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Texaco-Cities Service Pipeline Co. v. McGaw, 182 Ill.2d 262, 695 N.E.2d 481, 230 Ill.Dec. 991

Facts

Texaco-Cities, a Delaware corporation engaged in transporting petroleum products, sold significant segments of its pipeline assets during the 1983 tax year. The pipelines had serviced refineries that ceased operations, leading to their sale as they were of little operational value. Texaco-Cities reported the income from the sale as nonbusiness income but was audited by the Department of Revenue, which reclassified it as business income subject to apportionment. The case proceeded through various court levels, with differing opinions on the classification and apportionment of the income.

Texaco-Cities, a Delaware corporation with its principal offices in Houston, Texas, is in the business of transporting crude oil and other petroleum products by pipeline. As part of its business, Texaco-Cities owned and operated pipelines which ran through several states, including Illinois. During the 1983 tax year, Texaco-Cities sold major segments of its pipeline assets and associated real estate, including its entire contingent of pipeline assets in Illinois.

Issue

Whether the income derived from the sale of pipeline assets constituted 'business income' under the Illinois Income Tax Act and whether it was properly subject to apportionment under the single-factor formula.

Texaco-Cities first challenges the Department's determination that the gain from the sale of its pipeline assets constituted business income.

Rule

Business income is defined as income arising from transactions and activities in the regular course of the taxpayer's trade or business, including income from property if its acquisition, management, and disposition are integral parts of the taxpayer's regular business operations.

Section 1501(a)(1) of the Act defines 'business income' as: 'income arising from transactions and activity in the regular course of the taxpayer's trade or business * * *, and 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.'

Analysis

The court applied the functional test to determine that the income from the sale of the pipeline assets was business income, as the assets were used in Texaco-Cities' regular trade of transporting petroleum products. The court found that the sale was not an extraordinary event but rather an integral part of the business operations, thus justifying the classification as business income subject to apportionment under the single-factor formula.

The court found that Texaco-Cities has failed in its burden of proving that the gain from the sale of its pipeline assets was nonbusiness income. According to Texaco-Cities' tax return for the year in question, its business was 'pipeline transportation.' The pipelines sold were among several that Texaco-Cities employed to transport petroleum and other substances in its regular course of business.

Conclusion

The Supreme Court affirmed the appellate court's decision, holding that the income from the sale of the pipeline was business income and subject to apportionment under the single-factor formula.

For the foregoing reasons, we affirm the judgment of the appellate court.

Who won?

The Illinois Department of Revenue prevailed in the case, as the court upheld the classification of the income as business income and the application of the single-factor apportionment formula.

Bilandic, J., filed dissenting opinion in which McMorrow and Nickels, JJ., joined.

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