People v. Cameron

                                                                SIXTH DIVISION
                                                              January 17, 1997











No. 1-95-1022


TEXACO-CITIES SERVICE PIPELINE COMPANY,  )        Appeal from
                                         )     the Circuit Court
     Plaintiff-Appellee/Cross-Appellant, )      of Cook County.
                                         )
          v.                             )      No.  93-L-50312
                                         )
SAM McGAW, Acting Director of State of   )
Illinois Department of Revenue,          )         Honorable
                                         )    Alexander P. White,
     Defendant-Appellant/Cross-Appellee. )      Judge Presiding.



     JUSTICE THEIS delivered the opinion of the court:

     The trial court ruled that proceeds from a taxpayer's sale of
pipeline constituted business income to be apportioned under the
Illinois Income Tax Act's general three-factor formula.  On appeal,
the taxpayer challenges the trial court's classification of the
proceeds as business income, and the defendant challenges the trial
court's apportionment determination.  We affirm in part and reverse in
part.
     Texaco, a nonresident corporation, owned and operated pipeline
which ran through various states, including Illinois.  Texaco
transported crude oil and other petroleum products through this
pipeline, which serviced various oil refineries.  During the 1983 tax
year, Texaco sold major segments of pipeline, including the pipeline
which serviced refineries in Lockport and East Chicago, Illinois.  The
sale accounted for nearly 90% of Texaco's total pipeline holdings.  
     On its 1983 tax return, Texaco reported the sale of the pipeline
and associated real estate as nonbusiness income.  Texaco apportioned
the remainder of its business income under the one-factor
apportionment formula found in section 304(d)(2) of the Illinois
Income Tax Act.  35 ILCS 5/304(d)(2) (West 1994).
     Upon audit, the Department of Revenue determined that the
proceeds from the sale constituted business income.  The department
issued a timely notice of deficiency.  On March 8, 1990, Texaco filed
a protest to the notice.  The parties submitted the dispute to an
administrative law judge (ALJ) to determine:  (1) whether the income
was business income; and (2) whether the general three-factor formula
or the special one-factor formula should apply for apportioning
business income.  The ALJ concluded that the income was business
income subject to apportionment under the special one-factor formula
applicable to the transportation industry.        
     Texaco sought administrative review, arguing that, under the
plain language of the Illinois Income Tax Act (IITA) (35 ILCS
5/304(d)(2) (West 1994)), the proceeds constituted nonbusiness income. 
In the alternative, Texaco claimed that the general three-factor
formula for apportioning business income should apply to the proceeds. 
The trial court entered judgment in accordance with the ALJ's
determination that the proceeds constituted business income.  However,
the trial court rejected the ALJ's ruling that the special one-factor
formula for apportioning business income should apply.  The trial
court reasoned that the one-factor formula applied only to business
income derived from actual pipeline transportation activity.  The
trial court further found that the application of the one-factor
formula would be unconstitutional.  The department appealed and Texaco
cross-appealed the adverse determinations. 
     We will review these disputed legal issues under a de novo
standard.  Skokie Gold Standard Liquors, Inc. v. Joseph E. Seagram &
Sons, Inc., 116 Ill. App. 3d 1043, 452 N.E.2d 804 (1983).  Because a
finding that the proceeds constitute nonbusiness income would render
the issues raised in the Department's appeal moot, we will address
Texaco's cross-appeal first.  
     Section 1501(a)(1) of the Illinois Income Tax Act defines
business income:
               "(1) Business Income.  The term `business
          income  means income arising from transactions and
          activity in the regular course of the taxpayer's
          trade or business, net of the deductions allocable
          thereto, and includes income from tangible and
          intangible property if the acquisition, management,
          and disposition of the property constitute integral
          parts of the taxpayer's regular trade or business
          operations.  Such term does not include
          compensation or the deductions allocable thereto."
          (Emphasis added.)  35 ILCS 5/1501(a)(1) (West
          1994).
Nonbusiness income is all income not classified as business income. 
35 ILCS 5/1501(a)(13) (West 1994).  The taxpayer bears the heavy
burden of demonstrating that income is not business income.  Dover
Corp. v. Department of Revenue, 271 Ill. App. 3d 700, 712, 648 N.E.2d 1089, 1097 (1995).
     Texaco argues that a plain reading of the IITA demonstrates that
only income arising from transactions within the regular course of its
business constitutes business income.  Because Texaco is in the
business of transporting by pipeline, not selling the actual pipeline
itself, Texaco claims that the income from this extraordinary
transaction does not constitute business income.  
     We disagree.  In Dover Corp. v. Department of Revenue, this court
found that:
               "There are two alternative tests to be applied
          in   determining whether an item of income is
          business income.  (National Realty & Investment Co
          v. Department of Revenue (1986), 144 Ill. App. 3d
          541, 494 N.E.2d 924.)  These two tests are referred
          to as the `transactional  and `functional  tests.
          ***  Under the functional test, which is derived
          from the second clause of section 1501(a)(1), the
          relevant inquiry is whether the property was used
          in the taxpayer's regular trade or business
          operations.  National Realty, 144 Ill. App. 3 at
          554."  271 Ill. App. 3d 700, 711-12, 648 N.E.2d 1089, 1097.
In The Kroger Co. v. Department of Revenue, Nos. 1-95-1658 & 1-95-2232
(Cons.) (November 12, 1996), modified upon denial of rehearing, this
court rejected arguments similar to those raised by Texaco.  Finding
the Kroger analysis to be both thorough and persuasive, we affirm the
trial court's determination that Illinois law embraces two alternate
tests for classifying business income. 
     Having determined that the functional test is an appropriate
method for determining business income, we review the trial court's
application.  Texaco does not dispute that the pipeline was property
used in its business.  Texaco attempts to place the proceeds outside
of the scope of this definition by arguing that the sale of 90% of its
pipeline was an extraordinary transaction, which effectively
terminated Texaco's pipeline presence in Illinois.  
     Initially, we find, as the trial court did, that Texaco failed to
introduce any evidence that the sale of pipeline did not contribute to
Texaco's continuing business operations as a whole.  The absence of
this evidence negates Texaco's contention that the sale of pipeline
was a business-ending proposition.  Furthermore, a review of the
examples from the department's regulations indicates that such a
consideration is irrelevant.  86 Ill. Adm. Code 100.3050(d)(3)
(1991).  For example, where a corporation closes its plant, but does
not sell its plant until 18 months after ceasing operations, the gain
is business income.  86 Ill. Adm. Code 100.3050(d)(3) example C, at
1577 (1991).  While not binding authority, the department's
interpretation of law which it administers represents an informed
source for ascertaining legislative intent.  Dover Corp. v. Department
of Revenue, 271 Ill. App. 3d 700, 648 N.E.2d 1089 (1995).  We find
Texaco's argument raises a distinction without a difference and affirm
the trial court's application of the functional test. 
     We now turn to the issues raised in the department's appeal.  The
department disputes the trial court's interpretation of those sections
of the IITA which provide for the apportionment of business income. 
Business income is apportioned among the various states in which a
company does business.  As a general rule, the IITA apportions
business income under a three-factor formula.  35 ILCS 5/304(a) (West
1994).  The Illinois legislature created exceptions to the general
three-factor formula by enacting sections 304(b), (c), and (d) of the
IITA, which apportioned certain business income under a special one-
factor formula.  Specifically, section 304 provides special
apportionment for:
               "(b)  Insurance companies.  (1) In general. 
          Except as otherwise provided in paragraph (2),
          business income of an insurance company for a
          taxable year shall be apportioned to this State by
          multiplying such income by a [one factor] fraction
          ***.
          *** 
               (c)  Financial organizations.  (1)  In
          general.  Business income of a financial
          organization shall be apportioned to this State by
          multiplying such income by a [one factor] fraction
          ***.
                                  *   *   *
               (d)  Transportation services.  Business income
          derived from furnishing transportation services
          shall be apportioned to this State in accordance
          with paragraphs (1) and (2).
                                  *   *   *
               (2)  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. ***"  (Emphasis added.)  35 ILCS
          5/304(b), (c), (d)(2) (West 1994). 
     In construing section 304, the trial court found "[t]he key
distinction in Section 304(d) is that it focuses on the activity of
furnishing transportation services, and not on all business income of
transportation companies.  In Section 304(d) only the income derived
from furnishing transportation services is apportionable by a special
single-factor formula.  All other business income of a transportation
company is apportioned by the standard, equally-weighted three-factor
formula pursuant to Section 304(a)'s general rule."   The court stated
that if the legislature had intended for the one-factor formula to
apply to all of a transportation services company's business income, 
section 304(d) would have mirrored the language found in sections
304(b) and (c).
     In reviewing the statute, we cannot agree with the trial court's
conclusion that the plain language of section 304(d) clearly provides
for an activity analysis, as opposed to the entity approach taken in
sections 304(b) and (c).  Rather, we find that the language of section
304(d) is ambiguous.  Under traditional rules of statutory
construction, we therefore turn to the legislative history, the
department's regulations, and a review of the IITA's structure to
determine the drafters' intentions.
     "`In ascertaining the legislative intent, it is proper to
consider the circumstances leading up to the adoption as well as the
language used in the act. "   See Citizens Utilities Co. of Illinois
v. Department of Revenue, 111 Ill. 2d 32, 41, 488 N.E.2d 984, 987
(1986), quoting Follet's Book & Supply Store, Inc. v. Isaacs, 27 Ill. 2d 600, 604, 190 N.E.2d 324, 326 (1963).  Consistent with the majority
of states, Illinois adopted the approach of the Uniform Division of
Income for Tax Purposes Act (UDITPA) to apportioning business income. 
Dover Corp. v. Department of Revenue, 271 Ill. App. 3d 700, 648 N.E.2d 1089 (1995).  The author of the UDITPA noted that the three-factor
formula was designed specifically for the manufacturing and mercantile
industries.  Pierce, The Uniform Division of Income for State Tax
Purposes, 35 Taxes 747 (1957).  However, "[i]t was not regarded by its
creators as suitable to other types of business.  Different methods of
apportionment *** are applied *** to electric and gas utilities,
transportation and communication businesses *** and insurance
companies ***."  J.R. Hellerstein & W. Hellerstein, Hellerstein and
Hellerstein, State Taxation, vol. I, par. 10.01 at 10-2 (2d ed. 1993).
     Accordingly, the official commentary to Illinois' adoption of the
Uniform Division of Income for Tax Purposes Act stated that special
apportionment rules were being enacted for insurance companies,
financial organizations and "persons furnishing transportation
services."  Ill. Tax Reporter, vol. 1, par. 14-006, at 1903 (1987). 
Similarly, the department's regulations provide that the special
apportionment formula applies to "persons furnishing transportation
services."  86 Ill. Adm. Code 100.3500, at 1596 (1991).  The history
of the statute's enactment and the department's interpretation of the
statute reveal that the statute's goal was to provide special
apportionment rules for certain industries.     
     There is no dispute that subsections (b) and (c) of section 304
are consistent with this goal, dictating an entity approach to
apportionment.  The trial court's willingness to depart from this
established scheme based upon ambiguous statutory language is
inappropriate.  "Since a statute is passed as a whole, and animated by
one general purpose, each part should be construed with every other
part so as to produce a harmonious whole."  American National Bank &
Trust Co of Chicago v. National Advertising Co., 149 Ill. 2d 14, 23,
594 N.E.2d 313, 317 (1992).  We are persuaded that the legislature's
purpose in enacting section 304 was to create a special apportionment
formula for specific industries.  We find that the legislature's focus
was upon the taxpayer, not the income-producing activity.  Therefore,
we reject the trial court's binary entity and activity interpretation
of section 304.  We reverse the trial court's ruling and find that the
proceeds should be apportioned under the one-factor formula.
     Finally, we turn to Texaco's argument that application of the
one-factor formula violates due process, because the resultant tax
"would not be rationally related to the values generated from
activities within the State."  Texaco failed to present this argument
before the ALJ, raising it for the first time in the trial court.  In
an administrative review action, arguments not presented to the
administrative agency are waived.  A.R. Barnes & Co. v. Department of
Revenue, 173 Ill. App. 3d 826, 527 N.E.2d 1048 (1988).  Therefore, we
find Texaco's failure to present this issue to the ALJ results in
waiver.  See 735 ILCS 5/3-110 (West 1994).   
     Affirmed in part and reversed in part.
     CAHILL and O'BRIEN, JJ., concur.