Summary
The Supreme Court of Illinois held that shareholders of a subchapter S corporation could not claim Illinois research and development tax credits for expenses incurred by the corporation under the pre-1999 version of section 201(k) of the Illinois Income Tax Act. The court further held that the 1999 amendment creating a pass-through credit for S corporation shareholders could not be applied retroactively to the taxpayers' 1993–1995 expenditures. The court rejected the taxpayers' uniformity-clause challenge, reversed the lower-court judgments, and remanded with directions to enter summary judgment for the State.
Topics
Practice areas
Questions Presented
- Whether the pre-1999 version of section 201(k) of the Illinois Income Tax Act permitted S corporation shareholders to claim a personal Illinois research and development tax credit for expenses incurred by the S corporation.
- Whether the 1999 amendment to section 201(k), which added a pass-through credit for S corporation shareholders, applied retroactively to the taxpayers' 1993, 1994, and 1995 expenses.
- Whether the pre-1999 version of section 201(k) violated the uniformity clause of article IX, section 2, of the Illinois Constitution.
- Whether the State preserved its arguments concerning the pre-1999 statute for appellate review.
Holdings
- The State preserved its arguments that the taxpayers were ineligible under the pre-1999 statute and that the statute did not violate the uniformity clause; the appellate court's decision to affirm on another ground did not create a procedural default.
- The pre-1999 version of section 201(k) did not permit S corporation shareholders to claim a personal Illinois research and development tax credit for qualifying expenses incurred by the S corporation.
- The 1999 amendment to section 201(k) could not be applied retroactively to the taxpayers' 1993, 1994, and 1995 expenses because it made a substantive change by creating a pass-through credit that previously did not exist.
- The pre-1999 version of section 201(k) did not violate the uniformity clause of article IX, section 2, of the Illinois Constitution.
Key quotations
“What plaintiffs could not do, however, is claim a credit against their personal income tax liability for qualifying expenses incurred by a third party, even if that third party was an S corporation of which plaintiffs are shareholders.” (at 90)
“Thus, for purposes of Landgraf's first step, the legislature always will have clearly indicated the temporal reach of an amended statute, either expressly in the new legislative enactment or by default in section 4 of the Statute on Statutes.” (at 95)
“Prior to the 1999 amendment, section 201(k) granted all taxpayers subject to the income tax a credit for qualifying research and development expenditures incurred by the taxpayer. Such a credit is perfectly uniform.” (at 98)
Factual background
Jack and Margaret Caveney were shareholders in Panduit Corporation, an S corporation that incurred research and development expenses in Illinois during tax years 1993, 1994, and 1995. The Caveneys claimed Illinois income-tax credits for those expenses, but the State disallowed the credits and assessed back taxes and interest totaling $1,091,131.60, which the Caveneys paid under protest. They sued for recovery, arguing that the pre-1999 version of section 201(k) allowed the credit, that the 1999 amendment applied retroactively, or that the pre-1999 statute violated the Illinois Constitution's uniformity clause.
Procedural history
The Du Page County circuit court entered summary judgment for the taxpayers, holding that they qualified for the research and development credit and that the pre-1999 statute did not violate the Illinois Constitution's uniformity clause. The appellate court affirmed solely on the theory that the 1999 amendment applied retroactively. The Supreme Court issued a supervisory order vacating and remanding for reconsideration in light of Commonwealth Edison Co. v. Will County Collector. On remand, the appellate court again affirmed, and the Supreme Court granted review, reversed both lower-court judgments, and remanded with directions to enter summary judgment for the State.
Remand instructions
The cause was remanded to the circuit court with directions to enter summary judgment for the State.