THIRD DIVISION
MARCH 29, 2002

In this administrative review action, defendants, theIllinois Department of Revenue and its director, Kenneth E.Zehnder⁽¹⁾ (Director) (collectively the Department), appeal theorder of the circuit court reversing its determination thatcertain income realized by plaintiffs, Blessing/White, Inc.(BWI), a former New Jersey corporation, its sole shareholders,Norbert Blessing and Stroller White, and Stroller's wife, LindaWhite (collectively plaintiffs), through the sale ofsubstantially all of BWI's business assets qualified as taxable"business income" under section 1501(a)(1) of the Illinois IncomeTax Act (the IITA) (35 ILCS 5/1501(a)(1) (West 2000)). Theprincipal issue raised by the Department's appeal concerns theproper tax classification of income realized by a non-residentcorporation that conducts business activities within Illinois,from a sale of substantially all its business assets where,subsequent to the sale, the corporation ceases its operations anddistributes all the sale proceeds to its shareholders. TheDepartment contends such gain classifies as "business income"under section 1501(a)(1) and is, thus, taxable by the state. Plaintiffs, on the other hand, claim such gain constitutesnonbusiness income and, as such, falls outside the scope ofincome taxable under the IITA. O'Connor Partners, a privatepartnership, and Nicor, Inc., a private holding company, havebeen permitted to file an amicus curiae brief in support ofplaintiffs' position. We agree with plaintiffs and, for thefollowing reasons, affirm the order of the circuit court.

The following facts were stipulated to by the parties duringthe administrative proceedings.

At all times prior to May 1989, BWI was a New Jerseycorporation with its principal place of business in Princeton,New Jersey, engaged in the human resource consulting business,providing services mainly to major private businesses andgovernmental entities. Specifically, BWI provided instructionalprograms directed at enhancing the managerial and motivationalabilities of its clients' personnel. As part of its operations,BWI maintained a sales office in Chicago.

On May 31, 1989, BWI sold substantially all of its assets toan unrelated third party for $25,996,758. The assets involved inthe sale consisted primarily of intangible assets, particularlyclient relationships, customer lists and a variety of proprietarycurricula that had been developed by the company over the years. Per the parties' stipulation, the foregoing assets had been usedby BWI in its regular course of business and as part of itsincome-producing activities in Illinois.

Following the sale, BWI ceased its business activities,including those conducted in Illinois, and distributed nearly allof the sale proceeds to Blessing and White. Only a small amountof cash and a note retained for collection remained as assets.

On its Illinois income tax return for the tax year endingJanuary 30, 1990, BWI classified the gain realized from the May1989 sale as nonbusiness income not subject to tax by the Stateand allocated the gain to its corporate domicile of New Jersey. Given BWI's classification of the sale proceeds, Blessing andWhite, both New Jersey residents, did not file Illinois incometax returns for 1990.⁽²⁾

Upon conducting an audit of BWI's 1990 tax filing, theDepartment reclassified BWI's gain as business incomeapportionable to Illinois. The Department thereafter issuednotices of tax deficiency to BWI, Blessing and the Whites⁽³⁾.

Plaintiffs timely protested the Department'sreclassification of BWI's gain. During the administrativeproceedings, the parties stipulated to all material facts andexhibits. In pertinent part, plaintiffs expressly acknowledgedthat if the Department's classification of the sale proceeds asbusiness income was accurate, the proceeds were apportionable toIllinois and had to be reported to the State as taxable income.

The case was heard and considered by an administrative lawjudge (ALJ) in mid-1996. In a written ruling, the ALJrecommended that the Department's classification of BWI's gain beupheld. The Director agreed with the ALJ's assessment and fullyadopted the ALJ's ruling as his decision on February 14, 1996.⁽⁴⁾

Following the Director's ruling, the Department notifiedplaintiffs of their respective income tax arrearages. Accordingto the Department's calculations, BWI owed $31,211, Blessing owed$27,105, and the Whites owed $30,506.

On April 19, 1996, plaintiffs filed a complaint with thecircuit court for review of the Department's decision under theAdministrative Review Law (Review Law) (735 ILCS 5/3-101et seq.). By agreement of the parties, the circuit court allowedthe case to remain idle while our supreme court considered thecase of Texaco-Cities Service Pipeline Co. v. McGaw, 182 Ill. 2d262, 695 N.E.2d 481 (1998). Following resolution of that matter,the circuit court concluded BWI's gain realized from the 1989asset sale constituted nonbusiness income and, hence, was nottaxable in Illinois. Accordingly, the circuit court reversed theDepartment's decision.

The Department's timely appeal followed.

The principle issue here is whether the Department'scharacterization of BWI's gain from the 1989 asset sale as"business income" was accurate. The IITA, derived from theUniform Division of Income for Tax Purposes Act (UDITPA),addresses when income of a non-resident corporation conductingbusiness within Illinois is subject to taxation by the state. Under the statute, foreign corporations are required to pay taxesin proportion to the amount of its income-producing activities. 35 ILCS 5/304(a) (West 2000); Texaco-Cities Service Pipeline Co.v. McGaw, 182 Ill. 2d 262, 268, 695 N.E.2d 481, 484 (1998);Automatic Data Processing, Inc. v. Illinois Dept. of Rev., 313Ill. App. 3d 433, 438, 729 N.E.2d 897, 902 (2000).

Essentially, the IITA establishes two methods by whichcorporate income will be divided among Illinois and the otherjurisdictions in which the taxpayer conducts business. These twomethods are "apportionment" and "allocation," and the particularmethod by which the taxpayer's income will be divided turns uponwhether the income is classified as "business income" ornonbusiness income."

"Business income" is defined as:

"income arising from transactions andactivity in the regular course of thetaxpayer's trade or business ***, andincludes income from tangible and intangibleproperty if the acquisition, management, anddisposition of the property constituteintegral parts of the taxpayer's regulartrade or business operations." 35 ILCS5/1501(a)(1) (West 2000).⁽⁵⁾

Income falling within the purview of the foregoing definition issubject to apportionment in Illinois through use of a three-factor formula that takes into account the corporation'sproperty, payroll and sales. 35 ILCS 5/304(a)(1), (a)(2), (a)(3)(West 2000).

Any income not deemed to be business income is considerednonbusiness income. 35 ILCS 5/1501(a)(13) (West 2000). Fortaxing purposes, nonbusiness income is allocated to a particularstate, generally the state in which the corporation is domiciledor in which the income-producing property is situated. 35 ILCS5/303 (West 2000); Automatic Data, 313 Ill. App. 3d at 438, 729N.E.2d at 902.

Following the approach of other jurisdictions that haveadopted the UDITPA, our supreme court has recognized that section1501(a)(1) of the IITA encompasses two alternative and distinctapproaches for determining whether gain realized from the sale ofa capital asset may be apportioned. The first, or"transactional" test, is reflected by the first clause of thedefinition stating that business income is "income arising fromtransactions and activity in the regular course of the taxpayer'strade or business." Texaco-Cities, 182 Ill. 2d at 268, 695N.E.2d at 484. The second, or "functional" test, is embodied inthe second clause which reads that business income "includesincome from tangible or intangible property if the acquisition,management, and disposition of the property constitute integralparts of the taxpayer's regular trade or business operations." Texaco-Cities, 182 Ill. 2d at 268, 695 N.E.2d at 484.⁽⁶⁾

As explained by the supreme court, the transactional testclassifies income as business income if the gain is "attributableto a type of business transaction in which [the] taxpayerregularly engages." Texaco-Cities, 182 Ill. 2d at 269, 695N.E.2d at 484. Under this approach, the use or function of theasset sold is not determinative. General Care Corp. v. Olsen,705 S.W.2d 642, 645 (Tenn. 1986); Western Natural Gas Co. v.McDonald, 446 P.2d 781, 783 (Kan. 1968). Rather, it is thenature, frequency and regularity of the income-generatingtransaction that define the test. Texaco-Cities, 182 Ill. 2d at269, 695 N.E.2d 484; see also Ross-Araco Corp. v. Commonwealth ofPennsylvania, 674 A.2d 691, 693 (Pa. 1996) ("[t]he transactionaltest measures the particular transaction against the frequencyand regularity of similar transactions in the past practices ofthe business").⁽⁷⁾

As the parties submit, BWI's gain from the asset sale inquestion does not constitute business income under thetransactional approach since asset liquidations accompanied by acessation of business activity, like that undertaken by BWI here,is an extraordinary and uncommon corporate event not typicallyoccurring within a corporation's regular course of operations. See Hoechst Celanese Corp. v. Franchise Tax Bd., 22 P.3d 324, 337(Cal. 2001) ("income arising from 'extraordinary' events such asa 'complete liquidation and cessation of business' cannot satisfythe transactional test"); Ex parte Uniroyal Tire Co., 779 So. 2d227, 236 (Ala. 2000) ("[a] complete liquidation and cessation ofbusiness do not generate business income under the transactiontest *** because, by definition, such events are mostextraordinary; they do not occur in the 'regular course of thetaxpayer's trade or business'").

The functional test, as noted, provides that income isbusiness income where the "acquisition, management, anddisposition of the property constitute integral parts of thetaxpayer's regular trade or business operations." The expresswording of the IITA indicates that the acquisition, managementand disposition of the property at issue must constitute integralparts of the taxpaying corporation's business operations. Underthis construction of the statute, income is apportionable asbusiness income under the functional test only if the income-generating transaction (i.e., the disposition), as well as thetaxpayer's relationship to the property before disposition (i.e.,acquisition and management), are integral to the corporation'sregular operations. See Texaco-Cities, 182 Ill. 2d at 280-81,695 N.E.2d at 490 (Bilandic, J., dissenting).

The majority opinion in Texaco-Cities, yet, embraced adifferent view. At first blush, the court's decision seems toadopt the construction of the statute discussed above. Themajority specifically explained that the functional approachclassifies all gain from the disposition of a capital asset asincome "if the asset disposed of was used by the taxpayer in itsregular trade or business operations." Texaco-Cities, 182 Ill.2d at 268, 695 N.E.2d at 484. In construing the express wordingof the act, the majority determined that "the acquisition,management and disposition of the income-producing property mustclosely relate to the taxpayer's regular trade or whole processof operating its business." (Emphasis added.) Texaco-Cities,182 Ill. 2d at 271, 695 N.E.2d at 485. In this regard, the courtstated "the words 'acquisition, management, and disposition'suggest elements typically associated with the 'keeping' ofcorporate property, or *** the 'conditions of ownership' ofcorporate property." Texaco-Cities, 182 Ill. 2d at 271, 695N.E.2d at 485. Thus, according to the majority, "the sale ofproperty will constitute business income if the property and saleare essential [i.e., integral] to the taxpayer's businessoperations." (Emphasis added.) Texaco-Cities, 182 Ill. 2d at271, 695 N.E.2d at 485.

Further examination of the Texaco-Cities decision, however,reveals the majority believed the paramount inquiry was notwhether the property and disposition were essential but, rather,only whether the property itself was integral to thecorporation's business. In addressing the taxpayer's argumentthat the second clause of the "business income" definitionmandates that the taxpayer "'emphasize the trading of the soldasset as an integral part of its regular business," the majoritystated:

"We think that, had the legislature intendedfor this section to be confined to taxpayerswho routinely trade assets, or to gain fromthe sale of inventory, it could have said so. [The taxpayer's] construction narrowlyfocuses upon the 'regularity' or frequency ofthe transaction that produced the income. Instead, the reach of the second clause ismuch broader, directed toward the use ordisposition of the property as forming anintegral part of the taxpayer's business." (Emphasis added.) Texaco-Cities, 182 Ill. 2dat 271, 695 N.E.2d at 486.

The Texaco-Cities majority seemed to refine the scope of thefunctional test even more when it continued:

"The functional test classifies as businessincome all gain from the disposition of acapital asset if the asset was 'used by thetaxpayer in its regular trade or businessoperations. *** [T]he second clause ofsection 1501(a)(1) focuses upon the role orfunction of the property [disposed of] asbeing integral to regular businessoperations. The use of a capital asset inthe taxpayer's regular trade or businessindisputably renders that asset an integralpart of the taxpayer's regular businessoperations." (Emphasis added.) Texaco-Cities, 182 Ill.2d at 272, 695 N.E.2d 486.

The court further added that "the extraordinary nature orinfrequency of the sale is irrelevant" in applying the functionalapproach. Texaco-Cities, 182 Ill. 2d at 269, 695 N.E.2d at 485.

The court's analysis of the case before it confirms that theuse of the property by the taxpayer is the focal point of thefunctional test. The taxpayer in Texaco-Cities, Texaco-CitiesService Pipeline Company, was in the business of transportingcrude oil and other petroleum products by pipeline. As part ofits business, Texaco-Cities owned and operated pipelines that ranthrough several states, including Illinois. During the 1983 taxyear, Texaco-Cities sold major segments of its pipeline assetsand, specifically, its entire contingent of assets in Illinois. As a result, Texaco-Cities realized a nearly 90% reduction in itstotal pipeline miles and generated a gain of $9,987,176.

Texaco-Cities reported the income from its sale asnonbusiness income on its return for the 1983 tax year. TheIllinois Department of Revenue audited Texaco-Cities' tax returnsand, based thereupon, assessed a tax deficiency against thecompany. The revenue department reclassified the gain as"business income" subject to apportionment under the IITA,finding the sale to have constituted an integral part of Texaco-Cities' business operations. Texaco-Cities' protest to thereclassification proved unsuccessful and the company filed foradministrative review.

In a four-to-three decision, the supreme court, analyzingthe case under the functional approach, held the gain realized byTexaco-Cities represented apportionable income under the IITA:

"According to Texaco-Cities' tax return forthe year in question, its business was'pipeline transportation.' The pipelinessold were among several that Texaco-Citiesemployed to transport petroleum and othersubstances in its regular course of business. There was no dispute that they were usedfor the production of business income." Texaco-Cities, 182 Ill. 2d at 273, 695 N.E.2dat 486.

Certainly, in its application of the functional test, themajority opinion focused solely on the property and particularlywhether Texaco-Cities' pipeline assets were essential to thecompany's operations, i.e., whether the pipelines were "used bythe taxpayer in its regular trade or business operations." Inevaluating the significance of the subject pipeline to thecompany's business activities, the majority noted the pipelineassets had generated income for the company during the course oftheir utilization.⁽⁸⁾ No where in the majority's analysis is itapparent that the court concerned itself with whether the sale ofthe pipelines was also integral to the company's business. SeeTexaco-Cities, 182 Ill. 2d at 280, 695 N.E.2d at 490 (Bilandic,J., dissenting) (noting the majority's holding that "to satisfythe functional test for business income, the property that issold must simply be property that was "'used by the taxpayer inits regular trade or business operations'").

The majority's discussion and application of the functionalapproach in Texaco-Cities indicates the functional test forbusiness income is satisfied where the asset disposed of was usedby the taxpayer as an integral part of its regular trade orbusiness operations. In determining whether the subject assetwas integral, particular attention is given to whether the assetgenerated income for the company during its period ofutilization. The relevant focus is on the property and usethereof by the taxpayer, and the nature of the particulartransaction engaged in is typically of no concern.⁽⁹⁾ We say"typically" because further examination of the Texaco-Citiesopinion reveals that the majority believed application of amodified form of the functional test is appropriate when thedisposition of assets was made pursuant to a corporateliquidation in cessation of business.

After characterizing the pipeline assets sold by Texaco-Cities to be income-producing property while held by the company,the Texaco-Cities majority examined and distinguished thePennsylvania supreme court decision of Laurel Pipe Line Co. v.Commonwealth, 642 A.2d 472 (Pa. 1994), the principal authorityrelied on by Texaco-Cities in arguing for nonapportionment. InLaurel Pipe Line, the court, adopting both the transactional andfunctional tests, considered the issue of whether the proceedsfrom the sale of an independent pipeline held by a companyengaged in the petroleum product transportation businessconstituted business or nonbusiness income under statutoryapportionment provisions nearly identical to those contained inthe IITA. As part of its business activities, the taxpayingcorporation operated several pipelines, including a pipeline thatextended from Aliquippa, Pennsylvania to Cleveland, Ohio.

After discontinuing operation of the Aliquippa-Clevelandpipeline in 1983, the taxpayer sold the pipeline, along withrelated assets, in late 1986 for a gain of $3,766,047. Shortlythereafter, the proceeds from the sale were distributed to thecompany's stockholders. No amount of the sale proceeds wasreinvested back into the company's ongoing business activities.

The issue before the Laurel Pipe Line court was whether thePennsylvania department of revenue's classification of thetaxpayer's gain represented apportionable business income for taxpurposes. Considering the issue strictly within the parametersof the functional test, the court held the gain realized on thepipeline's sale was nonbusiness income. Laurel Pipe Line, 642A.2d at 477. While initially explaining that the functional testwill be satisfied "if the gain arises from the sale of an assetwhich produced business income while it was owned by thetaxpayer," the court nevertheless found the nature of thetransaction engaged in by the taxpayer significant, explainingthe "statutory definition of business income requires that 'theacquisition, management, and disposition of the propertyconstitute integral parts of the taxpayer's regular trade orbusiness operations.'" (Emphasis in original.) Laurel PipeLine, 642 N.E.2d at 475. In this regard, the court commented:

"The Aliquippa-Cleveland pipeline hadbeen idle for over three years prior to thetime that it was sold. In our view, thepipeline was not disposed of as an integralpart of *** [the taxpayer's] regular trade orbusiness. Rather, the effect of the sale wasthat the company liquidated a portion of itsassets. This is evidenced by the fact thatthe proceeds of the sale were not reinvestedback into the operations of the business, butwere distributed entirely to the stockholdersof the corporation. Although *** [thetaxpayer] continued to operate a second,independent pipeline, the sale of theAliquippa-Cleveland pipeline constituted aliquidation of a separate and distinct aspectof its business." Laurel Pipe Line, 642 A.2dat 475.

To the Laurel Pipe Line court, the disposition of the property,in addition to the property itself, had to be integral to thetaxpayer's regular operations for the gain generated by thedisposition to qualify as business income under the functionaltest. Since the sale of the Aliquippa-Cleveland pipeline was notessential to the taxpayer's business, the gain was deemed nottaxable.

In finding Laurel Pipe Line distinguishable, the majority inTexaco-Cities cited the effects the subject transactions had oneach of the taxpayer's respective business as well as thetaxpayers' respective use of the proceeds generated by the sales. The majority explained the sale consummated by Texaco-Cities,unlike the transaction involved in Laurel Pipe Line, did notrepresent a liquidation and cessation of Texaco-Cities businessoperations or a distinct and separate portion thereof. Texaco-Cities, 182 Ill. 2d at 273-74, 695 N.E.2d at 487. Rather, themajority stressed, Texaco-Cities, following the sale, "remainedprimarily in the business of providing transportation bypipeline, and that the sales proceeds were invested right backinto the business rather than being disseminated to itsshareholders."  Texaco-Cities, 182 Ill. 2d at 273, 695 N.E.2d at486-87.

The supreme court's treatment of the Laurel Pipe Linedecision is significant and suggests the functional test assumesa different application in cases where the taxpayer's dispositionof assets amounts to a corporate liquidation in cessation ofbusiness. Notably, the Laurel Pipe Line court applied afunctional test that considered the importance of both theproperty and transaction to the taxpaying corporation. Yet, theTexaco-Cities majority did not distinguish Laurel Pipe Line onthat basis but, rather, cited the discontinuation of thetaxpayer's business and the distribution, as opposed toreinvestment, of the sale proceeds. Neither did the majoritycite the extraordinary nature of the transaction engaged in byLaurel Pipe Line taxpayer. Certainly, the court's handling ofLaurel Pipe Line raises the question of whether the majoritywould have reached a different conclusion had Texaco-Citiesceased its pipeline activities, either in whole or part, anddistributed the sale proceeds to its stockholders. Texaco-Cities, in our view, tacitly recognizes the distinctive nature ofcorporate liquidations resulting in a discontinuation of businessactivity and suggests that the functional test will be met insuch cases only where the property and the liquidation of assets(i.e. disposition) are essential to the taxpayer's regular tradeor operations.⁽¹⁰⁾

Turning to the merits of the Department's appeal, we firstdiscuss the applicable standard of review. Under theAdministrative Review Law (735 ILCS 5/301 et seq. (West 2000)),we review the final decision of the administrative agency and notthe decision of the circuit court. Hercules, Inc. v. Departmentof Rev., 324 Ill. App. 3d 329, 335, 753 N.E.2d 418, 424 (2001). We consider all questions of law and fact presented by the record(735 ILCS 5/3-110 (West 2000)), and the standard of reviewapplied by this court turns on the proper characterization ofquestion presented. City of Belvidere v. Illinois State LaborRelations Bd., 181 Ill. 2d 191, 204, 692 N.E.2d 295, 302 (1998).

Deference is afforded the agency's findings of fact and theywill not be disturbed unless against the manifest weight of theevidence. City of Belvidere, 181 Ill. 2d at 205, 692 N.E.2d at302. Agency determinations involving mixed questions of fact andlaw are also provided a degree of deference and are reviewedpursuant to a clearly erroneous standard. City of Belvidere, 181Ill. 2d at 205, 692 N.E.2d at 302. Determinations of law,conversely, are not afforded deference and are reviewed on ade novo basis. City of Belvidere, 181 Ill. 2d at 205, 692 N.E.2dat 302.

The parties here disagree as to the proper characterizationof the Department's decision. The Department characterizes itsruling as a mixed question of fact and law and, therefore, urgesfor review under the clearly erroneous standard. Plaintiffs, onthe other hand, assert the absence of any factual dispute as aresult of the parties' stipulation required the Department todetermine only a question of law. Plaintiffs, therefore,advocate use of a de novo standard of review.

In City of Belvidere, the supreme court applied the clearlyerroneous standard in reviewing the ruling of the Illinois StateLabor Relations Board (ISLRB) that found the City of Belvidereguilty of an unfair labor practice under the Illinois PublicRelations Act when it refused to bargain with a firefightersunion concerning its decision to contract out paramedic servicesto a private company. Characterizing the ISLRB's ruling as amixed question of fact and law, the court explained the board'sdetermination was, in part, factual because it involved aconsideration of whether the facts supported a finding that thecity's decision "affected wages, hours and other conditions ofemployment (City of Belvidere, 181 Ill. 2d at 205, 692 N.E.2d at302), a primary consideration in determining an employer's dutyto bargain under the labor act. While the evidence in thisrespect was undisputed, the ISLRB was nonetheless required tomake certain factual findings. In particular, the board had toexamine the evidence and ascertain: whether the city had anestablished operating procedure and, if so, whether the city'sdecision constituted a departure from that practice; theconditions of the firefighters' employment and how they wereaffected by the city's decision (i.e., whether the firefighterswere deprived of potential work or promotional opportunities);and whether the firefighters, by the nature of their position,had a reasonable expectation to provide paramedic services to thecity's residents. City of Belvidere, 181 Ill. 2d at 201, 692N.E.2d at 300.

The supreme court further explained the ISLRB's decisionalso involved a question of law because the statutory phrase"wages, hours and other conditions of employment" is a legal termthat required interpretation. City of Belvidere, 181 Ill. 2d at205, 692 N.E.2d at 302. Stating a mixed question of fact and lawwas presented by the agency's decision "because *** [the] caseinvolve[d] an examination of the legal effect of a given set offacts," the court reviewed the agency's determination for clearerror. City of Belvidere, 181 Ill. 2d at 205, 692 N.E.2d at 302.

The Department contends that the instant case, like the casein City of Belvidere, concerns the legal effect of a given set offacts and, thus, represents a mixed question to be reviewed underthe clearly erroneous standard. We disagree. While the factsbefore the Department, like the facts before the ISLRB, were notin dispute, the Department was not required, like the laborboard, to draw any additional factual findings from the evidence. The only issue before the Department was whether BWI's gain fromthe 1989 asset sale constitutes business income under thefunctional test. Not only did the parties stipulate that thedisposed assets produced income for BWI and, thus, were essentialto the company's business, the parties further stipulated thatBWI ceased its activities in Illinois and distributed the saleproceeds to the company's shareholders shortly after thetransaction. Under these circumstances, the Department'sdecision represents a legal determination subject to de novoreview. See Taylor v. Cook County Sheriff's Merit Bd., 316 Ill.App. 3d 574, 579, 736 N.E.2d 673, 677 (2000) ("[t]he legal effectof undisputed facts is a question of law, and the appellate courtconsiders the propriety of the determination de novo").⁽¹¹⁾

While the record demonstrates that the assets disposed ofwere essential to BWI's regular operations, it wholly fails toshow that the disposition of those assets was equally importantto the company. The disposition amounted to a liquidation ofBWI's business property, reflecting an extraordinary, one-timecorporate event and marking the cessation of the company'sbusiness activities including those conducted in Illinois. Significantly, the liquidation proceeds were not used to supportany ongoing business concerns but, instead, disbursed in theirentirety to the company's shareholders. Since the liquidation ofBWI's assets was not integral to the company's regular businessoperations, BWI's gain does not qualify as business income underthe functional approach. See Lenox, 548 S.E.2d at 519-20(finding gain realized by taxpayer's liquidation of separate anddistinct portion of business operations did not constitutebusiness income under functional approach where the liquidationresulted in taxpayer's complete departure from the fine jewelrybusiness and where the sale proceeds were distributed to thetaxpayer's sole shareholder and not used to support any ongoingbusiness activities); Kemppel, 746 N.E.2d at 1076 (findingtaxpayer's gain not business income under functional test wheregain resulted from liquidation of assets followed by adissolution of the corporation); cf. Texaco-Cities, 182 Ill. 2dat 273, 695 N.E.2d at 486-87. BWI's gain is therefore bestclassified as nonbusiness income under the IITA and, as such, isnot taxable in Illinois.

For the foregoing reasons, the order of the circuit courtreversing the Department's decision is affirmed. Because of ourholding, we need not address the constitutional arguments againstapportionment raised by the amici.

Affirmed.

HALL, P.J., and WOLFSON, J., concur.

1. Glen Bower has replaced Zehnder as the Department'sdirector.

2. Because BWI operated as a subchapter S corporationpursuant to the Internal Revenue Code, BWI's earnings wereattributable for certain tax purposes to its shareholdersBlessing and White.

3. ³ Stroller's wife, Linda, is party to the instant case byreason of filing a joint federal income tax return with herhusband for the tax period in question.

4. ⁴ According to the record, BWI's gain from the 1989 assetsale encompassed both capital gains and interest income. Duringthe administrative proceedings, the Department conceded itsclassification of BWI's interest income as taxable income was notsupported by the evidence.

5. ⁵ This definition is virtually identical to thedefinition contained in section 1(e) of the UDITPA. Texaco-Cities, 182 Ill. 2d at 268, 695 N.E.2d at 484.

6. A small number of jurisdictions with tax statutessubstantially similar to the apportionment/allocation provisionsof the UDITPA and IITA have construed the definition of "businessincome" to embody the transactional test only. See HoeschstCelanese Corp. v. Franchise Tax Bd., 22 P.3d 324, 334 n.6 (Cal.2001) (citing jurisdictions).

7. Some courts also consider the corporate taxpayer'ssubsequent use of the income, i.e., whether the income isreinvested into the continuing business operations of the companyor whether the funds are distributed to the company'sshareholders. See Kemppel v. Zaino, 746 N.E.2d 1073, 1076 (Ohio2001); The May Department Stores Co. v. Indiana Dept. of StateRev., 749 N.E.2d 651, 658 (Ind. Tax Ct. 2001); Polaroid Corp. v.Offerman, 507 S.E.2d 284, 289 (N.C. 1998).

8. Other courts applying the functional test have statedthat the asset's production of income while it was owned by thetaxpayer is a central consideration in determining whether thefunctional approach has been met. See Kemppel, 746 N.E.2d at1076; Ross-Araco, 674 A.2d at 693

9. Other courts have expressed substantially similardescriptions of the functional test. See Kemppel, 746 N.E.2d at1076 (income is classified as business income under thefunctional test if "use of the property constituted an integralpart of the regular course of a trade or business operation");Hoechst, 22 P.3d at 340 (the functional approach focuses on theincome-producing property and classifies gain as business income"if the taxpayer's acquisition, control and use of the propertycontribute materially to the taxpayer's production of businessincome"); Ross-Araco, 674 A.2d at 693 ("income is business incomeif the gain arises from the sale of an asset that producedbusiness income while it was owned by the taxpayer"); District ofColumbia v. Pierce Associates, Inc., 462 A.2d 1129, 1131 (D.C.App. Ct. 1983) ("[i]f the property had an integral function inthe taxpayer's unitary business, its income properly can beapportioned and taxed as business income, even though thetransaction itself does not reflect the taxpayer's normal tradeor business"). Other courts, construing the plain language oftheir respective income tax statutes, focus not only on theproperty as being essential to the taxpayer's businessoperations, but the disposition of that property as well. SeeMay, 749 N.E.2d at 664; Willamette Industries, Inc. &Subsidiaries v. Department of Rev., 15 P.3d 18, 21 (Or. 2000).

10. The high courts of North Carolina and Ohio also apply amodified functional approach in cases involving liquidations. See Lenox, Inc. v. Tolson, 548 S.E.2d 513, 519-20 (N.C. 2001)("when an asset is sold pursuant to a complete or partialliquidation, the court must focus on more than the question ofwhether the asset was integral to the corporation's business");Kemppel, 746 N.E.2d at 1076-77. The North Carolina supreme courthas expressly placed liquidations in a category by themselvessince they are "not in furtherance of the unitary business, butrather a means of cessation." Polaroid, 507 S.E.2d at 296 n.6.

11. We do not believe City of Belvidere holds, as suggestedby the Department, that a mixed question of fact and law isalways presented whenever a case involves "an examination of thelegal effect of a given set of facts." In essence, every caseinvolves such an examination. The supreme court's statements inCity of Belvidere must be read in its proper context and with theunderstanding that while the facts before the agency there werenot in dispute, the agency was nevertheless required to drawfurther findings from the evidence.