Venture Stores, Inc. v. Ryan
Annotate this Case
NO. 4-96-0217
IN THE APPELLATE COURT
OF ILLINOIS
FOURTH DISTRICT
VENTURE STORES, INC., ) Appeal from
Plaintiff-Appellant, ) Circuit Court of
v. ) Sangamon County
GEORGE RYAN, as Secretary of State, ) No. 93CH0027
PATRICK QUINN, as Treasurer of the )
State of Illinois, and THE DEPARTMENT ) Honorable
OF BUSINESS SERVICES, ) Jeanne E. Scott,
Defendants-Appellees. ) Judge Presiding.
JUSTICE GREEN delivered the opinion of the court:
This case concerns the question of whether the format for
determining the annual franchise taxes of foreign corporations
doing business in Illinois, as provided for by section 15.65(d) of
the Business Corporation Act of 1983 (Business Act) (Ill. Rev.
Stat. 1989, ch. 32, par. 15.65(d)), at times pertinent, violated
the uniformity clause set forth in section 2 of article IX of the
Illinois Constitution of 1970, which states:
"In any law classifying the subjects or
objects of non-property taxes or fees, the
classes shall be reasonable and the subjects
and objects within each class shall be taxed
uniformly. Exemptions, deductions, credits,
refunds and other allowances shall be
reasonable." Ill. Const. 1970, art. IX, 2.
At all times pertinent, (1) section 15.70 of the Business
Act provided that the annual franchise tax upon foreign
corporations doing business in the state be based upon that
corporation's "paid-in capital" (Ill. Rev. Stat. 1989, ch. 32, par.
15.70)), and (2) section 1.80(j) of the Business Act stated, "paid-
in capital of a foreign corporation shall be determined on the same
basis and in the same manner as paid-in capital of a domestic
corporation, for the purpose of computing *** franchise taxes"
(Ill. Rev. Stat. 1989, ch. 32, par. 1.80(j)). Section 1.80(j) also
stated:
"'Paid-in capital' means the sum of the
cash and other consideration received, less
expenses, including commissions, paid or
incurred by the corporation, in connection
with the issuance of shares, plus any cash and
other consideration contributed to the
corporation by or on behalf of its
shareholders, plus amounts added or
transferred to paid-in capital by action of
the board of directors or shareholders
pursuant to a share dividend, share split, or
otherwise, minus reductions from that sum
effected by an acquisition of its own shares,
to the extent of the amount of paid-in capital
represented by such acquired shares."
(Emphasis added.) Ill. Rev. Stat. 1989, ch.
32, par. 1.80(j).
The record shows that plaintiff, Venture Stores, Inc.
(Venture), is a Delaware corporation which, consistent with the
laws of that state, reduced its capitalization by the distribution
to its sole shareholder, May Department Stores, Inc. (May), of
$262,500,000. Venture maintains that the foregoing format to
determine the basis for franchise taxes violates the uniformity
clause because the tax scheme unreasonably prevents corporations
such as it from reducing the basis for the franchise tax by this
kind of capital reduction, while a class of corporations that do so
by buying in their own shares are permitted to reduce that basis.
Venture contends that the resulting classification is unreasonable
within the meaning of the uniformity clause. We disagree.
In October 1992, Venture reported a reduction in paid-
in capital in the amount of the capital distribution to the office
of defendant, the Secretary of State (Secretary), and attempted to
pay its 1993 franchise tax based upon its paid-in capital reduced
by the amount of the distribution. Following the express terms of
the statutory format, the Secretary's office refused to reduce
Venture's paid-in capital and refused to accept the payment as
being in full for the franchise tax. Pursuant to section 2a of the
State Officers and Employees Money Disposition Act (Money Act) (30
ILCS 230/2a (West 1992)), on January 11, 1993, Venture paid its
1993 franchise tax under protest. The tax paid was based on paid-
in capital without a reduction for the capital distribution.
Subsequently, Venture also paid its 1994 and 1995 franchise taxes
under protest based upon no reduction in the paid-in capital basis.
In March 1993 it also filed a petition with the Secretary for a
refund of portions of its 1990, 1991, and 1992 franchise taxes
which had been based upon paid-in capital that had no reduction for
the capital distribution.
Acting pursuant to section 2a of the Money Act, on
February 8, 1993, Venture filed a three-count complaint in the
circuit court of Sangamon County. The only count before us is
count II, which charged that the statutory format applied by the
Secretary in assessing annual franchise tax fees violated the
uniformity clause. The Secretary, the State Treasurer, and the
Illinois Department of Business Services (Department) were joined
as defendants. Distribution of the money by the State Treasurer
was temporarily enjoined. Both sides requested summary judgments.
On June 22, 1995, the circuit court entered summary judgment as to
count II in favor of defendants and denied Venture's request for
summary judgment. That judgment is now final as to all claims and
parties, and Venture has appealed. We affirm.
The uniformity clause case most analogous to the instant
case is Searle Pharmaceuticals, Inc. v. Department of Revenue, 117 Ill. 2d 454, 512 N.E.2d 1240 (1987). There, the supreme court held
that section 203(e)(2)(E) of the Illinois Income Tax Act (Ill. Rev.
Stat. 1979, ch. 120, par. 2-203(e)(2)(E)) violated the uniformity
clause when it allowed corporate taxpayers, in an affiliated group
of corporations which had not elected to file a federal
consolidated income tax return, to carry their net operating losses
back to arrive at their state base income, while those corporations
in an affiliated group which had elected to file a consolidated
federal return were required to carry their net operating losses
forward. At issue was the disparity in tax treatment between two
classes of otherwise identically situated corporations of an
affiliated group--one class electing to file a consolidated return,
the other class not electing to file a consolidated return. The
Searle court articulated the test to determine whether taxpayer
classifications met the requirements of the uniformity clause as
follows:
"[T]he classification must be based on a real
and substantial difference between the people
taxed and those not taxed, and that the
classification must bear some reasonable
relationship to the object of the legislation
or to public policy." (Emphasis in original.)
Searle, 117 Ill. 2d at 468, 512 N.E.2d at
1246.
The Searle court rejected the Department of Revenue s
justification for the disparity in tax treatment, that being to (1)
clarify an ambiguity, (2) further administrative convenience and
budgeting concerns, and (3) generate state income. The court held
the Department could not maximize the state income in an arbitrary
and capricious manner by classifying corporate taxpayers where
there is "no real and substantial difference between these two
classes rationally related to this stated objective." Searle, 117 Ill. 2d at 478, 512 N.E.2d at 1250.
The posture of a taxpayer such as Venture and that of the
state, in a proceeding where the taxpayer challenges a tax on the
basis of a claimed violation of the uniformity clause, is explained
in Allegro Services, Ltd. v. Metropolitan Pier & Exposition
Authority, 172 Ill. 2d 243, 665 N.E.2d 1246 (1996), and Geja's Cafe
v. Metropolitan Pier & Exposition Authority, 153 Ill. 2d 239, 606 N.E.2d 1212 (1992). Both cases involved uniformity clause
challenges to nonproperty taxes imposed by the Metropolitan Pier
and Exposition Authority based upon the proximity of the taxpayer's
property to the McCormick Place exposition building.
In Geja's Cafe, the supreme court stated:
"[W]e preface this discussion by noting the
relatively narrow scope of the court's inquiry
when a tax has been challenged on uniformity
grounds. Statutes are presumed constitu-
tional, and broad latitude is afforded to
legislative classifications for taxing
purposes. A plaintiff challenging such a
classification has the burden of showing that
it is arbitrary or unreasonable; if a state of
facts can be reasonably conceived that would
sustain it, the classification must be upheld.
Illinois Gasoline Dealers Association v. City
of Chicago (1988), 119 Ill. 2d 391, 403.
We also note that the burdens placed on
each party by Illinois Gasoline, in
conjunction with Searle, may not be entirely
clear, and we clarify them today. A plaintiff
is not required to come forward with any and
all conceivable explanations for the tax and
then prove each one unreasonable; this was
specifically rejected in Searle, 117 Ill. 2d
at 468[, 512 N.E.2d at 1246]. Rather, these
cases stand for the proposition that, upon a
good-faith uniformity challenge, a taxing body
must produce a justification for its
classifications. The plaintiff then has the
burden to persuade the court that the
defendant s explanation is insufficient as a
matter of law, or unsupported by the facts, to
satisfy the Searle test. If the plaintiff is
unable to do this, judgment is proper as a
matter of law. As we shall see, plaintiffs
fail to meet their burden of persuasion with
any of their three challenges." (Emphasis
added.) Geja s Cafe, 153 Ill. 2d at 248-49,
606 N.E.2d at 1216.
In Allegro Services, where both sides had also moved for
summary judgment, the court stated:
"We also take note of the procedural
posture of this case, which is before us on
the trial court's ruling in favor of the
Authority on the parties' cross-motions for
summary judgment. Summary judgment is
ppropriate where 'the pleadings, depositions,
and admissions on file, together with the
affidavits, if any, show that there is no
genuine issue as to any material fact and that
the moving party is entitled to a judgment as
a matter of law.' 735 ILCS 5/2-1005(c) (West
1994); Gilbert v. Sycamore Municipal Hospital,
156 Ill. 2d 511, 517-18 (1993). The purpose
of summary judgment is not to try a question
of fact, but to determine whether one exists.
Gilbert, 156 Ill. 2d at 517. Plaintiffs are
not required to prove their case at the
summary judgment stage. However, to survive a
motion for summary judgment, the nonmoving
party must present a factual basis which would
arguably entitle him to a judgment. E.g.,
Gauthier v. Westfall, 266 Ill. App. 3d 213,
219 (1994). Accordingly, in the present case,
to the extent the Authority has produced a
legally sufficient justification for its tax
classification, plaintiffs would then be
required to present a factual basis negating
the asserted justification to survive
defendant s motion for summary judgment.
Conversely, if the Authority has failed to
produce a legally sufficient justification for
the classification, plaintiffs would be
entitled to a judgment as a matter of law."
(Emphasis added.) Allegro Services, 172 Ill. 2d at 255-56, 665 N.E.2d at 1254.
Defendants contend first that the statutory provisions at
issue concern the internal organization and financing of a
corporation doing business in Illinois and are not tax legislation
subject to the uniformity clause. As far as foreign corporations
such as Venture are concerned, defendants admit this is not so, as
the laws of the state of their incorporation control their internal
organization and financing, and the nature of "paid-in capital" is
significant only for the purpose of determining the franchise tax
for doing business in the state. However, defendants assert that
the classification created for domestic corporations, if reasonable
for internal control on domestic corporations, is reasonable to
impose on foreign corporations to keep foreign and domestic
corporations on an equal basis for taxing their authorization to do
business in Illinois.
Upon enactment of the Business Act, section 1.80(j)
defined "paid-in capital" in the following manner:
"'Paid-in capital' means the sum of the
cash and other consideration received, less
expenses, including commissions, paid or
incurred by the corporation, in connection
with the issuance of shares, plus any cash and
other consideration contributed to the
corporation by or on behalf of its
shareholders or transferred to paid-in capital
by action of the board of directors or
shareholders, less any distribution
therefrom." (Emphasis added.) Ill. Rev.
Stat. 1985, ch. 32, par. 1.80(j).
The official comments of the committee drafting the
Business Act state with reference to section 1.80(j), as follows:
"'Paid-in capital', a new term, is
defined. 'Paid-in capital' is intended to be
a substitute for the concepts of 'stated
capital' and 'paid-in surplus' of the 1933
Act, reflecting a revision of the financial
provisions and conforming to the proposed 1983
Revised Model Business Corporation Act. The
drafters recognize that the principles once
supporting the use of the terms 'par value',
'stated capital', and 'paid-in surplus' are no
longer valid. Traditionally, those terms
offered a form of protection and security to
creditors and preferred shareholders. Today,
provisions based on these terms are
meaningless, if not misleading, because many
corporations have authorized shares with a
nominal par value or without par value. In
addition, the elimination of 'stated capital'
and 'paid-in surplus' is consistent with the
provisions of [section 9.10 of the Business
Act (Ill. Rev. Stat. 1985, ch. 32, par.
9.10)], the section governing all
distributions under the 1983 Act, including
dividends and redemptions. A distribution
will be prohibited only if it would (a) render
the corporation insolvent or (b) reduce the
net assets to less than zero or less than the
maximum amount payable to preferred
shareholders in liquidation if the corporation
were then liquidated. The limitation in
[section 9.10] is expressed without the use of
the terms 'stated capital' or 'paid-in
surplus'; thus, no definition of these
concepts is needed." 2 Ill. Bus. Corp. Act
Ann., app. F., at 372 (3d ed. Supp. 1984).
Section 9.15(a)(3) of the Business Act originally
permitted corporations to reduce paid-in capital through
"distributions as liquidating dividends as permitted by law." Ill.
Rev. Stat. 1985, ch. 32, par. 9.15(a)(3). At that time, section
9.10(c)(2) of the Business Act permitted liquidating dividends to
be used by a corporation to reduce paid-in capital subject to
certain restrictions, one of which was that the dividend did not
leave the corporation insolvent or with liabilities greater than
assets. Ill. Rev. Stat. 1985, ch. 32, par. 9.10(c)(2). A summary
of the Business Act compiled by a committee selected by the
Secretary and which drafted the Business Act, explained:
"A new section entitled 'Distributions to
Shareholders' is the heart of the financial
changes incorporated in the 1983 Act. [Ill.
Rev. Stat. 1985, ch. 32, par. 9.10.] Both
dividends and repurchase of shares are
encompassed within the notion of
'distributions', and the Board now has general
power to authorize any distribution, subject
to any restriction in the Articles and also
subject to the limitation that a distribution
may not be made if, after giving it effect,
either (a) the corporation would be insolvent
or (b) the net assets of the corporation would
be less than zero or less than the maximum
amount payable upon shares having a
preferential right upon liquidation.
Illinois has been an 'earned surplus'
state; that is, dividends could be paid or
shares repurchased only 'out of' earned
surplus. Even in Illinois, dividends in
partial liquidation or dividends upon
preferred shares could be paid 'out of' paid-
in surplus, and shares that were deemed
'redeemable' could be purchased without regard
to earned surplus. Since the 1940's, many
states have provided additional flexibility
with respect to dividends and repurchase of
shares by permitting such repurchases out of
paid-in surplus as well as earned surplus.
Thus, the only sacrosanct account was 'stated
capital' but, since this was a function of the
par value of the shares and the par could be
reduced to a nominal amount, the protection
afforded by providing that distributions could
not be made out of stated capital was largely
illusory. Accordingly, the 1933 Act has now
been modified to delete reference to capital
accounts as a control upon distributions and
has instead adopted the approach now embodied
in the new Model Act. [Ill. Rev. Stat. 1985,
ch. 32, par. 9.10.]
Since 'par' and 'stated capital' tend to
be misleading concepts, they have been deleted
from the 1983 Act. Today the concept of par
value is an anachronism. The 1983 Act also
substitutes the concept of 'paid-in capital'
for what in the past would have been the sum
of stated capital plus paid-in surplus.
Accordingly, Section 19 dealing with the
determination of stated capital has been
deleted, and numerous other sections have been
simplified.
The 1983 Act also provides that shares
repurchased by a corporation, in the absence
of provisions to the contrary in the Articles,
become authorized but unissued shares and the
concept of treasury shares has been deleted
from the 1983 Act. Section 6 [(Ill. Rev.
Stat. 1985, ch. 32, par. 9.05)] has been
redrafted to reflect this approach, and
Section 60a [(Ill. Rev. Stat. 1985, ch. 32,
par. 9.15)] has been redrafted to establish
the mechanism for a corporation to reduce
paid-in capital." 2 Ill. Bus. Corp. Act Ann.,
app. D, II, at 209 (3d ed. Supp. 1984).
An experienced corporate law practitioner concluded that
upon the enactment of the Business Act, "the concept of corporate
capital *** serves the single purpose *** of providing the basis
for the Illinois corporate franchise tax and license fee." J. Van
Vliet, The New Illinois Business Corporation Act Needs More Work,
61 Chi.-Kent L. Rev. 42 (1985). Then, the General Assembly amended
section 1.80(j) to place it in the form pertinent here, repealed
section 9.15 and amended section 14.25. Pub. Act 84-1412, art. 14,
1, eff. January 1, 1987 (1986 Ill. Laws 3470, 3500-01, 3510,
3507-08) (amending Ill. Rev. Stat. 1985, ch. 32, par. 1.80(j);
repealing Ill. Rev. Stat. 1985, ch. 32, par. 9.15; amending Ill.
Rev. Stat. 1985, ch. 32, par. 14.25).
Section 14.25 of the Business Act concerns certain
required reports to the Secretary concerning changes in paid-in
capital. The original section 14.25 required such a report when
paid-in capital was reduced by either a capital deduction or a
repurchase of shares. See Ill. Rev. Stat. 1985, ch. 32, par.
14.25. The amended section makes no mention of a capital
distribution. See Ill. Rev. Stat. 1987, ch. 32, par. 14.25.
We conclude that the combined effect of these amendments
was that, although former concepts of corporate capital were not
all retained, the concept of paid-in capital was significant not
only in regard to franchise taxes but also in regard to protection
the Business Act was deemed to give to shareholders or creditors,
although the protection is not easy to define. In eliminating the
words "less any distribution therefrom" from the definition of
paid-in capital under section 1.80(j) of the Business Act and
adding a provision to reduce the amount of paid-in capital arising
from the repurchase of shares, the General Assembly seemed to have
indicated that paid-in capital could not be reduced by
"distribution therefrom." Ill. Rev. Stat. 1985, ch. 32, par.
1.80(j); Ill. Rev. Stat. 1989, ch. 32, par. 1.80(j).
The foregoing interpretation is made more certain by the
action in repealing section 9.15 of the Business Act, which spoke
of permitting the reduction of paid-in capital by legally
permissible "liquidating dividends." Ill. Rev. Stat. 1985, ch. 32,
par. 1.80(j). This interpretation is not negated by the continued
existence of section 9.10 of the Business Act, which speaks of
distributions in general without any reference to those arising
from capital. See 805 ILCS 5/9.10 (West 1994). Our interpretation
of the effect of the amendments is consistent with that of the
third district in Caterpillar Finance Corp. v. Ryan, 266 Ill. App.
3d 312, 640 N.E.2d 672 (1994). There, a foreign corporation
attempted to reduce its paid-in capital by a partial liquidating
deduction prior to reporting a reduction of the shares and was held
liable for a franchise tax based upon a paid-in capital not reduced
by the distribution.
When viewed merely upon the question of a valid basis for
a franchise tax, a substantial difference between a reduction for
a repurchase of shares and a reduction for a distribution of
capital is difficult to find. However, when viewed upon the
question of a protection for shareholders and creditors, a
difference is more apparent. Each theoretically reduces the
corporate capital, but a shareholder can resist any diminution of
its propriety interest by refusing to sell if the proposed
transaction is deemed detrimental to that interest. A shareholder
has no similar remedy to an unwise return of capital. Considering
the great deference given to the validity of statutory
classifications by Allegro and Geja's Cafe, we hold there is a
rational basis for the classification here.
Clearly, a rational system of capitalization, one which
serves public policy (Searle, 117 Ill. 2d at 468, 512 N.E.2d at
1246) is a proper basis for determination of a franchise tax. No
authority has been called to our attention which prohibits use of
such a basis, even though in detail some classifications result
which are not themselves a rational basis for purely tax purposes.
We recognize that Venture is a foreign corporation, and
this state does not have control over its capitalization except as
it affects its franchise tax. However, the treatment of domestic
and foreign corporation on an equal footing is a rational
consideration in imposing those taxes.
Venture has characterized much of its argument on the
basis that the instant taxes violate the second rather than the
first sentence of the uniformity clause on the basis that a
reduction from its paid-in capital because of its capital
distribution was a "deduction" within the meaning of that sentence.
We need not decide whether the first or the second sentence of the
uniformity clause is the key to this case because, in any event,
the question is whether a rational basis exists for the taxes, and
we have concluded that a rational basis was shown.
Accordingly, we affirm.
Affirmed.
GARMAN, J., concurs.
COOK, J., dissents. JUSTICE COOK, dissenting:
In 1989, May decided to dispose of its discount retail
business. It did that by transferring all the assets and liabil-
ities of its Venture division to its wholly owned subsidiary,
Venture Stores, Inc., a Delaware corporation. As a result,
Venture's paid-in capital increased from $1,000 to $319,029,539.
Then in 1990, Venture made a liquidating distribution of
$262,500,000 to May. Venture did not acquire or cancel any of its
stock in connection with that distribution; both before and after
the distribution May owned all 1,000 shares of Venture common
stock. On September 28, 1990, the shares of Venture's common stock
were split 16,808 to 1, and the shares were distributed to May's
shareholders. Venture is now a publicly owned and traded company.
In accordance with Generally Accepted Accounting
Principles (GAAP), the distribution was shown on Venture's books,
and in reports submitted to the Internal Revenue Service and to the
Securities and Exchange Commission, as a decrease in the capital of
the corporation. However, because Venture did not acquire or
cancel any of its shares in connection with the distribution,
Venture was not allowed to reduce its Illinois "paid-in capital,"
on which its annual franchise tax is based. See Ill. Rev. Stat.
1989, ch. 32, par. 1.80(j); Caterpillar, 266 Ill. App. 3d 312, 640 N.E.2d 672.
If May had surrendered just one share for cancellation in
connection with the distribution, paid-in capital could have been
reduced. See Ill. Rev. Stat. 1989, ch. 32, par. 1.80(j) (reduction
"to the extent of the amount of paid-in capital represented by such
acquired shares"). The Department disagrees that the surrender of
just one share would have been effective. See 805 ILCS 5/1.80(j)
(West 1992) (paid-in capital is reduced by "cost of the reacquired
shares or a lesser amount as may be elected by the corporation").
Whatever the number, it is clear that if May had surrendered some
shares for cancellation, its paid-in capital would have been
reduced. There is no indication in the record that May or Venture
would have been disadvantaged by surrendering and canceling shares.
May owned all the stock of Venture, whether it owned 1,000 shares,
500 shares, or 5 shares. The Department suggests the choice to
proceed by way of a liquidating dividend could have been "sheer
carelessness" on Venture's part, or it could have been a calculated
decision "perhaps because a liquidating dividend had certain
financial advantages." The Department does not indicate what those
financial advantages might be. It would appear to be easy for a
corporation which does business in many states to overlook
Illinois' unusual definition of paid-in capital.
Although Venture's assets have now been permanently
reduced by $262,500,000, its paid-in capital can never be changed
to reflect that reduction. Once the distribution was made it was
too late for Venture to acquire and cancel any shares. Section
14.25 of the 1983 Business Act is construed "as requiring the
cancellation of a corporation's shares to occur prior to or
contemporaneously with the reduction in paid-in capital."
Caterpillar, 266 Ill. App. 3d at 319, 640 N.E.2d at 677. It is
clear, after Caterpillar, that Illinois law distinguishes between
(1) liquidating distributions and (2) distributions accompanied by
the acquisition and cancellation of shares. The second reduces
paid-in capital, the first does not. The question now before the
court is whether that distinction violates the uniformity clause of
the Illinois Constitution. Ill. Const. 1970, art. IX, 2. The
constitutional issue was not addressed in Caterpillar.
Where a good-faith uniformity challenge is made, the
taxing body must produce a justification for its classifications.
The taxpayer then has the burden to persuade the court that the
taxing body's explanation is insufficient as a matter of law or
unsupported by the facts. Geja's Cafe, 153 Ill. 2d at 248-49, 606 N.E.2d at 1216. The Department's proffered justification here is
that a liquidating distribution is "essentially a forbidden
transaction," that "Illinois no longer permits liquidating
dividends or any other reduction of paid-in capital unaccompanied
by the redemption of shares."
Liquidating distributions are certainly legal in Illi-
nois. Section 9.10 of the 1983 Business Act specifically allows
any distributions to shareholders, so long as those distributions
do not violate the corporation's articles of incorporation, render
the corporation insolvent, reduce the corporation's net assets
below zero, or affect the rights of preferred shareholders. Ill.
Rev. Stat. 1985, ch. 32, par. 9.10. Sections 9.15(a) and (c) of
the 1983 Business Act allowed paid-in capital to be reduced by
liquidating dividends "as permitted by law" (the limitations found
in section 9.10). Ill. Rev. Stat. 1985, ch. 32, par 9.15(a), (c).
Section 9.15 of the 1983 Business Act was repealed in 1987 (Pub.
Act 84-1412, art. 14, 2, eff. January 1, 1987 (1986 Ill. Laws
3470, 3510)), but section 9.10 remains intact. Under current law
liquidating distributions can be made in Illinois, they just do not
reduce paid-in capital.
The 1983 Business Act made major changes in Illinois law.
The 1983 Business Act abandoned the idea that creditors and pre-
ferred shareholders could be protected by forcing the corporation
to retain assets in the form of "stated capital" and "paid-in
surplus." 2 Ill. Bus. Corp. Act Ann., app. F, 1.80(j), at 372 (3d
ed. Supp. 1984). Even before the 1983 Business Act, that protec-
tion could be avoided by the authorization of shares with a nominal
par value or without par value, and by other shareholder action.
The 1983 Business Act cut the heart out of the franchise tax. The
franchise tax was based on the level of corporate capital, and once
there was no statutory requirement that capital accounts be
maintained there was nothing to prevent reduction of paid-in capi-
tal to the minimum level. The only reason corporate capital was
important, after the 1983 Business Act, was in computing the
franchise tax and license fee. J. Van Vliet, The New Illinois
Business Corporation Act Needs More Work, 61 Chi.-Kent L. Rev., 42
(1985).
In 1987, the legislature responded to protect the
franchise tax. The response was not to repeal the 1983 Business
Act, or to ensure that corporate capital was held at certain
levels. Instead the legislature repealed section 9.15 of the 1983
Business Act, which had provided that paid-in capital could be
reduced by liquidating distributions and other methods, and changed
the section 1.80(j) definition of paid-in capital to state that
reductions could only be "effected by an acquisition of its own
shares." Pub. Act 84-1412, art. 14, 1, eff. January 1, 1987 (1986
Ill. Laws 3470, 3501). The 1987 amendments addressed form and not
substance. Paid-in capital could be reduced, just not by liqui-
dating distributions. The 1987 amendments attempted to slow
corporate reductions of paid-in capital, not by requiring that
paid-in capital be maintained at some level, but by placing impedi-
ments in the way of reduction. (Distributions accompanied by the
acquisition and transfer of stock are more difficult than other
distributions, especially if the company is widely held.) The 1987
amendment also appears to be a trap for the unwary.
Always before, the statute had been concerned with sub-
stance, the level of capital in the corporation. Reductions could
be made by any method, so long as they were "effected in a manner
permitted by law" (Ill. Rev. Stat. 1981, ch. 32, pars. 157.2-11,
157.2-12) that is, so long as a certain level was maintained. For
the first time in 1987, the concern was with the form of the
transaction, not with the level of remaining capital.
"[T]he classification must be based on a real and
substantial difference between the people taxed and those not
taxed." (Emphasis in original.) Searle, 117 Ill. 2d at 468, 512 N.E.2d at 1246. There is no difference as far as corporate capital
is concerned between a corporation which passes out capital through
a liquidating distribution and one which does so through a distri-
bution accompanied by the acquisition and cancellation of stock.
Both distributions are legal in Illinois, and both reduce the level
of capital in the corporation. The only difference between the two
forms of distribution is in tax consequences. The Department's
argument is that liquidating distributions result in taxation,
while distributions in connection with acquisition and cancellation
do not, because the statute says so. That is not sufficient
justification under the uniformity clause. Disparity in tax treat-
ment may not be justified simply because it generates state income.
Searle, 117 Ill. 2d at 477-78, 512 N.E.2d at 1250.
The majority argues that the concept of paid-in capital
may have some significance in regard to protection of shareholders
or creditors. That is not correct. The $262,500,000 in this case
is out of the corporation. Those funds are no longer available to
Venture's shareholders or creditors, and there is no cause of
action for their removal, because those funds were legally
distributed. The fact that for Illinois franchise tax purposes
Venture's paid-in capital is considered to be $319,029,539 provides
no protection for anyone.
The Department's argument that Illinois is not "obligated
to arrange its corporate law, and its franchise tax in particular,
to conform to the law in other jurisdictions," is off the mark.
Illinois corporations, as well as Delaware corporations, are
allowed to make liquidating distributions. The refusal to allow
Illinois corporations to reduce paid-in capital unless that
reduction is accomplished by a distribution accompanied by
acquisition and cancellation of shares violates the uniformity
clause. Venture's argument is not based on its status as a foreign
corporation.
IN THE APPELLATE COURT
OF ILLINOIS
FOURTH DISTRICT
VENTURE STORES, INC., ) Appeal from
Plaintiff-Appellant, ) Circuit Court of
v. ) Sangamon County
GEORGE RYAN, as Secretary of State, ) No. 93CH0027
PATRICK QUINN, as Treasurer of the )
State of Illinois, and THE DEPARTMENT ) Honorable
OF BUSINESS SERVICES, ) Jeanne E. Scott,
Defendants-Appellees. ) Judge Presiding.
JUSTICE GREEN delivered the opinion of the court:
This case concerns the question of whether the format for
determining the annual franchise taxes of foreign corporations
doing business in Illinois, as provided for by section 15.65(d) of
the Business Corporation Act of 1983 (Business Act) (Ill. Rev.
Stat. 1989, ch. 32, par. 15.65(d)), at times pertinent, violated
the uniformity clause set forth in section 2 of article IX of the
Illinois Constitution of 1970, which states:
"In any law classifying the subjects or
objects of non-property taxes or fees, the
classes shall be reasonable and the subjects
and objects within each class shall be taxed
uniformly. Exemptions, deductions, credits,
refunds and other allowances shall be
reasonable." Ill. Const. 1970, art. IX, 2.
At all times pertinent, (1) section 15.70 of the Business
Act provided that the annual franchise tax upon foreign
corporations doing business in the state be based upon that
corporation's "paid-in capital" (Ill. Rev. Stat. 1989, ch. 32, par.
15.70)), and (2) section 1.80(j) of the Business Act stated, "paid-
in capital of a foreign corporation shall be determined on the same
basis and in the same manner as paid-in capital of a domestic
corporation, for the purpose of computing *** franchise taxes"
(Ill. Rev. Stat. 1989, ch. 32, par. 1.80(j)). Section 1.80(j) also
stated:
"'Paid-in capital' means the sum of the
cash and other consideration received, less
expenses, including commissions, paid or
incurred by the corporation, in connection
with the issuance of shares, plus any cash and
other consideration contributed to the
corporation by or on behalf of its
shareholders, plus amounts added or
transferred to paid-in capital by action of
the board of directors or shareholders
pursuant to a share dividend, share split, or
otherwise, minus reductions from that sum
effected by an acquisition of its own shares,
to the extent of the amount of paid-in capital
represented by such acquired shares."
(Emphasis added.) Ill. Rev. Stat. 1989, ch.
32, par. 1.80(j).
The record shows that plaintiff, Venture Stores, Inc.
(Venture), is a Delaware corporation which, consistent with the
laws of that state, reduced its capitalization by the distribution
to its sole shareholder, May Department Stores, Inc. (May), of
$262,500,000. Venture maintains that the foregoing format to
determine the basis for franchise taxes violates the uniformity
clause because the tax scheme unreasonably prevents corporations
such as it from reducing the basis for the franchise tax by this
kind of capital reduction, while a class of corporations that do so
by buying in their own shares are permitted to reduce that basis.
Venture contends that the resulting classification is unreasonable
within the meaning of the uniformity clause. We disagree.
In October 1992, Venture reported a reduction in paid-
in capital in the amount of the capital distribution to the office
of defendant, the Secretary of State (Secretary), and attempted to
pay its 1993 franchise tax based upon its paid-in capital reduced
by the amount of the distribution. Following the express terms of
the statutory format, the Secretary's office refused to reduce
Venture's paid-in capital and refused to accept the payment as
being in full for the franchise tax. Pursuant to section 2a of the
State Officers and Employees Money Disposition Act (Money Act) (30
ILCS 230/2a (West 1992)), on January 11, 1993, Venture paid its
1993 franchise tax under protest. The tax paid was based on paid-
in capital without a reduction for the capital distribution.
Subsequently, Venture also paid its 1994 and 1995 franchise taxes
under protest based upon no reduction in the paid-in capital basis.
In March 1993 it also filed a petition with the Secretary for a
refund of portions of its 1990, 1991, and 1992 franchise taxes
which had been based upon paid-in capital that had no reduction for
the capital distribution.
Acting pursuant to section 2a of the Money Act, on
February 8, 1993, Venture filed a three-count complaint in the
circuit court of Sangamon County. The only count before us is
count II, which charged that the statutory format applied by the
Secretary in assessing annual franchise tax fees violated the
uniformity clause. The Secretary, the State Treasurer, and the
Illinois Department of Business Services (Department) were joined
as defendants. Distribution of the money by the State Treasurer
was temporarily enjoined. Both sides requested summary judgments.
On June 22, 1995, the circuit court entered summary judgment as to
count II in favor of defendants and denied Venture's request for
summary judgment. That judgment is now final as to all claims and
parties, and Venture has appealed. We affirm.
The uniformity clause case most analogous to the instant
case is Searle Pharmaceuticals, Inc. v. Department of Revenue, 117 Ill. 2d 454, 512 N.E.2d 1240 (1987). There, the supreme court held
that section 203(e)(2)(E) of the Illinois Income Tax Act (Ill. Rev.
Stat. 1979, ch. 120, par. 2-203(e)(2)(E)) violated the uniformity
clause when it allowed corporate taxpayers, in an affiliated group
of corporations which had not elected to file a federal
consolidated income tax return, to carry their net operating losses
back to arrive at their state base income, while those corporations
in an affiliated group which had elected to file a consolidated
federal return were required to carry their net operating losses
forward. At issue was the disparity in tax treatment between two
classes of otherwise identically situated corporations of an
affiliated group--one class electing to file a consolidated return,
the other class not electing to file a consolidated return. The
Searle court articulated the test to determine whether taxpayer
classifications met the requirements of the uniformity clause as
follows:
"[T]he classification must be based on a real
and substantial difference between the people
taxed and those not taxed, and that the
classification must bear some reasonable
relationship to the object of the legislation
or to public policy." (Emphasis in original.)
Searle, 117 Ill. 2d at 468, 512 N.E.2d at
1246.
The Searle court rejected the Department of Revenue s
justification for the disparity in tax treatment, that being to (1)
clarify an ambiguity, (2) further administrative convenience and
budgeting concerns, and (3) generate state income. The court held
the Department could not maximize the state income in an arbitrary
and capricious manner by classifying corporate taxpayers where
there is "no real and substantial difference between these two
classes rationally related to this stated objective." Searle, 117 Ill. 2d at 478, 512 N.E.2d at 1250.
The posture of a taxpayer such as Venture and that of the
state, in a proceeding where the taxpayer challenges a tax on the
basis of a claimed violation of the uniformity clause, is explained
in Allegro Services, Ltd. v. Metropolitan Pier & Exposition
Authority, 172 Ill. 2d 243, 665 N.E.2d 1246 (1996), and Geja's Cafe
v. Metropolitan Pier & Exposition Authority, 153 Ill. 2d 239, 606 N.E.2d 1212 (1992). Both cases involved uniformity clause
challenges to nonproperty taxes imposed by the Metropolitan Pier
and Exposition Authority based upon the proximity of the taxpayer's
property to the McCormick Place exposition building.
In Geja's Cafe, the supreme court stated:
"[W]e preface this discussion by noting the
relatively narrow scope of the court's inquiry
when a tax has been challenged on uniformity
grounds. Statutes are presumed constitu-
tional, and broad latitude is afforded to
legislative classifications for taxing
purposes. A plaintiff challenging such a
classification has the burden of showing that
it is arbitrary or unreasonable; if a state of
facts can be reasonably conceived that would
sustain it, the classification must be upheld.
Illinois Gasoline Dealers Association v. City
of Chicago (1988), 119 Ill. 2d 391, 403.
We also note that the burdens placed on
each party by Illinois Gasoline, in
conjunction with Searle, may not be entirely
clear, and we clarify them today. A plaintiff
is not required to come forward with any and
all conceivable explanations for the tax and
then prove each one unreasonable; this was
specifically rejected in Searle, 117 Ill. 2d
at 468[, 512 N.E.2d at 1246]. Rather, these
cases stand for the proposition that, upon a
good-faith uniformity challenge, a taxing body
must produce a justification for its
classifications. The plaintiff then has the
burden to persuade the court that the
defendant s explanation is insufficient as a
matter of law, or unsupported by the facts, to
satisfy the Searle test. If the plaintiff is
unable to do this, judgment is proper as a
matter of law. As we shall see, plaintiffs
fail to meet their burden of persuasion with
any of their three challenges." (Emphasis
added.) Geja s Cafe, 153 Ill. 2d at 248-49,
606 N.E.2d at 1216.
In Allegro Services, where both sides had also moved for
summary judgment, the court stated:
"We also take note of the procedural
posture of this case, which is before us on
the trial court's ruling in favor of the
Authority on the parties' cross-motions for
summary judgment. Summary judgment is
ppropriate where 'the pleadings, depositions,
and admissions on file, together with the
affidavits, if any, show that there is no
genuine issue as to any material fact and that
the moving party is entitled to a judgment as
a matter of law.' 735 ILCS 5/2-1005(c) (West
1994); Gilbert v. Sycamore Municipal Hospital,
156 Ill. 2d 511, 517-18 (1993). The purpose
of summary judgment is not to try a question
of fact, but to determine whether one exists.
Gilbert, 156 Ill. 2d at 517. Plaintiffs are
not required to prove their case at the
summary judgment stage. However, to survive a
motion for summary judgment, the nonmoving
party must present a factual basis which would
arguably entitle him to a judgment. E.g.,
Gauthier v. Westfall, 266 Ill. App. 3d 213,
219 (1994). Accordingly, in the present case,
to the extent the Authority has produced a
legally sufficient justification for its tax
classification, plaintiffs would then be
required to present a factual basis negating
the asserted justification to survive
defendant s motion for summary judgment.
Conversely, if the Authority has failed to
produce a legally sufficient justification for
the classification, plaintiffs would be
entitled to a judgment as a matter of law."
(Emphasis added.) Allegro Services, 172 Ill. 2d at 255-56, 665 N.E.2d at 1254.
Defendants contend first that the statutory provisions at
issue concern the internal organization and financing of a
corporation doing business in Illinois and are not tax legislation
subject to the uniformity clause. As far as foreign corporations
such as Venture are concerned, defendants admit this is not so, as
the laws of the state of their incorporation control their internal
organization and financing, and the nature of "paid-in capital" is
significant only for the purpose of determining the franchise tax
for doing business in the state. However, defendants assert that
the classification created for domestic corporations, if reasonable
for internal control on domestic corporations, is reasonable to
impose on foreign corporations to keep foreign and domestic
corporations on an equal basis for taxing their authorization to do
business in Illinois.
Upon enactment of the Business Act, section 1.80(j)
defined "paid-in capital" in the following manner:
"'Paid-in capital' means the sum of the
cash and other consideration received, less
expenses, including commissions, paid or
incurred by the corporation, in connection
with the issuance of shares, plus any cash and
other consideration contributed to the
corporation by or on behalf of its
shareholders or transferred to paid-in capital
by action of the board of directors or
shareholders, less any distribution
therefrom." (Emphasis added.) Ill. Rev.
Stat. 1985, ch. 32, par. 1.80(j).
The official comments of the committee drafting the
Business Act state with reference to section 1.80(j), as follows:
"'Paid-in capital', a new term, is
defined. 'Paid-in capital' is intended to be
a substitute for the concepts of 'stated
capital' and 'paid-in surplus' of the 1933
Act, reflecting a revision of the financial
provisions and conforming to the proposed 1983
Revised Model Business Corporation Act. The
drafters recognize that the principles once
supporting the use of the terms 'par value',
'stated capital', and 'paid-in surplus' are no
longer valid. Traditionally, those terms
offered a form of protection and security to
creditors and preferred shareholders. Today,
provisions based on these terms are
meaningless, if not misleading, because many
corporations have authorized shares with a
nominal par value or without par value. In
addition, the elimination of 'stated capital'
and 'paid-in surplus' is consistent with the
provisions of [section 9.10 of the Business
Act (Ill. Rev. Stat. 1985, ch. 32, par.
9.10)], the section governing all
distributions under the 1983 Act, including
dividends and redemptions. A distribution
will be prohibited only if it would (a) render
the corporation insolvent or (b) reduce the
net assets to less than zero or less than the
maximum amount payable to preferred
shareholders in liquidation if the corporation
were then liquidated. The limitation in
[section 9.10] is expressed without the use of
the terms 'stated capital' or 'paid-in
surplus'; thus, no definition of these
concepts is needed." 2 Ill. Bus. Corp. Act
Ann., app. F., at 372 (3d ed. Supp. 1984).
Section 9.15(a)(3) of the Business Act originally
permitted corporations to reduce paid-in capital through
"distributions as liquidating dividends as permitted by law." Ill.
Rev. Stat. 1985, ch. 32, par. 9.15(a)(3). At that time, section
9.10(c)(2) of the Business Act permitted liquidating dividends to
be used by a corporation to reduce paid-in capital subject to
certain restrictions, one of which was that the dividend did not
leave the corporation insolvent or with liabilities greater than
assets. Ill. Rev. Stat. 1985, ch. 32, par. 9.10(c)(2). A summary
of the Business Act compiled by a committee selected by the
Secretary and which drafted the Business Act, explained:
"A new section entitled 'Distributions to
Shareholders' is the heart of the financial
changes incorporated in the 1983 Act. [Ill.
Rev. Stat. 1985, ch. 32, par. 9.10.] Both
dividends and repurchase of shares are
encompassed within the notion of
'distributions', and the Board now has general
power to authorize any distribution, subject
to any restriction in the Articles and also
subject to the limitation that a distribution
may not be made if, after giving it effect,
either (a) the corporation would be insolvent
or (b) the net assets of the corporation would
be less than zero or less than the maximum
amount payable upon shares having a
preferential right upon liquidation.
Illinois has been an 'earned surplus'
state; that is, dividends could be paid or
shares repurchased only 'out of' earned
surplus. Even in Illinois, dividends in
partial liquidation or dividends upon
preferred shares could be paid 'out of' paid-
in surplus, and shares that were deemed
'redeemable' could be purchased without regard
to earned surplus. Since the 1940's, many
states have provided additional flexibility
with respect to dividends and repurchase of
shares by permitting such repurchases out of
paid-in surplus as well as earned surplus.
Thus, the only sacrosanct account was 'stated
capital' but, since this was a function of the
par value of the shares and the par could be
reduced to a nominal amount, the protection
afforded by providing that distributions could
not be made out of stated capital was largely
illusory. Accordingly, the 1933 Act has now
been modified to delete reference to capital
accounts as a control upon distributions and
has instead adopted the approach now embodied
in the new Model Act. [Ill. Rev. Stat. 1985,
ch. 32, par. 9.10.]
Since 'par' and 'stated capital' tend to
be misleading concepts, they have been deleted
from the 1983 Act. Today the concept of par
value is an anachronism. The 1983 Act also
substitutes the concept of 'paid-in capital'
for what in the past would have been the sum
of stated capital plus paid-in surplus.
Accordingly, Section 19 dealing with the
determination of stated capital has been
deleted, and numerous other sections have been
simplified.
The 1983 Act also provides that shares
repurchased by a corporation, in the absence
of provisions to the contrary in the Articles,
become authorized but unissued shares and the
concept of treasury shares has been deleted
from the 1983 Act. Section 6 [(Ill. Rev.
Stat. 1985, ch. 32, par. 9.05)] has been
redrafted to reflect this approach, and
Section 60a [(Ill. Rev. Stat. 1985, ch. 32,
par. 9.15)] has been redrafted to establish
the mechanism for a corporation to reduce
paid-in capital." 2 Ill. Bus. Corp. Act Ann.,
app. D, II, at 209 (3d ed. Supp. 1984).
An experienced corporate law practitioner concluded that
upon the enactment of the Business Act, "the concept of corporate
capital *** serves the single purpose *** of providing the basis
for the Illinois corporate franchise tax and license fee." J. Van
Vliet, The New Illinois Business Corporation Act Needs More Work,
61 Chi.-Kent L. Rev. 42 (1985). Then, the General Assembly amended
section 1.80(j) to place it in the form pertinent here, repealed
section 9.15 and amended section 14.25. Pub. Act 84-1412, art. 14,
1, eff. January 1, 1987 (1986 Ill. Laws 3470, 3500-01, 3510,
3507-08) (amending Ill. Rev. Stat. 1985, ch. 32, par. 1.80(j);
repealing Ill. Rev. Stat. 1985, ch. 32, par. 9.15; amending Ill.
Rev. Stat. 1985, ch. 32, par. 14.25).
Section 14.25 of the Business Act concerns certain
required reports to the Secretary concerning changes in paid-in
capital. The original section 14.25 required such a report when
paid-in capital was reduced by either a capital deduction or a
repurchase of shares. See Ill. Rev. Stat. 1985, ch. 32, par.
14.25. The amended section makes no mention of a capital
distribution. See Ill. Rev. Stat. 1987, ch. 32, par. 14.25.
We conclude that the combined effect of these amendments
was that, although former concepts of corporate capital were not
all retained, the concept of paid-in capital was significant not
only in regard to franchise taxes but also in regard to protection
the Business Act was deemed to give to shareholders or creditors,
although the protection is not easy to define. In eliminating the
words "less any distribution therefrom" from the definition of
paid-in capital under section 1.80(j) of the Business Act and
adding a provision to reduce the amount of paid-in capital arising
from the repurchase of shares, the General Assembly seemed to have
indicated that paid-in capital could not be reduced by
"distribution therefrom." Ill. Rev. Stat. 1985, ch. 32, par.
1.80(j); Ill. Rev. Stat. 1989, ch. 32, par. 1.80(j).
The foregoing interpretation is made more certain by the
action in repealing section 9.15 of the Business Act, which spoke
of permitting the reduction of paid-in capital by legally
permissible "liquidating dividends." Ill. Rev. Stat. 1985, ch. 32,
par. 1.80(j). This interpretation is not negated by the continued
existence of section 9.10 of the Business Act, which speaks of
distributions in general without any reference to those arising
from capital. See 805 ILCS 5/9.10 (West 1994). Our interpretation
of the effect of the amendments is consistent with that of the
third district in Caterpillar Finance Corp. v. Ryan, 266 Ill. App.
3d 312, 640 N.E.2d 672 (1994). There, a foreign corporation
attempted to reduce its paid-in capital by a partial liquidating
deduction prior to reporting a reduction of the shares and was held
liable for a franchise tax based upon a paid-in capital not reduced
by the distribution.
When viewed merely upon the question of a valid basis for
a franchise tax, a substantial difference between a reduction for
a repurchase of shares and a reduction for a distribution of
capital is difficult to find. However, when viewed upon the
question of a protection for shareholders and creditors, a
difference is more apparent. Each theoretically reduces the
corporate capital, but a shareholder can resist any diminution of
its propriety interest by refusing to sell if the proposed
transaction is deemed detrimental to that interest. A shareholder
has no similar remedy to an unwise return of capital. Considering
the great deference given to the validity of statutory
classifications by Allegro and Geja's Cafe, we hold there is a
rational basis for the classification here.
Clearly, a rational system of capitalization, one which
serves public policy (Searle, 117 Ill. 2d at 468, 512 N.E.2d at
1246) is a proper basis for determination of a franchise tax. No
authority has been called to our attention which prohibits use of
such a basis, even though in detail some classifications result
which are not themselves a rational basis for purely tax purposes.
We recognize that Venture is a foreign corporation, and
this state does not have control over its capitalization except as
it affects its franchise tax. However, the treatment of domestic
and foreign corporation on an equal footing is a rational
consideration in imposing those taxes.
Venture has characterized much of its argument on the
basis that the instant taxes violate the second rather than the
first sentence of the uniformity clause on the basis that a
reduction from its paid-in capital because of its capital
distribution was a "deduction" within the meaning of that sentence.
We need not decide whether the first or the second sentence of the
uniformity clause is the key to this case because, in any event,
the question is whether a rational basis exists for the taxes, and
we have concluded that a rational basis was shown.
Accordingly, we affirm.
Affirmed.
GARMAN, J., concurs.
COOK, J., dissents. JUSTICE COOK, dissenting:
In 1989, May decided to dispose of its discount retail
business. It did that by transferring all the assets and liabil-
ities of its Venture division to its wholly owned subsidiary,
Venture Stores, Inc., a Delaware corporation. As a result,
Venture's paid-in capital increased from $1,000 to $319,029,539.
Then in 1990, Venture made a liquidating distribution of
$262,500,000 to May. Venture did not acquire or cancel any of its
stock in connection with that distribution; both before and after
the distribution May owned all 1,000 shares of Venture common
stock. On September 28, 1990, the shares of Venture's common stock
were split 16,808 to 1, and the shares were distributed to May's
shareholders. Venture is now a publicly owned and traded company.
In accordance with Generally Accepted Accounting
Principles (GAAP), the distribution was shown on Venture's books,
and in reports submitted to the Internal Revenue Service and to the
Securities and Exchange Commission, as a decrease in the capital of
the corporation. However, because Venture did not acquire or
cancel any of its shares in connection with the distribution,
Venture was not allowed to reduce its Illinois "paid-in capital,"
on which its annual franchise tax is based. See Ill. Rev. Stat.
1989, ch. 32, par. 1.80(j); Caterpillar, 266 Ill. App. 3d 312, 640 N.E.2d 672.
If May had surrendered just one share for cancellation in
connection with the distribution, paid-in capital could have been
reduced. See Ill. Rev. Stat. 1989, ch. 32, par. 1.80(j) (reduction
"to the extent of the amount of paid-in capital represented by such
acquired shares"). The Department disagrees that the surrender of
just one share would have been effective. See 805 ILCS 5/1.80(j)
(West 1992) (paid-in capital is reduced by "cost of the reacquired
shares or a lesser amount as may be elected by the corporation").
Whatever the number, it is clear that if May had surrendered some
shares for cancellation, its paid-in capital would have been
reduced. There is no indication in the record that May or Venture
would have been disadvantaged by surrendering and canceling shares.
May owned all the stock of Venture, whether it owned 1,000 shares,
500 shares, or 5 shares. The Department suggests the choice to
proceed by way of a liquidating dividend could have been "sheer
carelessness" on Venture's part, or it could have been a calculated
decision "perhaps because a liquidating dividend had certain
financial advantages." The Department does not indicate what those
financial advantages might be. It would appear to be easy for a
corporation which does business in many states to overlook
Illinois' unusual definition of paid-in capital.
Although Venture's assets have now been permanently
reduced by $262,500,000, its paid-in capital can never be changed
to reflect that reduction. Once the distribution was made it was
too late for Venture to acquire and cancel any shares. Section
14.25 of the 1983 Business Act is construed "as requiring the
cancellation of a corporation's shares to occur prior to or
contemporaneously with the reduction in paid-in capital."
Caterpillar, 266 Ill. App. 3d at 319, 640 N.E.2d at 677. It is
clear, after Caterpillar, that Illinois law distinguishes between
(1) liquidating distributions and (2) distributions accompanied by
the acquisition and cancellation of shares. The second reduces
paid-in capital, the first does not. The question now before the
court is whether that distinction violates the uniformity clause of
the Illinois Constitution. Ill. Const. 1970, art. IX, 2. The
constitutional issue was not addressed in Caterpillar.
Where a good-faith uniformity challenge is made, the
taxing body must produce a justification for its classifications.
The taxpayer then has the burden to persuade the court that the
taxing body's explanation is insufficient as a matter of law or
unsupported by the facts. Geja's Cafe, 153 Ill. 2d at 248-49, 606 N.E.2d at 1216. The Department's proffered justification here is
that a liquidating distribution is "essentially a forbidden
transaction," that "Illinois no longer permits liquidating
dividends or any other reduction of paid-in capital unaccompanied
by the redemption of shares."
Liquidating distributions are certainly legal in Illi-
nois. Section 9.10 of the 1983 Business Act specifically allows
any distributions to shareholders, so long as those distributions
do not violate the corporation's articles of incorporation, render
the corporation insolvent, reduce the corporation's net assets
below zero, or affect the rights of preferred shareholders. Ill.
Rev. Stat. 1985, ch. 32, par. 9.10. Sections 9.15(a) and (c) of
the 1983 Business Act allowed paid-in capital to be reduced by
liquidating dividends "as permitted by law" (the limitations found
in section 9.10). Ill. Rev. Stat. 1985, ch. 32, par 9.15(a), (c).
Section 9.15 of the 1983 Business Act was repealed in 1987 (Pub.
Act 84-1412, art. 14, 2, eff. January 1, 1987 (1986 Ill. Laws
3470, 3510)), but section 9.10 remains intact. Under current law
liquidating distributions can be made in Illinois, they just do not
reduce paid-in capital.
The 1983 Business Act made major changes in Illinois law.
The 1983 Business Act abandoned the idea that creditors and pre-
ferred shareholders could be protected by forcing the corporation
to retain assets in the form of "stated capital" and "paid-in
surplus." 2 Ill. Bus. Corp. Act Ann., app. F, 1.80(j), at 372 (3d
ed. Supp. 1984). Even before the 1983 Business Act, that protec-
tion could be avoided by the authorization of shares with a nominal
par value or without par value, and by other shareholder action.
The 1983 Business Act cut the heart out of the franchise tax. The
franchise tax was based on the level of corporate capital, and once
there was no statutory requirement that capital accounts be
maintained there was nothing to prevent reduction of paid-in capi-
tal to the minimum level. The only reason corporate capital was
important, after the 1983 Business Act, was in computing the
franchise tax and license fee. J. Van Vliet, The New Illinois
Business Corporation Act Needs More Work, 61 Chi.-Kent L. Rev., 42
(1985).
In 1987, the legislature responded to protect the
franchise tax. The response was not to repeal the 1983 Business
Act, or to ensure that corporate capital was held at certain
levels. Instead the legislature repealed section 9.15 of the 1983
Business Act, which had provided that paid-in capital could be
reduced by liquidating distributions and other methods, and changed
the section 1.80(j) definition of paid-in capital to state that
reductions could only be "effected by an acquisition of its own
shares." Pub. Act 84-1412, art. 14, 1, eff. January 1, 1987 (1986
Ill. Laws 3470, 3501). The 1987 amendments addressed form and not
substance. Paid-in capital could be reduced, just not by liqui-
dating distributions. The 1987 amendments attempted to slow
corporate reductions of paid-in capital, not by requiring that
paid-in capital be maintained at some level, but by placing impedi-
ments in the way of reduction. (Distributions accompanied by the
acquisition and transfer of stock are more difficult than other
distributions, especially if the company is widely held.) The 1987
amendment also appears to be a trap for the unwary.
Always before, the statute had been concerned with sub-
stance, the level of capital in the corporation. Reductions could
be made by any method, so long as they were "effected in a manner
permitted by law" (Ill. Rev. Stat. 1981, ch. 32, pars. 157.2-11,
157.2-12) that is, so long as a certain level was maintained. For
the first time in 1987, the concern was with the form of the
transaction, not with the level of remaining capital.
"[T]he classification must be based on a real and
substantial difference between the people taxed and those not
taxed." (Emphasis in original.) Searle, 117 Ill. 2d at 468, 512 N.E.2d at 1246. There is no difference as far as corporate capital
is concerned between a corporation which passes out capital through
a liquidating distribution and one which does so through a distri-
bution accompanied by the acquisition and cancellation of stock.
Both distributions are legal in Illinois, and both reduce the level
of capital in the corporation. The only difference between the two
forms of distribution is in tax consequences. The Department's
argument is that liquidating distributions result in taxation,
while distributions in connection with acquisition and cancellation
do not, because the statute says so. That is not sufficient
justification under the uniformity clause. Disparity in tax treat-
ment may not be justified simply because it generates state income.
Searle, 117 Ill. 2d at 477-78, 512 N.E.2d at 1250.
The majority argues that the concept of paid-in capital
may have some significance in regard to protection of shareholders
or creditors. That is not correct. The $262,500,000 in this case
is out of the corporation. Those funds are no longer available to
Venture's shareholders or creditors, and there is no cause of
action for their removal, because those funds were legally
distributed. The fact that for Illinois franchise tax purposes
Venture's paid-in capital is considered to be $319,029,539 provides
no protection for anyone.
The Department's argument that Illinois is not "obligated
to arrange its corporate law, and its franchise tax in particular,
to conform to the law in other jurisdictions," is off the mark.
Illinois corporations, as well as Delaware corporations, are
allowed to make liquidating distributions. The refusal to allow
Illinois corporations to reduce paid-in capital unless that
reduction is accomplished by a distribution accompanied by
acquisition and cancellation of shares violates the uniformity
clause. Venture's argument is not based on its status as a foreign
corporation.
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