Exelon Corp. v. Illinois Department of Revenue

FIRST DIVISION
September 24, 2007
No. 1-06-3388
EXELON CORPORATION, ) Appeal from the
) Circuit Court of
Plaintiff-Appellant, ) Cook County.
)
v. )
)
ILLINOIS DEPARTMENT OF REVENUE, and )
BRIAN A. HAMER, as Director of )
Revenue, ) Honorable
) Sheldon Gardner,
Defendants-Appellees. ) Judge Presiding.
JUSTICE WOLFSON delivered the opinion of the court:
At issue in this case is whether Commonwealth Edison
(ComEd), a wholly-owned subsidiary of Exelon Corporation, as
successor to Unicom Corporation, is entitled to a tax credit for
investments in “qualified property” on its 1995 and 1996 tax
returns pursuant to section 201(e) of the Illinois Income Tax Act
(Act) (35 ILCS 5/201(e) (West 1994)). We also are asked to
consider whether section 201(e), as applied to gas and electric
utility providers, violates the uniformity clause of the Illinois
Constitution. The Department of Revenue rejected Exelon’s claims
and we agree.
FACTS
In 1995 and 1996, ComEd invested nearly $3 billion in
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property used for generating, transmitting, and distributing
electricity to customers in Illinois. The property was
depreciable under section 167 of the Internal Revenue Code, and
had not been previously used in Illinois. Neither ComEd nor its
parent company claimed a section 201(e) credit on its original
combined 1995 or 1996 Illinois tax return. On May 28, 1998,
ComEd’s parent company, Unicom Corporation, filed amended
Illinois combined income tax returns, seeking a $10,419,507
section 201(e) credit for 1995 and a $4,398,115 credit for 1996.
Section 201(e) provides a tax credit against the Personal
Property Tax Replacement Income Tax for investments in “qualified
property.”
The Department of Revenue (Department) denied the requests.
Unicom submitted an administrative protest and requested a
hearing. The parties filed cross-motions for summary judgment.
In support of its motion for summary judgment, Unicom
attached an affidavit and report from its expert witness, Dr.
Joel Fajans, a professor of physics at University of California,
Berkeley. Dr. Fajans opined that, as a matter of irrefutable
scientific fact, electricity itself is both a physical and
material commodity. Dr. Fajans noted that electricity can be
sensed, measured, stored, and weighed.
Unicom also asked the Department to admit whether it had
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ever approved an investment credit for either a natural gas
utility or another regulated electric utility. After raising a
relevancy objection, the Department admitted it allowed
investment credits to natural gas utilities generally. The
Department denied granting the credit to a regulated electric
utility. The Department admitted, however, that between the tax
years 1992 and 1998, a combined gas and electric utility filed an
amended return claiming the section 201(e) credit for property
used in its electricity business. The Department did not audit
the amended return and the taxpayer received the credit.
The Administrative Law Judge (ALJ) recommended granting the
Department’s summary judgment motion. The ALJ found the Illinois
General Assembly did not intend to include electricity within the
meaning of “tangible” when enacting section 201(e), relying in
large part on our supreme court’s decision in Farrand Coal Co. v.
Halpin, 10 Ill. 2d 507, 140 N.E.2d 698 (1957). The ALJ also
found that “[t]reating electric utilities differently than
natural gas utilities *** does not violate the uniformity clause
of the Illinois Constitution.” The Director of the Department
accepted the ALJ’s recommendation. Unicom petitioned for circuit
court review of the administrative decision. After Unicom was
purchased by Exelon Corporation, the circuit court ordered the
case caption changed to “Exelon Corporation, as successor to
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Unicom Corporation.” The court affirmed the Director’s decision.
Exelon appeals.
DECISION
We review the administrative agency’s decision, not the
circuit court’s decision. Wigginton v. White, 364 Ill. App. 3d
900, 905, 847 N.E.2d 646 (2006). An administrative agency’s
factual determinations are reviewed under a manifest weight of
the evidence standard. Lindsey v. Board of Education of the City
of Chicago, 354 Ill. App. 3d 971, 978, 847 N.E.2d 1161 (2004).
An administrative agency’s legal conclusions, however, are
reviewed de novo. Wigginton, 364 Ill. App. 3d at 905; Lindsey,
354 Ill. App. 3d at 979. We review the issues here de novo.
I. Classification of Electricity as Intangible
Section 201(e) of the Act provides a tax credit for
investments in “qualified property.” 35 ILCS 5/201(e) (West
1994). The statute defines “qualified property” as property
“used in Illinois by a taxpayer who is primarily engaged in
manufacturing, or in mining coal or fluorite, or in retailing.”
35 ILCS 5/201(e)(2)(D) (West 1994). “Retailing” is defined as
“the sale of tangible personal property or the sale of services
rendered in conjunction with the sale of tangible consumer goods
or commodities.” 35 ILCS 5/201(e)(3) (West 1994). At issue in
this case is whether electricity is “tangible personal property.”
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The legislature did not define “tangible personal property”
within the Act.
Exelon contends the Department erred in determining ComEd
does not, as a matter of law, engage in “retailing” as defined by
section 201(e). Specifically, Exelon contends the Department
erred in determining the Illinois legislature did not intend for
electricity to be considered “tangible” when enacting the section
201(e) tax credit.
When the facts are undisputed, the determination of whether
property is exempt from taxation is a question of law. Chicago
Patrolmen’s Association v. Department of Revenue, 171 Ill. 2d
263, 271, 664 N.E.2d 52 (1996); Schwak, Inc. v. Zehnder, 326 Ill.
App. 3d 752, 755, 761 N.E.2d 192 (2001). “Statutes exempting
property from taxation are to be strictly construed in favor of
taxation.” Chicago Patrolmen’s Association, 171 Ill. 2d at 271.
The primary goal of statutory interpretation is to ascertain
and give effect to the legislature’s intent. Andrews v. Kowa
Printing Corp., 217 Ill. 2d 101, 105-06, 838 N.E.2d 894 (2005).
“The best indication of legislative intent is the statutory
language, given its plain and ordinary meaning.” Andrews, 217
Ill. 2d at 106. “Where the language is clear and unambiguous, we
must apply the statute without resort to further aids of
statutory construction.” Andrews, 217 Ill. 2d at 106.
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In Farrand Coal Co. v. Halpin, 10 Ill. 2d 5077, 140 N.E.2d
698 (1957), our supreme court considered whether electricity was
tangible personal property under the Retailers’ Occupation Tax
Act. The court noted the ordinary and popularly understood
meaning of “tangible” is “ ‘Capable of being touched; also,
perceptible to the touch; tactile; palpable.’ ” Farrand Coal, 10
Ill. 2d at 511, quoting Webster’s New International Dictionary,
Second Edition, Unabridged, 1946. The same dictionary defined
“ ‘tangible property’ as ‘Corporeal property either real or
personal’ and defines ‘corporeal’ as meaning ‘Of the nature of,
consisting of, or pertaining to, matter or a material body;
physical; bodily; material;-opposed to spiritual or
immaterial.’ ” Farrand Coal, 10 Ill. 2d at 511.
In light of the ordinary and popularly understood meaning of
“tangible”, the court held:
“All witnesses who testified on the subject
*** agreed that energy cannot be separated
from matter and tagged or otherwise
physically identified in any way, cannot be
located spacially, and does not have
dimensions. In all these respects energy
falls short of fitting into the ordinary and
popularly understood meaning of the word
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‘tangible’ as used by the General Assembly in
this act in question.” Farrand Coal, 10 Ill.
2d at 511.
The court noted that although it had previously recognized
electricity as personal property, it had at no time held
electricity to be “tangible” personal property. Farrand Coal, 10
Ill. 2d at 512.
In light of our supreme court’s decision in Farrand Coal, we
find including electricity within the classification of “tangible
personal property” for the purposes of section 201(e) would be
inconsistent with Illinois precedent classifying property as
intangible in the context of other tax statutes. See Schwak,
Inc., 326 Ill. App. 3d at 755 (“Moreover, as we look beyond the
dictionary definitions of manufacturing, the inclusion of
Schwak’s business in the classification “manufacturing” [for the
purposes of section 201(e)] is inconsistent with Illinois
precedent classifying the graphic arts as a service occupation in
the context of other statutes.”) Contrary to Exelon’s
contentions, we are bound by the principle of stare decisis and
must adhere to the decisions of our supreme court. See
Wreglesworth ex rel. Wreglesworth v. Arctco, Inc., 316 Ill. App.
3d 1023, 1030, 738 N.E.2d 964 (2000).
Moreover, we recognize that “[w]here statutes are enacted
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after judicial opinions are published, it must be presumed that
the legislature acted with knowledge of the prevailing case law.”
Burrell v. Southern Truss (Wood River Tp. Hospital), 176 Ill. 28171, 176, 679 N.E.2d 1230 (1997). The section 201(e) tax credit
was enacted in 1982, nearly 25 years after Farrand Coal was
decided. See Pub. Act 82-315, eff. Jan. 1, 1982. Therefore, we
must presume the legislature was aware of, and approved, the
Farrand Coal court’s classification of electricity as intangible
property when it enacted the tax credit and continued to use the
phrase “tangible personal property” to refer to those who may
receive the credit. See Burrell, 176 Ill. 2d at 176. If the
legislature intended to re-classify electricity as “tangible
personal property” under section 201(e), it could have
specifically modified the classification in the statutory
language. See Modern Dairy Co. v. Department of Revenue, 413
Ill. 55, 66, 108 N.E.2d 8 (1952) (“When this court construes a
statute and that construction is not interfered with by the
legislature, it is presumed that such construction is in harmony
with the legislative intent.”) The legislature chose not to do
so.
We find the Department did not err in determining Exelon
does not, as a matter of law, engage in “retailing” as defined by
section 201(e).
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II. Uniformity Clause
Exelon contends section 201(e) violates the uniformity
clause of the Illinois Constitution because the statute
unlawfully differentiates between suppliers of energy
commodities.
The uniformity clause provides:
"In any law classifying the subjects or
objects of non-property taxes or fees, the
classes shall be reasonable and the subjects
or objects within each class shall be taxed
uniformly. Exemptions, deductions, credits,
refunds and other allowances shall be
reasonable." Ill. Const. 1970, art. IX, § 2.
When a statute is challenged on uniformity grounds, the
scope of a court’s inquiry is relatively narrow. Geja’s Café v.
Metropolitan Pier & Exposition Authority, 153 Ill. 2d 239, 248,
606 N.E.2d 1212 (1992). "To survive scrutiny under the
uniformity clause, a nonproperty tax classification must be based
on a real and substantial difference between the people taxed and
those not taxed, and the classification must bear some reasonable
relationship to the object of the legislation or to public
policy." Allegro Services, Ltd. v. Metropolitan Pier &
Exposition Authority, 172 Ill. 2d 243, 250, 665 N.E.2d 1246-9-
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(1996). Statutes are presumed constitutional. Broad latitude is
afforded to legislative classifications for taxing purposes.
Geja’s Café, 153 Ill. 2d at 248.
In this case, Exelon is not challenging a tax or fee; it
claims it is entitled to a credit. Our reading of the plain
language of the uniformity clause leads us to conclude the first
sentence of the clause does not apply to a credit. It applies
only to taxes or fees. The second sentence applies to
"exemptions, deductions, credits, refunds and other allowances."
Ill. Const. 1970, art. IX, § 2. That sentence merely requires
that a credit be "reasonable." Thus, under our interpretation of
the uniformity clause, Exelon may challenge the credit only for
reasonableness, not for uniformity. In other words, Exelon
cannot contend under the uniformity clause that there is no real
and substantial difference between those receiving the credit
(the gas company), and those not receiving the credit (the
electric company). Its argument must be limited to whether the
credit itself is reasonable. Exelon has not challenged the
reasonableness of the credit. It simply wants to receive it.
Our reading of the uniformity clause finds support in a line
of cases beginning with the Illinois Supreme Court’s decision in
Head v. Korshak, 62 Ill. 2d 226, 227, 341 N.E.2d 706 (1976),
where the court construed a city of Chicago wheel tax ordinance.
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A 1974 amendment to the ordinance gave reduced rates to people
over 65 years of age who owned automobiles in two classes of
smaller automobiles but did not grant the reduction to those over
65 years of age who owned automobiles in the largest class.
The court held the amended ordinance did not add another
classification; rather, it established an exemption, or a right
to a deduction or credit within the meaning of the second
sentence of the uniformity clause. Head, 62 Ill. 2d at 229. The
court said:
"The constitutional determination to require
that ‘exemptions, deductions, credits,
refunds and other allowances’ meet only a
standard of reasonableness, and not a
standard of uniformity and reasonableness
seems clear." Head, 62 Ill. 2d at 229.
The court accepted the reasons advanced by the city to
support the reasonableness of the exemption. First, persons aged
65 years and older who were able to afford vehicles with large
horsepower engines were less in need of tax relief than others.
Second, motor vehicles with higher horsepower created greater
environmental problems than lower horsepower vehicles. These
reasons were sufficient to justify the exemption granted by the
ordinance. Head, 62 Ill. 2d at 230.
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In Toney v. Bower, 318 Ill. App. 3d 1194, 1208, 744 N.E.2d
351 (2001), the court upheld the validity of a statutory income
tax credit for school expenses. Toney, 318 Ill. App. 3d at 1196;
35 ILCS 5/201(m) (West Supp. 1999). Qualified parents were
eligible for a credit of up to $500 against their income tax
liability equal to 25% of qualified education expenses.
Qualified expenses were defined as amounts incurred on behalf of
a qualifying pupil in excess of $250 for tuition, books, and lab
fees. The plaintiffs contended the credit violated the
uniformity clause because it disqualified nearly all parents of
public school students. Toney, 318 Ill. App. 3d at 1207. They
argued the $250 per child threshold was unreasonable because it
was unrelated to the taxpayers’ total financial burden of
educating their children.
The court held:
"The sole requirement placed on tax credits
by section 2 of article IX is that the
‘[e]xemptions, deductions, credits,
refunds[,] and other allowances shall be
reasonable.’ [Citation.] Thus, our
constitution recognizes that differences will
exist in the deductions granted to various
classes of taxpayers and merely imposes a
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requirement of reasonableness." Toney, 318
Ill. App. 3d at 1208.
The court found the education credit was reasonable because
certain parents who did not benefit from the tax credit had
incurred lower costs in educating their children. Toney, 318
Ill. App. 3d at 1208. Parents who sent their children to private
schools relieved the State and other taxpayers of the expense of
educating their children. The credit was related to the
"appropriate legislative goal" of assisting private schools in
remaining financially viable. Toney, 318 Ill. App. 3d at 1208.
In Brown v. Illinois Department of Revenue, 89 Ill. App. 3d
238, 243, 411 N.E.2d 882 (1980), the plaintiffs challenged
sections of the Illinois Income Tax Act that allowed noncorporate
taxpayers who had sold property during the year to deduct the
amount of appreciation that had accrued before the effective date
of the Act. Ill. Rev. Stat. 1975, ch. 120, pars. 2-203(a)(2)(F),
2-203(c)(2)(F). The plaintiffs, shareholders of a small business
corporation, were not allowed to deduct the gain realized from
the sale of the corporation’s equipment and goodwill. Brown, 89
Ill. App. 3d at 239.
Citing the language in the second sentence of the uniformity
clause, the court said, "The constitution recognizes that there
will be differences in the deductions granted to various classes
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of taxpayers and merely imposes a requirement of reasonableness
on these deductions." Brown, 89 Ill. App. 3d at 243. The court
held the sections of the Act granting the deduction only to
noncorporate taxpayers were reasonable.
We acknowledge that despite clear language in the uniformity
clause separating nonproperty taxes and fees from credits,
exemptions, and other allowances, several courts have analyzed
exemptions and credits under the uniformity analysis used for
taxes and fees--although none of those cases pitted gas companies
against electricity providers. None reflected the distinctions
between gas and electricity drawn in Farrand and Peoples Gas
Light & Coke Co. v. City of Chicago, 9 Ill. 2d 348, 137 N.E.2d
330 (1956) (despite similarities in the energy products sold by
gas and electric companies, the court held the legislature may
classify the two providers separately).
In Milwaukee Safeguard Insurance Co. v. Selcke, 179 Ill. 2d
94, 688 N.E.2d 68 (1997), the court examined a privilege tax
imposed on foreign companies by section 409 of the Illinois
Insurance Code. 215 ILCS 5/409(1) (West 1992). The section
contained an exemption for domestic companies. The court first
found a real and substantial difference between those who pay the
privilege tax and those who do not--the disparity in power the
Illinois Department of Insurance has over foreign versus domestic
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insurance companies. Milwaukee Safeguard, 179 Ill. 2d at 101.
The court next found the classification did not bear a reasonable
relationship to the object of the legislation or to public
policy. The court held the section imposed an unreasonable
burden on foreign insurance companies because the tax was imposed
on all foreign companies regardless of their financial strength
or their compliance with recordkeeping requirements. Milwaukee
Safeguard, 179 Ill. 2d at 103.
The supreme court analyzed another set of exemptions using
the two-part test for uniformity challenges in Commercial
National Bank of Chicago v. City of Chicago, 89 Ill. 2d 45, 432
N.E.2d 227 (1982). The Chicago service tax statute exempted from
the tax all commodities and securities businesses and all
transactions on a futures or securities exchange for a period of
10 years. Commercial National Bank, 89 Ill. 2d at 70. The
plaintiffs contended they provided services to their clients that
were substantially similar to those provided to clients of
commodities and securities businesses that were not subject to
the tax. The court held:
"[t]here does not appear to be any real or
substantial difference between those taxed
and those not taxed which bears a reasonable
relationship to the revenue-gathering purpose
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of the tax*** The distinction is wholly
arbitrary and cannot be upheld." Commercial
National Bank, 89 Ill. 2d at 73.
See also Zunamon v. Zehnder, 308 Ill. App. 3d 69, 77-78, 719
N.E.2d 130 (1999) (applying uniformity analysis to foreign tax
credit); Moran Transportation Corp. v. Stroger, 303 Ill. App. 3d
459, 473-75, 708 N.E.2d 508 (1999) (exemption of railroads from
diesel fuel tax survived uniformity challenge because there was a
real and substantial difference between those taxed and those not
taxed, and a reasonable relationship existed between the
exemption and the object of the legislation).
We believe the more appropriate approach to the claim for a
credit in this case is to follow the plain language of the
uniformity clause and require only that the credit be reasonable.
Exelon does not specifically challenge the reasonableness of the
credit itself. We find the legislature’s decision to limit the
section 201(e) tax credit to “mining,” “manufacturing,” and
“retailing,” is reasonably related to the goal of the legislature
in enacting the credit. Because Exelon does not claim the credit
is unreasonable, we find its’ uniformity argument must be
rejected.
CONCLUSION
For the reasons we have stated, we affirm the Department’s
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order.
Affirmed.
CAHILL, P.J., and GARCIA, J., concur.
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