Borden Chemicals and Plastics, L.P., v. Zehnder, No. 1-98-4456

1st District, 14 February 2000

FIRST DIVISION

JUSTICE GALLAGHER delivered the opinion of the court:

This is an action for administrative review of a final decision of Ken Zehnder, the Director of the Department of Revenue of the State of Illinois (the Department). The circuit court entered judgment in favor of the Department and against plaintiff, Borden Chemicals & Plastics, L.P. Plaintiff now appeals.

The issues presented are: (1) whether plaintiff is subject to the replacement tax under the Income Tax Act (replacement tax)(35 ILCS 5/201(c)(West 1996)) and (2) if so, whether plaintiff is entitled to a replacement tax Investment credit (investment credit), as provided by section 201(e) (35 ILCS 5/201(e) (West 1996)), which was generated by certain qualified property owned by the Illinois partnership, of which plaintiff is a limited partner.

The replacement tax, which went into effect in 1979, was a tax imposed on the privilege of earning or receiving income as a resident of Illinois or from Illinois sources. The relevant language provides as follows:

"Beginning on July 1, 1979 and thereafter, in addition to such income tax, there is also hereby imposed the Personal Property Tax Replacement Income Tax measured by net income on every corporation (including Subchapter S corporations), partnership and trust, for each taxable year ending after June 30, 1979. Such taxes are imposed on the privilege of earning or receiving income in or as a resident of this State. The Personal Property Tax Replacement Income Tax shall be in addition to the income tax imposed by subsections (a) and (b) of this Section *** " 35 ILCS 5/201(c)(West 1996).

The replacement tax was adopted to "replace" the revenues lost as a result of the abolition of the personal property tax by the Illinois Constitution of 1970.

Taxpayers who incur replacement tax liability are also entitled to what is known as an investment credit, under certain circumstances. The relevant provision, during the relevant tax years, stated as follows:

"Investment credit. A taxpayer shall be allowed a credit against the Personal Property Tax Replacement Income Tax for investment in qualified property." 35 ILCS 5/201(e) (West 1996).

The statute further defines the term "qualified property." The definition of "qualified property" states as follows:

"(2) The term "qualified property" means property which:

(A) is tangible, whether new or used, including buildings and structural components of buildings and signs that are real property, but not including land or improvements to real property that are not a structural component of a building such as landscaping, sewer lines, local access roads, fencing, parking lots, and other appurtenances;

(B) is depreciable pursuant to Section 167 of the Internal Revenue Code, except that '3-year property' as defined in Section 168(c)(2)(A) of that Code is not eligible for the credit provided by this subsection (e);

(C) is acquired by purchase as defined in Section 179(d) of the Internal Revenue Code;

(D) is used in Illinois by a taxpayer who is primarily engaged in manufacturing, or in mining coal or fluorite, or in retailing; and

(E) has not previously been used in Illinois in such a manner and by such a person as would qualify for the credit provided by this subsection (e) or subsection (f)." 35 ILCS 5/201(e)(2)(1996).

Plaintiff is a Delaware limited partnership. Plaintiff and Borden Chemicals & Plastics Management, Inc., are the two sole partners of Borden Chemicals & Plastics Operating, L.P. (Operating Partnership), a limited partnership that operates in Illinois. The plaintiff, a limited partner, owns a 98.99% interest in the Operating Partnership; Borden Chemicals & Plastics Management, Inc., is the general partner and owns a 1.01% interest. During the years in issue, 1988 and 1989, the Operating Partnership purchased certain assets that it placed in service in Illinois. This "qualified property" gave rise to replacement tax investment credits of $11,913 and $53,369, respectively, for the years in issue. Nevertheless, the Operating Partnership was not entitled to an investment credit for this qualifying property because it had no replacement tax liability. The Operating Partnership did not have any replacement tax liability for the years 1988 and 1989, because, after subtracting the amount of income that was distributable to the partners, including plaintiff, the Operating Partnership's taxable income was zero. Plaintiff, as a result of the distributable income it received from the Operating Partnership, was subject to the Illinois personal property tax replacement income tax (replacement tax). Plaintiff claimed that, under these circumstances, it was entitled to use the Operating Partnership's replacement tax investment credit. The Department rejected this claim because the assets that generated the investment credit were owned by the Operating Partnership, not the plaintiff, which owned no assets in Illinois.

Plaintiff appeals and raises two separate arguments in a case of first impression in Illinois. Plaintiff contends that it is entitled to an investment credit against its replacement tax liability. Plaintiff, however, has also raised a constitutional argument, contending that the due process clause (U.S. Const., amend. XIV,