Texaco-Cities Service Pipeline Co. v. McGaw

JUSTICE BILANDIC, dissenting:

I respectfully dissent. The relevant facts are undisputed. Texaco-Cities was a company principally engaged in the business of transporting petroleum products by pipeline. During the 1983 tax year, Texaco-Cities sold major segments of its pipeline assets and associated real estate. The pipelines sold had serviced only two refineries and those refineries had ceased operations. As a result of the sale, Texaco-Cities retained no pipelines in Illinois and reduced its total pipeline miles by nearly 90%. Also as a result of the sale, Texaco-Cities ceased its business of transporting petroleum products by pipeline in Illinois. These facts clearly demonstrate that this sale was an extraordinary event for Texaco-Cities, essentially closing down its business in a specific geographic region. Under the plain language of section 1501, the gain from this extraordinary sale constitutes nonbusiness income. Even accepting the majority’s conclusion that section 1501(a)(1) encompasses two, alternate tests for “business income,” the gain in this case does not constitute business income.

The Department concedes that the gain from the sale of the pipeline does not qualify as business income under the first alternate test, the “transactional test.” Rather, the Department contends that the gain qualifies as business income under the “functional test” derived from the second clause of section 1501(a)(1). That clause provides that business income includes “income from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer’s regular trade or business operations.” (Emphasis added.) 35 ILCS 571501(a)(1) (West 1994). The majority disregards the plain language of this clause to reach the conclusion that the gain from the sale in this case constitutes business income.

The majority holds that, to satisfy the functional test for business income, the property that is sold must simply be property that was “ ‘used by the taxpayer in its regular trade or business operations.’ ” 182 Ill. 2d at 269, quoting National Realty & Investment Co. v. Department of Revenue, 144 Ill. App. 3d 541, 554 (1986). That is not, however, what section 1501(a)(1) says. The second clause of section 1501(a)(1) plainly requires that the “acquisition, management, and disposition” of the property constitute “integral parts” of the taxpayer’s “regular” business, not simply that the property was “used” in the taxpayer’s regular business. (Emphasis added.) 35 ILCS 571501(a)(1) (West 1994). Thus, it is not the use of the property in the business which is the determining factor under the statute. Rather, the statute requires that the disposition which gives rise to the income constitute an integral part of the taxpayer’s regular business operations. If the legislature had intended to include as business income all gain from the sale of any property “used” by the taxpayer in the regular course of its business, it could have easily written the statute to say so. The legislature chose not to use such language. The majority’s holding in this case does not interpret the statutory language, it rewrites it. As noted by one commentator, in criticizing the interpretation of the UDITPA definition here adopted by the majority:

“The words ‘integral,’ ‘regular,’ and ‘operations’ must be taken into account in analyzing the existence of business income. Merely examining whether an asset produced business income while owned by the taxpayer effectively ignores this very important part of the statute.

*** [E]ven under the so-called functional test, the actual disposition transaction must be an integral part of the taxpayer’s regular trade-or-business operations. The statute specifically requires that the ‘acquisition, management, and disposition of the asset’ must be an integral part of the taxpayer’s regular trade-or-business operations.” (Emphasis in original.) D. Lisonbee, State of the Law of Nonbusiness Gain, 7 J. St. Tax. 333, 335-36 (1989).

A number of decisions from other jurisdictions have interpreted and applied the UDITPA definition of business income in accord with its plain language. The Supreme Court of Pennsylvania reached this conclusion on remarkably similar facts in Laurel Pipe Line Co. v. Commonwealth of Pennsylvania, 537 Pa. 205 , 642 A.2d 472 (1994). In that case, Laurel Pipe Line Company (Laurel) was in the business of transporting petroleum products by pipeline. Laurel operated a pipeline from Philadelphia to Pittsburgh and another pipeline from Pennsylvania to Ohio (the Ohio pipeline). As a result of shifting distribution patterns, Laurel discontinued operation of the Ohio pipeline and later sold the pipeline along with related assets. Laurel classified the $3,766,047 gain from the sale of the Ohio pipeline as nonbusiness income.

The Pennsylvania Supreme Court, applying the UDITPA definition of business income, agreed that Laurel’s gain from the sale was nonbusiness income. The court noted that the statutory definition encompassed two tests, the transactional test and the functional test. After concluding that the gain did not qualify as business income under the transactional test, the court considered whether the gain should be classified as business income under the functional test. The court emphasized that the statutory definition required that the “ ‘acquisition, management and disposition of the property constitute integral parts of the taxpayer’s regular trade or business operations.’ ” (Emphasis in original.) Laurel Pipe Line, 537 Pa. at 211 , 642 A.2d at 475 , quoting 72 Pa. Stat. § 7401(3)(2)(a)(l)(A). The court held that, under this definition, the gain from the sale was not business income, reasoning that:

“[T]he pipeline was not disposed of as an integral part of Laurel’s regular trade or business. Rather, the effect of the sale was that the company liquidated a portion of its assets. This is evidenced by the fact that the proceeds of the sale were not reinvested back into the operations of the business, but were distributed entirely to the stockholders of the corporation. Although Laurel continued to operate a second, independent pipeline, the sale of the [Ohio] pipeline constituted a liquidation of a separate and distinct aspect of its business.” Laurel Pipe Line, 537 Pa. at 211 , 642 A.2d at 475 .

The court went on to conclude that the sale of the pipeline could be characterized as a “partial liquidation which has changed the structure of the taxpayer’s business.” Laurel Pipe Line, 537 Pa. at 214 , 642 A.2d at 477 . Based on this reasoning, the Pennsylvania Supreme Court held that the gain from the sale was nonbusiness income, reversing the lower court’s decision to the contrary. Notably, in the administrative proceedings in the case at bar, the Department relied heavily on the lower court’s decision in Laurel Pipe Line, arguing that the case was “perhaps directly on point.” Likewise, the decision of the administrative law judge in this case relied on the lower court’s decision in Laurel Pipe Line, concluding that it presented the “identical situation.”

Similar facts were also presented in McVean & Barlow v. New Mexico Bureau of Revenue, 88 N.M. 521 , 543 P.2d 489 (1975), a decision relied upon in Laurel Pipe Line. In McVean, the taxpayer was in the business of laying pipelines of two varieties, small diameter and large diameter. As part of a corporate reorganization, the taxpayer liquidated its large diameter pipeline business. The New Mexico Court of Appeals, again applying the UDITPA definition of business income, held that this gain was properly classified as nonbusiness income. In so holding, the court noted that the facts indicated that this transaction was “very unusual” for the taxpayer and “changed the geographical environment of where [the taxpayer’s] business could operate.” The court further noted that the taxpayer was not in the business of buying and selling pipeline equipment. The court found that the transaction at issue was a partial liquidation of the taxpayer’s business and a total liquidation of the taxpayer’s large diameter pipeline business. Accordingly, the sale did not constitute an integral part of the regular trade or business operations of the taxpayer and the gain derived therefrom was not business income. McVean, 88 N.M. at 524 , 543 P.2d at 492 .

Similarly, in Phillips Petroleum Co. v. Iowa Department of Revenue & Finance, 511 N.W.2d 608 (Iowa 1994), the Supreme Court of Iowa held that a petroleum corporation’s sale of approximately $2 billion in oil and gas reserves and related assets did not produce business income under the UDITPA definition. The sale was accomplished as part of a plan of capital restructuring to avoid a hostile takeover. The court began its analysis by noting that a number of jurisdictions had determined that the statutory language encompassed two alternate tests. Without deciding whether the statute encompassed the functional test in addition to the transactional test, the court determined that the income from the sale would not constitute business income under either test. In addressing the functional test, the Phillips Petroleum court reasoned that this test was intended to encompass income derived from the disposal of fixed assets by taxpayers who emphasize the trading of assets as an integral part of regular business. Accordingly, because the taxpayer owned the disposed assets for purposes of petroleum production, not for trading purposes, the gain from the sale of those assets was not business income. Phillips Petroleum, 511 N.W.2d at 610 ; see also General Care Corp. v. Olsen, 705 S.W.2d 642, 646 (Tenn. 1986) (“the drafters’ use of the conjunction ‘and’ clearly indicates that the disposition, as well as the acquisition and management of property must be an integral part of the taxpayer’s regular trade or business operations”); Western Natural Gas Co. v. McDonald, 202 Kan. 98 , 446 P.2d 781 (1968) (gains from oil company’s sale of oil and gas leases were not business income because the disposition giving rise to the income did not constitute an integral part of the company’s regular trade or business operations).

The majority cites to no decision which finds a gain to constitute business income under factual circumstances similar to the case at bar. The two decisions primarily relied upon by the majority, Ross-Araco Corp. v. Commonwealth, Board of Finance & Revenue, 544 Pa. 74 , 674 A.2d 691 (1996), and District of Columbia v. Pierce Associates, Inc., 462 A.2d 1129 (D.C. 1983), are both factually distinguishable. In Ross-Araco, the court held that the gain from the taxpayer’s sale of a tract of land was not business income under either the transactional or the functional test. Ross-Araco, 544 Pa. at 85 , 674 A.2d at 696-97 . In so holding, the court cited with approval its prior decision in Laurel Pipe Line. In Pierce Associates, the court held that insurance proceeds the taxpayer received for flood damage to its manufacturing facility could constitute business income if they represented a gain to the taxpayer. It is true, as the majority asserts, that both decisions stated that the functional test for business income may be satisfied merely by showing that the property was used as an integral part of the taxpayer’s business. In reaching this interpretation, however, those decisions, like the majority in this case, contradict the plain language of the statute. As explained by the Tennessee Supreme Court in rejecting this interpretation of the statute:

“[This interpretation] disregards the statute’s clear grammatical structure by attempting to make the word ‘property’ the subject of the clause upon which [the functional test is based]. The literal terms of the statute cannot be read to make the integral role of an asset in the taxpayer’s business the controlling factor by which business earnings are identified without doing violence to the elementary rules of grammar.” General Care, 705 S.W.2d at 648 .

The majority also finds support for its conclusion in the comments to the UDITPA. 182 Ill. 2d at 270-72. Such interpretive aids cannot, however, be employed to reach an interpretation that is contrary to the plain language of the statute. Where the intent of the legislature may be ascertained from the plain language of a statutory provision, that language must be given effect without resort to other aids for construction. See DiFoggio v. Retirement Board of the County Employees Annuity & Benefit Fund, 156 Ill. 2d 377, 382 (1993). The plain language of section 1501(a)(1) classifies gain from the sale of property as business income only if the acquisition, management and disposition of the property were integral parts of the taxpayer’s regular business operations. There is no rule of construction which allows a court to declare that the legislature did not mean what the plain language of the statute imports. DiFoggio, 156 Ill. 2d at 382-83 . The majority’s attempt to ascribe a meaning to section 1501(a)(1) that contradicts the plain language of the statute is improper.

Accorded its proper construction, section 1501(a)(1) would not encompass the gain from the sale at issue in this case. Undeniably, the sale of nearly 90% of Texaco-Cities’ pipeline assets, entailing the complete cessation of its pipeline transportation business in Illinois, was not an “integral part” of Texaco-Cities’ “regular trade or business operations.” Texaco-Cities was in the business of transporting petroleum products, not the business of disposing of 90% of its pipelines. The facts reveal that this sale was an extraordinary event, similar to the partial liquidations identified in Laurel Pipe Line and McVean. Accordingly, under the plain language of section 1501, the gain from that sale is nonbusiness income and must be allocated and taxed as such.

I therefore dissent from the majority’s holding that the gain from Texaco-Cities’ sale of the pipeline assets constitutes business income.

JUSTICES McMORROW and NICKELS join in this dissent.