Illinois Tax Potpourri: Three Issues of Interest to Taxpayers

From tax incentives to audit instructions, Illinois taxpayers and CPAs have a lot to watch as legislators and courts tackle more tax issues.

With all that has been happening in Illinois tax, it’s impossible to settle on a single topic for this quarterly column. So, let’s decode three issues of interest to auditors, business owners, CPAs, and taxpayers alike.

THE RELEASE OF IDOR’S AUDIT MANUAL

In late December, the Circuit Court of Sangamon County ruled in Tax Analysts v. Illinois Department of Revenue, No. 2018MR001018, that the Illinois Department of Revenue’s (IDOR) audit manual is not exempt from disclosure under the Freedom of Information Act.

The audit manual is, as you’d expect, a multi-volume compilation of instructions to auditors. Unlike in many other states, IDOR has resisted releasing the audit manual to the public, arguing that it is exempt from disclosure under the Freedom of Information Act. Among other things, IDOR contends the audit manual contains confidential information that, if disclosed, would provide taxpayers with a road map to tax evasion.

In my roles on IDOR’s legal staff, I had access to the audit manual and reviewed many of its proposed revisions. It is my estimation that during my nearly 10 years with IDOR, more than 95 percent of the material contained in the audit manual did not contain confidential information. As I recall, the audit manual consisted of a detailed outline of the various tax acts administered by IDOR, the rules under the various acts, the case law construing those acts, and IDOR’s positions on issues with implementing and enforcing those acts. There were instructions to auditors about “tolerances” and cost/benefit analysis instructions for when an issue should be pressed in an audit. Those instructions could and should be edited out of a public version of the audit manual. Absent those instructions, I see no credible basis for failing to publish the rest of the audit manual.

I suspect we’ll see more on this topic and, ultimately, the public publication of the audit manual at some point.

THE HOSPITAL CHARITABLE PROPERTY TAX EXEMPTION

The Circuit Court of Champaign County recently issued a 145-page decision and opinion in The Carle Foundation v. Illinois Department of Revenue et al., No. 2008-L-202, ruling that the foundation is entitled to charitable property tax exemptions for four parcels for the 2005-2011 tax years.

This decision is the latest chapter in litigation concerning the parcels, which had been granted charitable exemptions for many years until being denied in 2004. That exemption denial was upheld by the local board of review and IDOR’s exemption division.

The litigation began in the Circuit Court of Cook County in 2007 and simultaneously in IDOR’s administrative hearing division. The case was transferred to Champaign County in 2008 after one of the defendants filed a motion for a change of venue. The case was filed directly in the circuit court under Section 23-25(e) of the Property Tax Code as a cause of action “to establish a tax exemption for a specific assessment year for property determined to have been exempt on comparable grounds for a prior or subsequent year.”

The local taxing bodies attempted to dismiss the case on various grounds, including that it was improper to go directly to court to challenge the exemption denial. The circuit court judge allowed an appeal to the appellate court on that issue prior to hearing the substance of the case. The foundation prevailed in the appeals court and the case was returned to the circuit court in The Carle Foundation v. Illinois Department of Revenue, 396 Ill. App. 3d 329 (2009).

While the legal jousting was occurring, Public Act 97-688 was enacted, effective June 14, 2012, establishing a new charitable hospital property tax exemption under Section 15-86 of the Property Tax Code. This resulted in yet another interlocutory appeal to the appellate court over whether the new exemption applied to the tax years at issue prior to the effective date of the new law. The appellate court ruled in The Carle Foundation v. Cunningham Township, 2017 IL 120427, that the new law did apply to the tax years at issue. However, the appellate court also ruled that Section 15-86 was facially unconstitutional.

Both sides appealed to the Illinois Supreme Court. In 2017, the Illinois Supreme Court vacated the appellate court’s ruling that Section 15-86 was facially unconstitutional and sent the case back to the circuit court where the case remained on hold while the Illinois Supreme Court considered the constitutionality of Section 15-86 in another case. In the 2018 case of Oswald v. Hamer, the Illinois Supreme Court upheld the constitutionality of the hospital property tax exemption.

Finally, after 12 years, the case went to trial on Jan. 2, 2019. After 20 days of trial and many witnesses, the court eventually ruled in favor of The Carle Foundation on Feb. 5, 2020 and ordered a refund of over $6 million.

The length for the decision and opinion is highly unusual for a case in circuit court and, at this point, I don’t know whether the case will be appealed again.

THE PROPOSAL TO STOP TAX INCENTIVES

The House Revenue Committee held a subject matter hearing in February on HB 4138, or the Phase Out Corporate Giveaways Compact. This ill-advised legislation would authorize Illinois to enter into a multistate compact with any state and the District of Columbia, in which each member state of the compact agrees not to offer or provide any company-specific tax incentive or grant to any entity located in any other member state as an inducement to relocate to the offering member state.

The testimony in favor of the proposal was made during an hour of mind-numbing academic theorizing by representatives of Americans for Prosperity and the Mercatus Institute. Their contention is that all tax incentives are bad, and the adoption of the compact will start states down the road to eliminating all tax incentives.

In full disclosure, if you couldn’t tell from my tone, I testified in opposition to HB 4138. I pointed out that among its other flaws, the legislation would authorize a private right of action by any “taxpayer resident” who wishes to challenge the granting of a companyspecific tax incentive. I noted the Illinois False Claims Act’s track record demonstrates problems endemic in granting a private right of action that authorizes third parties to go to court to seek a determination involving taxes of someone else. At best, the language of the legislation would result in the attorney general wasting resources by going to court to respond to specious claims. At worst, the attorney general, acting on behalf of the party bringing the case in court, would end up adverse to IDOR and/or the Illinois Department of Commerce and Economic Opportunity, and the courts could begin second guessing incentive awards.

Ultimately, the compact would outlaw state-level tax incentives. By outlawing only state-level incentives and not local incentives, the legislation would give an unfair advantage to affluent portions of the state that could afford to offer incentives to businesses.

Finally, even though the compact would be an agreement between member states, the restrictions would have broader implications. Take for example a situation where a company proposes to relocate its headquarters, manufacturing facility, or data center. Five states, including Illinois, would like the company to relocate to their state. Illinois and one of the other states are members of this compact. In that situation, because of the restrictions of the compact, Illinois would be precluded from offering any incentives to attract the company to Illinois, but all of the other states, with the exception of the other compact member state, would be free to offer incentives. Thus, the non-compact states would have a competitive advantage.

In short, there’s a lot to decode when it comes to tax in Illinois.