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The Illinois Court of Appeals, First Division, held that a taxpayer was not subject to a double interest penalty provided under an amnesty program for additional income taxes that could not be determined at the time of the amnesty period. Metro. Life Ins. Co. v. Hamer, 2012 Ill. App. LEXIS 144 (Ill. App. Ct. 1st Dist. 2012).
State tax amnesties are nothing unique. States have been using this tactic as a means of temporarily boosting tax receipts. A recent Illinois tax amnesty program though contained a more punitive penalty than most. In 2003, the Illinois legislature enacted the Tax Delinquency Amnesty Act [see 35 ILCS 745/10] (the" Act"), which provided protection from penalties and interest to any taxpayer that came forward and paid any delinquent tax owed for any taxable period after June 30, 1983 and prior to July 1, 2002. To receive this protection, the taxpayer had from October 1, 2003 through November 15, 2003 to pay "all taxes due." To encourage participation, the Illinois legislature amended the state's Uniform Penalty and Interest Act [see 35 ILCS 735/3-2] to allow the Illinois Department of Revenue (the "Department") to assess a double interest penalty (interest imposed at 200% of the statutory rate) on taxpayers who had a tax liability eligible for protection, but who did not pay the delinquent taxes during the amnesty period.
In 2004, the Internal Revenue Service completed a federal audit of Metropolitan Life Insurance Co. ("Met Life") and concluded that Met Life's federal taxable income for tax years 1998 and 1999 was more than what it had indicated on its timely filed income tax returns. The Department determined that Met Life owed additional state taxes for those years. Since Met Life did not pay the delinquent taxes during the amnesty period, the Department assessed a double interest penalty for the additional taxes owed. Met Life paid the penalty under protest and filed a Protest Monies Action in Illinois circuit court for an injunction and declaratory judgment. Met Life argued that the double interest penalty did not apply because the audit was not completed until after the amnesty period had expired. Met Life also argued that "all taxes due" does not include an undeterminable amount that was later assessed and due as a result of a federal or state audit. In addition, Met Life argued that, if the legislature did intend such, the Act and the double interest penalty violated its due process rights. On summary judgment, the trial court held the legislature did not intend the Act to impose a double interest penalty on taxpayers that were not aware they owed additional taxes. The Department appealed to the Illinois Appeals Court, First Division ("Court").
On appeal, the issue to be addressed was the meaning of the phrase "all taxes due," and whether the legislature intended to consider the taxpayer's knowledge, or lack thereof, of delinquent taxes during the amnesty period. The Department argued the double interest penalty assessed against Met Life was proper as the phrase "all taxes due" means "on or before the date fixed for filing of the taxpayer's return," as established under section 601(a) of the Illinois Income Tax Act [35 ILCS 5/601]. The Department further argued the legislature did not intend the Department to consider a taxpayer's knowledge when assessing the double interest penalty. Essentially, the Department argued it was the taxpayer's burden to determine whether it had delinquent taxes for any taxable period after June 30, 1983 and prior to July 1, 2002. lf the taxpayer was unsure of whether additional taxes were owed, the taxpayer should have made a good faith estimate of its tax liability and paid such during the amnesty period to avoid the double interest penalty. In support of its argument, the Department cited to section 601(a) and section 521.105 of title 86 of the Illinois Administrative Code. Section 521.105 states a taxpayer, including a taxpayer that is under audit during the amnesty period and unsure of the exact amount of liability, should make a "good faith estimate" of its tax liability to avoid the double interest amnesty penalty.
The Court rejected the Department's argument and held that the phrase "all taxes due" means those taxes that a taxpayer knew were due and owing during the amnesty period. The Court based its holding by considering subsections (j), (k), and (I) of section 521.105. Subsection (j) provides that in order to participate in the amnesty program, a taxpayer must pay the entire liability for a tax type and tax period, irrespective of whether that liability is known to the Department or the taxpayer. The Court was unable to discern any logical interpretation of this subsection. Subsection (k) provides that taxpayers, including those under audit during the amnesty period, who were unsure of the exact amount of a tax liability, should make a good faith estimate of its liability. Similarly, subsection (l) provides that a taxpayer under federal audit may participate in the amnesty program by making a good faith estimate of its liability to the Department. The Court found that subsections (k) and (I) exceeded the legislative intent and statutory language of the Act. The Court did not address Met Life's substantive due process argument because it dispensed with the issue in Met Life's favor based on statutory interpretation.
RELATED LINKS: For further insight and discussion of state corporate income tax amnesty principles, see:
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