HORWOOD MARCUS & BERK CHARTERED
TAXPAYER VICTORY IN REFUND
CASE INVOLVING ILLINOIS
AMNESTY PROGRAM
January 17, 2012
If you have any questions regarding
this memorandum, or any other state
or local tax matter, please contact any
of Horwood Marcus & Berk’s state and
local tax professionals:
Fred O. Marcus
(312) 606-3210
fmarcus@saltlawyers.com
Marilyn A. Wethekam
(312) 606-3240
mwethekam@saltlawyers.com
Jordan M. Goodman
(312) 606-3225
jgoodman@saltlawyers.com
David A. Hughes
(312) 606-3212
dhughes@saltlawyers.com
David S. Ruskin
(312) 606-3235
druskin@saltlawyers.com
Jennifer A. Zimmerman
(312) 606-3247
jzimmerman@saltlawyers.com
Breen M. Schiller
(312) 606-3220
bschiller@saltlawyers.com
Christopher T. Lutz
(312) 606-3222
clutz@saltlawyers.com
David A. Fruchtman
(312)281-1111
dfruchtman@hmblaw.com
This morning, the Illinois Appellate Court, 1st District, issued a
decision in favor of the taxpayer in Con-Way Transportation
Services, Inc. v. Hamer, Docket No. 1-11-3410, 2013 Ill. App. (1st)
113410-U. The Court held that Con-Way Transportation Services,
Inc. (“Taxpayer”), who was undergoing a federal audit at the time
of an Illinois amnesty program, is entitled to a refund of tax paid
under amnesty for the 1997 tax year because the return requesting
such refund was timely filed pursuant to the applicable statute of
limitations set forth in Section 911(b) of the Illinois Income Tax Act
(“Act”). Fred Marcus and Jennifer Zimmerman of Horwood
Marcus & Berk represented the Taxpayer in this case.
In 2003, Illinois enacted the Amnesty Act which provided amnesty
to taxpayers who paid all taxes due for any taxable period after June
30, 1983 and prior to July 1, 2002. To participate in the amnesty
program, taxpayers had to make their full payment of all taxes due
during the amnesty period of October 1, 2003 through November
17, 2003 (“amnesty period”). If an eligible taxpayer did not
participate in amnesty, the statute provides for a double interest
penalty, i.e. interest imposed at 200% the statutory rate.
Pursuant to the Amnesty Act, the Illinois Department of Revenue
(“Department”) enacted Emergency Rules which provided that a
taxpayer who is under federal audit may participate in amnesty by
making a good faith estimate of any increased liability that may be
owed. In addition, the Emergency Rules stated that although
participants in the amnesty program may not seek or claim refunds,
a limited exception to this rule is permitted for taxpayers whose
refund claims are based upon final determinations by the Internal
Revenue Service (“IRS”).
During the amnesty period, the Taxpayer was in the midst of a
federal audit for the 1997 tax year. Pursuant to the Department’s
Emergency Rules, Taxpayer participated in amnesty using the only
mechanism provided: filing a first amended return on which it made
a good faith estimate of the additional Illinois tax due based on the
federal changes it anticipated. Specifically, the taxpayer reported an
increase of approximately $40,000,000 in taxable income,
increasing its tax liability by approximately $100,000.
Horwood Marcus & Berk Chartered
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Chicago, IL 60661
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Taxpayer received a final determination of its federal changes in
August 2004, nine months after the expiration of the amnesty
period. The changes reflected taxable income of $10 million less
than the Taxpayer’s good faith estimate on its first return. In
November 2004, more than one year after the good faith estimate
was paid, Taxpayer timely reported the federal changes to the
Department pursuant to Act Section 506(b) of the Act by filing a
second amended return, and requested a refund of approximately
$43,000.
The Department took the position that the return was not timely
filed within the limitation period in Section 911(a), which requires
filing within 3 years of the due date of the original return or 1 year
within payment. Taxpayers contended, however, that the federal
changes entitled them to the longer limitations period under Act
Section 911(b), thus making the return timely. An Administrative
Law Judge (“ALJ”) and the Cook County Circuit Court sided with
the Department, however, finding that the second amended return
including the federal changes reported an increase from the taxable
income from the original return, and that therefore the amount
sought by the Taxpayer exceeds the limitation on allowable refunds
under Act Section 911(b). Both the ALJ and the Circuit Court
disregarded the effect of the first amended return reflecting the good
faith estimate, and the payment of tax with that return.
The Appellate Court reversed, finding the ALJ’s decision “clearly
erroneous.” The court stated that the decrease in federal taxable
income along with the resulting overpayment of Illinois taxes in this
case arose from a combination of the Taxpayer’s actions as well as
from a final federal action. The Appellate Court indicated that but
for the Taxpayer having to report a good faith estimate in its first
amended return and having to pay the tax due under this estimate,
there would be no overpayment. The Appellate Court concluded
that because the Taxpayer’s good faith estimate of income was
altered by a final determination required to be reported by Act
Section 506(b), the Taxpayer’s refund claim case fit the
requirements of Act Section 911(b), and the 2-year statute of
limitations applied. Because the Taxpayer filed its refund claim
within that time period, the request for refund was timely.
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HMB COMMENT
Given that this decision was just issued today, there is no telling
whether the Department will file a petition for leave to appeal this
case to the Illinois Supreme Court. However, the Department’s
decision may be affected by the fact that applying the clearly
erroneous standard, all three judges on the panel agreed that a
mistake had been committed by the administrative tribunal. We
will keep you updated on any new developments.