TTX Co. v. Whitley

Annotate this Case
March 13, 1998

1-96-3120

TTX COMPANY, ) Appeal from the
) Circuit Court of
Plaintiff-Appellee, ) Cook County.
)
v. )
)
DOUGLAS L. WHITLEY, Director of the )
Illinois Department of Revenue, and )
PATRICK QUINN, Treasurer of the State )
of Illinois, )
)
Defendants, )
----------------------------------------)
WILLIAM T. LUNDEEN, Chief Counsel of )
the Illinois Department of Revenue, ) Honorable
) Alexander P. White,
Contemnor-Appellant. ) Judge Presiding.

JUSTICE HARTMAN delivered the opinion of the court:
William T. Lundeen, in his capacity as chief counsel of the
Illinois Department of Revenue (Department), appeals the circuit
court's order finding him in contempt of court after he refused to
comply with a discovery order requiring the Department to disclose
information found in income tax returns belonging to other State
taxpayers. On appeal, Lundeen raises as issues whether: (1) the
Illinois Income Tax Act (35 ILCS 5/917(a) (West 1994) (section
917(a)) prohibited him from producing the information requested in
the discovery order; (2) the information was discoverable as
relevant to the cause of action; (3) the scope of the circuit
court's order to produce was overly burdensome; and (4) the circuit
court's order finding him in contempt should be vacated.
Plaintiff, TTX Company (TTX), is a Delaware corporation with
its principal place of business in Chicago, Illinois. On its
federal income tax returns, TTX listed its business activity as
"Leasing Railroad Cars." The company, originally named Trailer
Train Company, was formed by national railroads in 1956, which
pooled their resources to establish a nationwide fleet of flatcars,
to help them lower costs and compete more effectively with the
trucking industry for the shipping of freight. By 1991, TTX and
its subsidiaries operated and maintained a fleet of almost 100,000
rail cars, which are leased to railroads pursuant to a pooling
agreement approved by the Surface Transportation Board (STB)
(previously known as the Interstate Commerce Commission). The
company's objective is to "provide standardized railroad equipment
and related services to the nation's railroads at the lowest
possible car hire rates."
All railroads in possession of TTX cars pay charges set by
TTX's rate policy, which provides that TTX will charge only what it
needs to pay its expenses. TTX made no attempt to maximize its
profits or pay a dividend to its shareholders during the period
audited by the Department. Although the STB does not regulate TTX
as a common carrier, the agency monitors the company's pooling
activities pursuant to 49 U.S.C. sec. 11322 (1997).
TTX calculated its Illinois income taxes for the calendar year
1984 using a three-factor apportionment formula pursuant to section
304(a) of the then applicable Illinois Income Tax Act (Ill. Rev.
Stat. 1983, ch. 120, par. 3-304(a)) (section 3-304(a)). On January
9, 1986, after reviewing TTX's 1984 income tax return, the
Department sent TTX a notification requesting more information. A
handwritten note at the bottom of the notice[fn1] stated: "It
appears you should be filing and apportioning your income as a
transportation company. Please explain why a three factor formula
is used ***. Please respond within 60 days." After reading this
notation, and examining the relevant statutes, TTX began
calculating its Illinois income taxes using a single factor
transportation formula, pursuant to section 304(d) of the Illinois
Income Tax Act (Ill. Rev. Stat. 1983, ch. 120, par. 3-304(d))
(section 304(d)), which applies to business income derived from
furnishing transportation services.
In 1991, the Department audited the combined tax returns of
TTX and its subsidiaries for 1987, 1988, and 1989 (audit period),
and concluded that TTX was not furnishing transportation services
within the meaning of section 304(d) and incorrectly used the
single factor transportation formula to calculate its income taxes.
The Department informed TTX that it should have used the three-
factor formula. Applying this formula, on July 21, 1992, the
Department issued a Notice of Deficiency to TTX in the amount of
$852,508. The Department also assessed a penalty against TTX for
failing to pay its entire tax liability for the audit period by the
due date.
TTX filed a notice of payment under protest and deposited the
entire amount due, $1,104,150, which included the alleged
deficiency plus interest and penalties, into a protest fund. See
30 ILCS 230/1 et seq. (West 1992). TTX then filed the present
action, requesting a declaration that TTX is a transportation
company as defined by section 304(d), and a judgment in favor of
TTX in the amount of the protest payment. In an agreed preliminary
injunction order, defendants were prohibited from transferring
TTX's payment out of the protest fund.
In its second set of interrogatories, TTX requested defendants
to "identify each taxpayer who apportioned income to Illinois using
the single factor transportation formula" during the audit period.
Defendants objected to the request, arguing that it sought
confidential information about other taxpayers, was unduly
burdensome, and did not seek information reasonably calculated to
lead to the discovery of admissible evidence.
Defendants also moved for summary judgment, arguing that as a
matter of law TTX was required to use the three-factor formula when
calculating its state income taxes during the audit period.
Defendants asserted that TTX did not qualify for the single-factor
formula because it did not transport passengers or freight. In
response, TTX argued that because it was at least indirectly
involved in furnishing transportation services, questions of fact
existed as to whether it qualified for application of the single-
factor formula, precluding summary judgment.
TTX moved to compel defendants to answer the second set of
interrogatories. The circuit court continued defendants' summary
judgment motion pending TTX's motion to compel. Subsequently, in
a written order, the court denied the motion to compel "in so far
[sic] as it would require the Department to produce a list of
taxpayers who file income tax returns in Illinois using the single
factor transportation apportionment formula." The court found that
TTX "has not made any allegations in its complaint with respect to
disparate treatment, violation of due process and/or equal
protection." Nonetheless, the court wanted to "satisfy itself"
that the Department applied section 304(d) to other taxpayers in
the same manner it applied that section to TTX during the audit
years.
The circuit court ordered TTX to produce a list of 200
taxpayers it believed might be using the single factor formula when
filing their income tax returns. From that list, the Department
was ordered to compile a second list identifying which of those
taxpayers actually used the single factor formula; and a third list
identifying taxpayers from the second list who were audited during
the audit period. The Department would give these lists to the
court for review. The court further required the Department to
prepare an affidavit explaining the criteria used to determine if
a taxpayer may use the single factor formula, and whether the
criteria were applied in an equal manner to all taxpayers being
audited during the audit period. Lastly, the court ordered the
Department to furnish for in camera inspection any documentation
necessary to support the facts alleged in the affidavit.
After the Department indicated that it would not comply with
the order, the circuit court ordered it to "provide a detailed
affidavit" explaining its position. In response, Lundeen prepared
an affidavit in which he asserted that the discovery order violated
the Income Tax Act, and the information being requested was
irrelevant to TTX's claim. Lundeen also detailed how complying
with the Act would place an enormous burden on the Department's
resources.
The circuit court held Lundeen in contempt for refusing to
comply with the discovery order and fined him $25 per day until he
complied. The court stayed the contempt sanctions pending
resolution of the Department's appeal.
I
Lundeen argues that the circuit court abused its discretion in
finding him in contempt of court for refusing to comply with the
discovery order. The circuit court retains great latitude in
defining the scope of discovery. In re Marriage of Daniels, 240
Ill. App. 3d 314, 324, 607 N.E.2d 1255 (1992). A discovery order
will not be disturbed absent abuse of discretion, although the
court does not have discretion to compel disclosure of privileged
information or that otherwise exempted by statute or common law.
Daniels, 240 Ill. App. 3d at 324.
A contempt proceeding is the appropriate method by which a
party may test the correctness of a discovery order. Daniels, 240
Ill. App. 3d at 323-24. Pursuant to Supreme Court Rule 219(c), the
circuit court may use contempt proceedings to compel a party to
obey a discovery order. 134 Ill. 2d R. 219(c). The imposition of
such a sanction will not be disturbed on review absent abuse of
discretion. Daniels, 240 Ill. App. 3d at 323.
II
Lundeen first argues that section 917(a) prohibits the
Department from disclosing the information requested in the
discovery order. Section 917(a) provides:
"Confidentiality. Except as provided in
this Section, all information received by the
Department from returns filed under this Act,
or from any investigation conducted under the
provisions of this Act, shall be confidential,
except for official purposes within the
Department or pursuant to official procedures
for collection of any State tax ***, and any
person who divulges any such information in
any manner, except for such purposes and
pursuant to order of the Director or in
accordance with a proper judicial order, shall
be guilty of a Class A misdemeanor."
(Emphasis added) 35 ILCS 5/917(a) (West 1994).
It is a fundamental rule that when construing a statutory
provision, this court must "ascertain and give effect to the true
intent and meaning of the legislature." Hernon v. E.W. Corrigan
Construction Co., 149 Ill. 2d 190, 194, 595 N.E.2d 561 (1992); City
of Decatur v. American Federation of State, County, and Municipal
Employees, Local 268, 122 Ill. 2d 353, 364, 522 N.E.2d 1219 (1988).
The first step in determining legislative intent is to examine the
language of the statute; unambiguous terms, when not specifically
defined, must be given their plain and ordinary meaning. Hernon,
149 Ill. 2d at 194-95. When the language contains a general
prohibition along with enumerated exceptions, the prohibition
applies in all places not specifically excepted. People ex rel.
DiFanis v. Barr, 83 Ill. 2d 191, 199, 414 N.E.2d 731 (1980).
The first part of section 917(a) states the general rule that
the Department must keep all information found in tax returns
confidential, with some exceptions. TTX finds two exceptions
relevant to the present case. First, TTX interprets the phrase "in
accordance with a proper judicial order" to permit the Department
to reveal taxpayer information if disclosure is required by a court
order. TTX's argument fails to consider this phrase within the
context of the statute as a whole. When interpreting the scope of
a statute, "the entire statute must be considered." Decatur, 122 Ill. 2d at 364. Moreover, statutes should be construed so that no
term is rendered superfluous or meaningless. Niven v. Siqueira,
109 Ill. 2d 357, 365, 487 N.E.2d 937 (1985).
Considered in its entirety, section 917(a) contains two
separate rules, each with its own exceptions. The first rule
requires the Department to keep tax return information
confidential, but states exceptions where disclosure of such
information would be permitted. The second rule imposes a criminal
penalty on parties who release confidential information, providing
that they shall be guilty of a misdemeanor. An exception to this
rule exists if the information is released "in accordance with a
proper judicial order." Thus, if a Department employee discloses
information from a tax return pursuant to a court order, he is
immune from criminal prosecution even though he violated the first
part of section 917(a).
The plain language of section 917(a) reveals that the judicial
order exception was not intended to be part of the confidentiality
rule. Its placement in the statute confirms the legislature's
intention to provide an exception to the criminal culpability rule
also found in section 917(a). A contrary interpretation would
allow courts to order the release of tax return information
whenever such information was found relevant to the case. As a
result, the judiciary, rather than the legislature, would be
deciding what information may be released, in direct contravention
of section 917(a)'s confidentiality rule.
TTX compares section 917(a) to the confidentiality rules found
in other federal and state tax laws, noting that they provide
limited exceptions allowing taxpayer information to be released
pursuant to a judicial order. The language of those tax laws,
however, is much different from the language found in section 917.
For instance, Section 6103 of the Internal Revenue Code (Code)
contains an extensive list of exceptions to the confidentiality
rule. 26 U.S.C. sec. 6103(a) (1989). One exception provides for
the disclosure of information in a "Federal or State judicial or
administrative proceeding pertaining to tax administration, *** if
the treatment of an item reflected on such return is directly
related to the resolution of an issue in the proceeding." 26
U.S.C. sec. 6103(h)(4)(B) (1989). A federal court applied this
exception to a case involving facts similar to the present case.
Beresford v. United States, 123 F.R.D. 232 (E.D. Mich. 1988).
TTX argues that the Beresford decision is persuasive here.
The Beresford court, however, was interpreting an exception to the
federal confidentiality rule that is not present in section 917.
Another federal case cited by TTX, McSurely v. McAdams, 502 F. Supp. 52 (D.D.C. 1980), also is unpersuasive because it involved a
nontax civil suit. See Beresford, 123 F.R.D. at 234.
The confidentiality rules promulgated by other states are
similarly distinguishable. See Ind. Code sec. 6-8.1-7-1(a) (1989);
Ohio Rev. Code Ann. sec. 5747.18 (Anderson 1989). The language of
those statutes contain important differences, in that they
specifically create an exception to the confidentiality rule for
disclosures made in accordance with a judicial order. The Illinois
statute contains such an exception only to the extent that
Department employees are immune from criminal prosecution for
violating the confidentiality rule. The exception does not apply
to the confidentiality rule itself.
TTX next argues that an exception found in the first clause of
section 917(a) permits disclosure of the tax return information TTX
requested. The provision requires information to be kept
confidential unless it is disclosed "pursuant to official
procedures for collecting of any State tax ***." TTX contends that
the litigation of its complaint against the Department should be
considered an official procedure for the collection of a State tax.
The Income Tax Act provides that "[e]xcept as otherwise
expressly provided or clearly appearing from the context, any term
used in this Act shall have the same meaning as when used in a
comparable context in the United States Internal Revenue Code ***."
35 ILCS 5/102 (West 1994); see also Bodine Electric Co. v. Allphin,
70 Ill. App. 3d 844, 847, 389 N.E.2d 168 (1979), aff'd, 81 Ill. 2d 502, 410 N.E.2d 828 (1980). Section 6103(h)(1) of the Code
authorizes disclosure of federal tax return information to federal
employees "whose official duties require such inspection or
disclosure for tax administration purposes." 26 U.S.C. sec.
6103(h)(1) (1989). This information also may be disclosed to State
agencies responsible for the administration of State tax laws. 26
U.S.C. sec. 6103(d) (1989). The term "tax administration" is
defined to include the "assessment, collection, enforcement, [and]
litigation" of taxes and tax laws. 26 U.S.C. sec. 6103(b)(4)(B)
(1989). Thus, the collection of taxes comprises a portion of the
taxing agency's responsibilities with regard to the administration
of tax laws.
The claim involved in the present case is not part of the
Department's administration of the State's tax laws. This case
instead involves a private taxpayer, TTX, seeking a reduction in
the taxes assessed against and owed by it, and a refund of the
money placed in escrow. Such a claim does not constitute an
official procedure for the collection of State taxes and does not
allow for disclosure of the information requested in the present
case.
The parties next dispute whether information that must be kept
confidential under section 917(a) is nonetheless discoverable.
Lundeen compares section 917(a) to other State statutes that he
argues "illustrate the legislative intent to grant
confidentiality." For instance, the Freedom of Information Act
(FOIA) exempts taxpayer information from the list of public records
that must be made available to the public. This exemption is
limited, however, in that the information must be disclosed if it
"is otherwise required by State statute." 5 ILCS 140/7(1)(b)(iv)
(West 1994). In addition, FOIA addresses disclosures made to the
public generally, not disclosures made in response to a discovery
order. Daniels, 240 Ill. App. 3d at 326.
When considering statutes containing confidentiality rules
similar to section 917(a), courts have held that documents subject
to those statutes could not be disclosed during discovery or at
trial. Niven, 109 Ill. 2d at 366; Arnold v. Thurston, 240 Ill.
App. 3d 570, 574, 608 N.E.2d 418 (1992); People v. Ellis, 128 Ill.
App. 3d 180, 183, 470 N.E.2d 524 (1984). Those cases are
distinguishable from the present case, however, because the plain
language of the statutes they interpreted specifically stated that
the confidential documents were inadmissible in court. 625 ILCS
5/11-412 (West 1994); 735 ILCS 5/8-2102 (West 1994); 820 ILCS
405/1900A (West 1994).
Although section 917 does not contain a comparable provision
stating that information in tax returns are inadmissible or
nondiscoverable, its language requires confidentiality, and does
not create an exception for disclosure pursuant to a court order.
In the absence of a statutory exception to the confidentiality
rule, permitting disclosure of tax return information pursuant to
the discovery order would violate the explicit prohibition of such
disclosures as stated in section 917(a).
III
Lundeen also asserts that the information requested is not
discoverable because it is irrelevant to the pending action. Great
latitude is allowed in the scope of discovery, and the concept of
relevance is broader for discovery purposes than for purposes of
admitting evidence at trial. Leeson v. State Farm Mutual
Automobile Insurance Co., 190 Ill. App. 3d 359, 365, 546 N.E.2d 782
(1989). Relevance for discovery purposes includes not only what is
admissible at trial, but also that which leads to admissible
evidence. Pemberton v. Tieman, 117 Ill. App. 3d 502, 504-05, 453 N.E.2d 802 (1983). Discovery should be denied, however, when there
is insufficient evidence that the requested discovery is relevant.
Rokeby-Johnson v. Derek Bryant Insurance Brokers, Ltd., 230 Ill.
App. 3d 308, 317, 594 N.E.2d 1190 (1992).
In the present case, the information requested in the
discovery order is irrelevant to the issues presented. TTX alleged
in its complaint that it properly applied the single factor
transportation formula, instead of the three-factor formula, when
calculating its state income taxes. The issue before the circuit
court was whether TTX qualified as a transportation company under
section 304(d). Whether other companies unrelated to TTX
calculated their income taxes as transportation companies, and
whether they were audited for doing so, is irrelevant to the issue
of whether TTX should be designated a transportation company for
income tax purposes. The relevant question is not whether TTX was
treated differently from other companies, or whether the Department
is interpreting correctly section 304 with regard to other
companies.
Evidence of which corporate taxpayers are using the single
factor formula would prove only that the Department might or might
not be enforcing section 304(d) in a consistent manner. As the
circuit court specifically noted, however, TTX did not allege
disparate treatment or violation of its due process or equal
protection rights. TTX asserts that if it obtains evidence during
discovery that would establish a basis for an equal protection
claim, TTX could amend its complaint to add that claim. TTX has
not alleged a single fact that would support an equal protection
claim, and fails to show how the information sought in the
interrogatory would state a constitutional violation. Whether the
Department violated TTX's equal protection rights by allowing other
companies to use the single factor formula is purely speculative.
The information requested by TTX is not discoverable on the basis
of a potential future, unsubstantiated equal protection claim.
The cases cited by TTX in support of its relevance argument
are not on point. See Vitacco v. Eckberg, 271 Ill. App. 3d 408,
414, 648 N.E.2d 1010 (1995); Snyder v. Lowrey, 141 Ill. App. 3d 30,
33, 489 N.E.2d 899 (1986); Harris Trust & Savings Bank v. Joanna-
Western Mills Co., 53 Ill. App. 3d 542, 557, 368 N.E.2d 629 (1977).
TTX is not seeking to introduce tax information from a party to the
case; rather, TTX is seeking tax information from the Department
about private third parties. Moreover, the instant case does not
involve questions of custom and practice, or issues of an item's
fair market value.
TTX argues that the information sought in its interrogatories
is relevant to determining precisely how the Department has
interpreted section 304(d). An agency's interpretation of a
statute it is charged with administering is relevant, but not
binding. Branson v. Department of Revenue, 168 Ill. 2d 247, 254,
659 N.E.2d 961 (1995). In this case, review of tax returns filed
by other taxpayers is unnecessary to determine the Department's
construction of section 304(d). The Department already has
explained its interpretation of section 304(d) during the
litigation of this case. The Department believes that TTX may not
use that provision to calculate its income taxes because it does
not qualify as a transportation company, in that it does not
transport passengers or freight. That reading of section 304(d) as
it applies to TTX is the issue in this case, rather than the
Department's interpretation of section 304(d)'s applicability to
other taxpayers.
In light of the foregoing, Lundeen's argument that the
discovery order was oppressive and placed an undue burden on the
Department need not be addressed.
For the reasons set forth above, the circuit court's order
requiring Lundeen to comply with its discovery order is reversed,
and the contempt order and fine are vacated.
Order reversed; contempt order and fine vacated.
HOFFMAN, P.J., and HOURIHANE, J., concur.
[fn1]This handwritten note was not signed. The parties later
stipulated that Connie Franklin, a former tax analyst for the
Department, made the notation.


Some case metadata and case summaries were written with the help of AI, which can produce inaccuracies. You should read the full case before relying on it for legal research purposes.

This site is protected by reCAPTCHA and the Google Privacy Policy and Terms of Service apply.