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Lakehead Pipe Line Co., Inc. v. Department of Revenue, 192 Ill.App.3d 756, 549 N.E.2d 598, 139 Ill.Dec. 872

Facts

Lakehead Pipe Line Company, a Delaware corporation, operates a pipeline system transporting crude oil and other hydrocarbons. The company sought refunds for corporate income taxes paid from 1973 to 1977, arguing that the taxes should have been calculated using a three-factor apportionment formula instead of the one-factor barrel mile formula mandated by the Illinois Department of Revenue. The Department denied the refund claims, leading to administrative hearings and subsequent appeals.

Lakehead Pipe Line Company, Inc. (Lakehead) is a Delaware corporation with its principal office located in Superior, Wisconsin. Lakehead is wholly owned by Interprovincial Pipe Line, Ltd. (Interprovincial), a Canadian corporation.

Issue

Whether the statutory one-factor barrel mile formula for apportioning Lakehead's corporate income tax fairly represented its business activity in Illinois or whether an alternative allocation formula was justified.

Put simply, the issue before us is whether the Department's conclusion that the statutory one-factor barrel mile formula of section 304(d) was proper as fairly representing the business activity of Lakehead in Illinois for the years at issue or whether an alternative allocation formula under section 304(e) was justified.

Rule

The Illinois Income Tax Act allows for alternative apportionment methods if the statutory formulas do not fairly represent a taxpayer's business activity in the state, provided that the taxpayer demonstrates that the statutory formula leads to a grossly distorted result.

However, as noted above, our legislature has determined that a different apportionment formula should apply to multistate corporations providing transportation services including, specifically, oil pipeline companies such as Lakehead.

Analysis

The court analyzed whether the one-factor barrel mile formula unreasonably and arbitrarily attributed income to Illinois in proportion to Lakehead's business activity. It found that the differences in apportionment percentages between the one-factor and three-factor formulas did not constitute gross distortion, as the one-factor formula's results fell within the range of the other formulas.

The record reveals that the primary business conducted by Lakehead in Illinois was limited primarily to the flow of oil over the 115.6 miles of pipeline located here.

Conclusion

The Appellate Court reversed the Circuit Court's decision, concluding that the one-factor barrel mile formula was appropriate and did not result in a grossly distorted representation of Lakehead's business activity in Illinois.

Because we find no such arbitrariness under application of the one-factor barrel mile formula to Lakehead's particular situation, we must reverse the judgment of the circuit court.

Who won?

Department of Revenue prevailed in the case because the court found that the one-factor barrel mile formula was appropriate and did not lead to a grossly distorted result regarding Lakehead's business activity.

The Department determined that Lakehead was required to use the statutory one-factor barrel mile apportionment formula of section 304(d) of the Act, concluding Lakehead failed to meet its burden of showing that it was entitled to elect an alternative formula.

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