Judicial Rulings
Illinois Supreme Court

IN A 4-3 decision November 21, the Illinois Supreme Court ruled constitutional the replacement of the corporate personal property tax with an income tax surtax. However, Justice William G. Clark, in the dissenting opinion, argued that the replacement's increase in the tax on partnerships is unconstitutional.

The replacement increases the income tax rate on corporations from 4 percent to 6.85 percent until January 1, 1981, when the rate drops to 6.50 percent. The replacement also increased by 1.5 percent the tax on partnerships and added a .8 percent tax on utilities' invested capital.

The 1970 Constitution "ordered" the legislature to replace the old tax by January 1, 1979. The Illinois General Assembly was finally goaded into action in February when the high court ruled the old tax was dead and could not be assessed in fiscal 1979. The General Assembly approved the replacement in August, retroactive to July, the start of fiscal 1980.

The replacement tax triggered a lawsuit, Continental Illinois National Bank and Trust Company of Chicago v. James B. Zagel, Director of the Illinois Department

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of Revenue. The bank challenged the constitutionality of the income tax surtax on nine counts. The high court upheld the constitutionality on all nine.

The main argument by the bank was that the income tax surtax was a new tax rather than a replacement tax because it will generate additional revenue. The bank estimated the replacement will generate $520 million, while the corporate personal property tax would have generated $468 million during calendar 1980.

In delivering the majority opinion, Justice Robert C. Underwood said the Constitution "does not limit the legislature's replacement duty to the amount of actual revenue lost, as distinguished from potential revenue lost ....

"We conclude that the anticipated amount of revenue to be raised under the act[P.A. 81 SS 1-1] is not so excessive as to constitute an unreasonable exercise of legislative discretion in carrying out the mandate [in the Constitution] . . . particularly when the diminished purchasing power of a 1980 dollar is considered."

The bank also argued the replacement is unconstitutional because the income tax surtax will be levied on additional classes, the increase in the partnerships tax is double taxation, and the new utilities invested capital tax is an ad valorem property tax as well as double taxation. (The bank also argued the governor had no right to effect the replacement via an amendatory veto of legislation, the legislature had no right to restrict reclassification of property under the replacement, and the retroactive effective date denies due process.)

In upholding the constitutionality of the tax, the high court consistently ruled that the framers of the 1970 Constitution intended a loose interpretation of the mandate to the legislature. The court extensively cited debates of the Constitutional Convention as evidence of intent.

On taxing other classes, Underwood said, ". . . we do find that it [the Constitution] does not require in the replacement tax an exact correlation of persons and property taxed with those formerly subject to personal property tax.

"[I]t is clear that the replacement tax was intended to be imposed broadly on those classes rather than on those particular persons relieved of paying the personal property tax.

"Since a replacement tax imposed on the basis of income was expressly contemplated in it [the Constitution], " Underwood said, "we cannot agree that only those persons who incurred liability under the personal property tax were in fact the intended subjects of the replacement taxes."

On the added .8 percent tax on utilities invested capital, the court said: "Since the method of taxation under the Act does not assign a cash value to utility property and then levy a tax on that value, it does not amount to an ad valorem mode of taxation.

"However, since we have found the tax on invested capital to be a tax on the privilege of engaging in specified business occupations, there is no double taxation simply because there is another tax directly on the property."

Underwood said the bank failed to prove the 1.5 percent increase in the partnerships' tax is "arbitrary and unreasonable," the high court's chief criteria for unconstitutionally.

The high court had previously allowed the levy of separate taxes on members of partnerships as individuals and as partners. However, Clark, in his dissent, said that the court's 1973 ruling in Lake Shore Auto Parts Co. v. Korzen, was based on personal property taxes rather than income taxes:

"Clearly, income earned by the partnership is precisely the same income which is distributed to the partners. This is irrefutable herein that if the income is the same, it is being taxed twice: once when the partnership realizes the income by means of the replacement income tax, and a second time when the partnership receives it, in the form of the State personal income tax."

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