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October 5, 2018
State and Local Tax this week
Illinois General Assembly
The General Assembly returns to Springfield for the fall veto session on November 13. The House and Senate are scheduled to be in session November 13 through 15 and November 27 through 29.
New tax-related legislation filed this week:
HB 5960 - Durkin & Wehrli - Creates the Vacancy Fraud and Penalties Act. Allows a taxing body or representative of a taxing body to file a vacancy fraud complaint with the chief county assessment officer or the county board of review if property receives vacancy relief and the property owner is not actively attempting to lease, sell, or alter the property. Sets forth factors for determining whether or not vacancy fraud has occurred. Sets forth penalties. Provides that a person commits property tax vacancy fraud when he or she knowingly owns vacant property and, for 2 or more consecutive years in which vacancy relief is granted, has not actively attempted to sell, lease, or alter the vacant property. Provides that property tax vacancy fraud is a Class A misdemeanor. Provides that a person commits aggravated property tax vacancy fraud when he or she commits property tax vacancy fraud that leads to the assessment of more than $100,000 in back taxes. Provides that aggravated property tax vacancy fraud is a Class 4 felony.
HB 5962 - McSweeney - Creates the Truth in Legislative Taxation Act. Provides that every new Act that creates a new tax or fee or increases an existing tax or fee shall include the words "Tax Increase", "Fee Increase", or "Tax and Fee Increase" in its short title. Requires the sponsor of the new Act to inform the Legislative Reference Bureau that the new Act creates a new tax or fee or increases an existing tax or fee each time a drafting request is made related to that new Act. Requires the sponsor to provide a statement of legislative intent to the Legislative Reference Bureau that describes each new or increased tax or fee in the new Act and that sets forth the reason for each new or increased tax or fee. Directs the Legislative Reference Bureau to: ensure that the short title of the new Act conforms to the naming requirements of this Act; include the statement of legislative intent provided by the sponsor in the Section of the new Act immediately following the short title; and in its synopsis of the bill or amendment, state that the new Act creates a new tax or fee or increases an existing tax or fee. Where the new Act is drafted in the form of bill, directs the Legislative Reference Bureau to affix to the first page of the bill a stamp or words indicating that the new Act is one to which this Act applies. Provides corresponding requirements for amendatory Acts.
Please keep in mind when reviewing legislation filed at this time of the legislative cycle that it is unlikely such legislation will be considered and move through the process during the upcoming veto session. In addition, all proposed legislation filed during the the 100th General Assembly will die when the 100th General Assembly adjourns and is succeeded by the 101st General Assembly in January 2019.
Rulemaking
The October 5 edition of the Illinois Register
did not contain any new rulemakings by t
he Illinois Department of Revenue or the Illinois Department of Commerce and Economic Opportunity.
The Department of Revenue adopted one rulemaking in today's edition of the Illinois Register. The Department's description of the rulemaking is as follows:
"This rulemaking amends Section 100. 2330 to address issues arising from the suspension of net loss carryforward deductions between 2010 and 2014 under IITA Section 207(d) and the special rules for computing Illinois net losses of the residual interest holders of real estate mortgage investment companies under IITA Section 207(e), amends Section 100.2405 and adds new Section 100.2360 to address issues in computing and carrying forward net losses of cooperatives under IITA Section 203(e)(2)(F), adds new Section 100.2665 to address issues in computing the base income of reciprocal insurers under IITA Section 203(b)(2)(R) and adds new Section 100.2668 to address issues in computing the net losses of corporations receiving dividends from controlled foreign corporations under IITA Section 203(b)(2)(Z). This rulemaking also adds new Sections 100.2565, 100.2770 and 100.2775 to Part 100 to provide guidance on the subtractions allowed to individuals, trusts and estates for refunds of state taxes and recoveries of itemized deductions that are subject to federal income tax because they are recoveries of items that were deducted in computing federal taxable income, when those recoveries should not be taxed by Illinois because no Illinois income tax deduction was allowed for the original payments. Finally, this rulemaking amends Section 100.3420 to reflect the provisions of PA 97-507, which amended IITA Section 304(b)(2) to allow reinsurance companies to elect one of three methods of incorporating reinsurance premiums into their apportionment factor computation."
Court cases
The taxpayer operates a dairy farm and grows corn for silage. The corn is packed into a silage bag. The corn is placed into the silage bag for the purpose of fermentation. Upon completion of fermentation, the cows eat the product and the bags are used for storage of the remaining product.
The bags were purchased by the taxpayer sales tax-free claiming the farm equipment exemption. The Department audited the taxpayer and assessed tax on the bags after concluding that the bags are taxable supplies.
The taxpayer protested the assessment. The ALJ upheld the assessment and indicated that the bags are consumable and used only once finding the bags "are not the type of durable product the term 'equipment' commonly describes."
The circuit court upheld the Department's determination. The case was appealed to the appellate court.
The appellate court found that the issue presented a mixed question of law and fact. As a result, the court will reduce the Director's decision only if the decision is clearly erroneous.
The appellate court ruled that the Director of Revenue improperly concluded that the taxpayer failed to establish that silage bags qualify as equipment and the decision was clearly erroneous.
The court found that establishing the exemption requires two findings - (1) that the item is equipment and (2) that the item is essential to production agriculture. The court reversed the determination that the items are not equipment and remanded the case for a determination of whether the items are essential to production agriculture.
Tax Tribunal
No new decisions were issued this week by the Tribunal.
A number of new cases filed with the Tribunal this week raise noteworthy issues.
Madison Dearborn Partners IV, L.P. v. Illinois Department of Revenue is an income tax case that deals with the scope of the deduction authorized by IITA Section 203(d)(2)(H) for personal service income or a reasonable allowance for compensation of partners of partnerships. The following is a description of the petitioner and the issues in the case from the petition.
The petitioner in this case was organized for the purpose of acting as the general partner of Madison Dearborn Capital Partners IV, a Delaware limited partnership. Petitioner's general parnter is Madison Dearborn Partners, LLC a Delaware limited liability company.
The fund is a private equity fund formed for the purpose of investing in equity and equity-related securities of management buyout transactions an other special equity situations.
As the Fund's general partner, Petitioner was vested with control over the business and affairs of the fund. Each of Petitioner's Service partners devoted substantially all of their business time and attention to providing the investment management services to the Fund and other private equity funds managed by Madison Dearborn partners and its affiliates.
Petitioner received as compensation an annual management fee from the Fund and a profit participation on the Fund's investments. Petitioner allocated the Management Fee and the Carried interest among certain of its service partners as compensation.
The Department adjusted the Petitioner's deduction. The Petitioner explains that the adjustment was erroneous and contrary to law because Petitioner was entitled to claim a deduction in respect to the management fee and carried interest income it receive.
As explained by the Petitioner, the personal service income deduction applies to any personal service income "of the partnership." It explains that the relevant test, therefore, is whether such income, determined at the level of the partnership that received the income, constitutes "personal service income."
Madison Dearborn is represented by Scott Heyman of Illinois Chamber of Commerce member law firm Sidley Austin LLP.
Graphic Advantage Inc. v. Illinois Department of Revenue is a sales tax/service occupation tax case that deals with whether, and when, certificates of resale are required to be obtained from customers of a company that coordinates design, printing and materials between printers and its customers. The printed materials at issue include product user manuals, product labels, product warranty cards that, as explained by the petitioner, "become incorporated into the customers' products sold," which products are subject to sales and use tax.
In this particular case, the facts set forth in the petition make clear that Jame and Maria Lindbury were not residents of Illinois for the periods at issue.
Apparently, the Department's legal division agreed because the Department withdrew the notices of deficiency and caused the case to be dismissed with prejudice by the Tribunal two days after the case was filed.
The petitioners in this matter were represented by David Kupiec of Illinois Chamber Tax Institute member law firm Kupiec & Martin, LLC.
Mike A. Maedge Trucking Inc. v. Illinois Department of Revenue is a sales tax case and deals with the scope of documentation required for claiming the rolling stock exemption. As explained in the petition, the petitioner was audited and in the course of the audit supplied records to document the rolling stock exemption with respect to certain vehicle purchases. The records consisted of travel logs and a sample of the tens of thousands of trip tickets for the petitioner's hauls.
According to the petitioner, the Department has refused to allow the rolling stock exemption unless the petitioner copies and delivers all of the trip tickets to the Department. The petitioner explains that the Department refused to conduct the audit at the petitioner's place of business or his representative's place of business where the Department could have access to all of the trip tickets for purposes of review.
Mike A. Maedge Trucking Inc. is represented by John Simpson of Illinois Chamber Tax Institute member law firm Sorling Northrup.
City of Chicago
The City of Chicago has increased the tax on liquid nicotine used in e-cigarettes Ordinance O2018-7371
Publications
The Illinois General Assembly bi-partisan Commission on Government Forecasting and Accountability has issued theSeptember Monthly Briefing
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