 85-1200, effective August 24, 1988, section 203 of the Act prohibited any modifications to taxable income or base income except those expressly provided therein. Ill.Rev.Stat.1987, ch. 120, par. 2-203(h).

Public Act 85-1200 amended section 203 of the Act by providing that the taxable income of a trust may be modified by adding thereto an amount equal to the tax deducted pursuant to section 164 of the Internal Revenue Code (IRC) (26 U.S.C.A. § 164 (1986)), if the trust is claiming the same tax for purposes of the foreign tax credit under section 601. However, the statutory amendment states that such modification is allowable "[f]or taxable years ending on or after January 1, 1989". Ill.Rev.Stat.1989, ch. 120, par. 2-203(c)(2)(F).

In contrast to the foregoing provisions governing the taxation of trusts, the Act provides that the base income of an individual is calculated with reference to his or her "adjusted gross income", as defined in the IRC. Ill.Rev.Stat.1987, ch. 120, par. 2-203(a), (e)(1). Adjusted gross income under the IRC does not include a deduction for state taxes. See 26 U.S.C.A. § 62 (1986). Thus, unlike a trust, an individual need not forgo the federal deduction in order to take the foreign tax credit.

With this statutory scheme in mind, we consider whether the trusts are entitled to take the foreign tax credit for the tax years in issue. The trusts argue that this court's decision in Eisenberg v. Zehnder, 179 Ill.2d 581, 235 Ill.Dec. 563, 705 N.E.2d 436 (1998) (unpublished order under Supreme Court Rule 23) is dispositive and requires reversal.

While the present case was pending in the circuit court, the same court had before it the Eisenberg case, in which certain resident trusts made the same arguments regarding their entitlement to the foreign tax credit. In Eisenberg, the circuit court reversed the decision of the Department, thus allowing the foreign tax credits. On appeal, we affirmed. However, while Eisenberg was pending before this court, the circuit court entered its ruling in the instant case. The circuit court determined that its reasoning in Eisenberg was faulty, and affirmed the Department's decision disallowing the tax credits. The trusts contend that, based on our decision in Eisenberg, the Department is collaterally estopped from relitigating the meaning of the subject provisions of the Act in the case at bar.

The doctrine of collateral estoppel bars the relitigation of issues decided in another action where (1) the issue decided in the prior adjudication is identical with the one presented in the present litigation; (2) there was a final judgment on the merits in the prior adjudication; and (3) the party against whom estoppel is asserted is a party or in privity with a party to the prior adjudication. Illinois State Chamber of Commerce v. Pollution Control Board, 78 Ill.2d 1, 7, 34 Ill.Dec. 334, 398 N.E.2d 9 (1979). Although an unpublished order of the court is not precedential, it may be cited for limited purposes, including to support contentions of collateral estoppel. 166 Ill.2d R. 23(e).

There is no question that the controlling legal issue in the Eisenberg case is identical to the initial issue raised in the case at bar, that there was a final judgment on the merits in Eisenberg, and that the party against whom estoppel is sought — the Department—was a party in that case. However, the Department maintains that collateral estoppel applies only to the relitigation of questions of fact, not to questions of law. See Nokomis Quarry Co., 295 Ill.App.3d at 267, 229 Ill.Dec. 866, 692 N.E.2d 855; City of Chicago v. Chicago Fiber Optic Corp., 287 Ill.App.3d 566, 576, 222 Ill.Dec. 821, 678 N.E.2d 693 (1997). But see Morris v. Union Oil Co. of California, 96 Ill.App.3d 148, 153, 51 Ill.Dec. 770, 421 N.E.2d 278 (1981) (collateral estoppel forecloses relitigation of issues of either fact or law logically and legally necessary in reaching prior judgment); Restatement (Second) of Judgments § 27 (1980) (collateral estoppel applies to issues of evidentiary fact, ultimate fact, and issues of law essential to prior judgment).

We need not decide whether collateral estoppel applies here. Even if the Department is not estopped from relitigating identical issues of statutory construction, we find no reason to depart from this court's analysis in Eisenberg. Accordingly, we reverse the Director's decision disallowing the foreign tax credits for pre-1988 tax years.

The cardinal rule of statutory construction is to ascertain and give effect to the intent of the legislature. Ordinarily, the best indicator of the legislature's intent is the language of the statute itself. Nottage v. Jeka, 172 Ill.2d 386, 392, 217 Ill. Dec. 298, 667 N.E.2d 91 (1996). Although a statute should be interpreted, if possible, so that no clause or term is rendered superfluous (Niven v. Siqueira, 109 Ill.2d 357, 365, 94 Ill.Dec. 60, 487 N.E.2d 937 (1985)), statutory provisions must also be harmonized and inconsistent phrasing may be modified, changed or rejected to conform to legislative intent (Certain Taxpayers v. Sheahen, 45 Ill.2d 75, 83, 256 N.E.2d 758 (1970)). Thus, where the letter of the statute conflicts with the spirit of the statute, the latter is controlling. Bogseth v. Emanuel, 261 Ill.App.3d 685, 690, 199 Ill. Dec. 108, 633 N.E.2d 904 (1994),aff'd166 Ill.2d 507, 211 Ill.Dec. 505, 655 N.E.2d 888 (1995). Where an unambiguous statute is...