dissenting:
In 1989, May decided to dispose of its discount retail business. It did that by transferring all the assets and liabilities of its Venture division to its wholly owned subsidiary, Venture Stores, Inc., a Delaware corporation. As a result, Venture’s paid-in capital increased from $1,000 to $319,029,539. Then in 1990, Venture made a liquidating distribution of $262,500,000 to May. Venture did not acquire or cancel any of its stock in connection with that distribution; both before and after the distribution May owned all 1,000 shares of Venture common stock. On September 28, 1990, the shares of Venture’s common stock were split 16,808 to 1, and the shares were distributed to May’s shareholders. Venture is now a publicly owned and traded company.
In accordance with generally accepted accounting principles (GAAP), the distribution was shown on Venture’s books, and in reports submitted to the Internal Revenue Service and to the Securities and Exchange Commission, as a decrease in the capital of the corporation. However, because Venture did not acquire or cancel any of its shares in connection with the distribution, Venture was not allowed to reduce its Illinois "paid-in capital,” on which its annual franchise tax is based. See Ill. Rev. Stat. 1989, ch. 32, par. 1.80(j); Caterpillar, 266 Ill. App. 3d 312, 640 N.E.2d 672.
If May had surrendered just one share for cancellation in connection with the distribution, paid-in capital could have been reduced. See Ill. Rev. Stat. 1989, ch. 32, par. 1.80(j) (reduction "to the extent of the amount of paid-in capital represented by such acquired shares”). The Department disagrees that the surrender of just one share would have been effective. See 805 ILCS 5/1.80(j) (West 1992) (paid-in capital is reduced by "cost of the reacquired shares or a lesser amount as may be elected by the corporation”). Whatever the number, it is clear that if May had surrendered some shares for cancellation, its paid-in capital would have been reduced. There is no indication in the record that May or Venture would have been disadvantaged by surrendering and canceling shares. May owned all the stock of Venture, whether it owned 1,000 shares, 500 shares, or 5 shares. The Department suggests the choice to proceed by way of a liquidating dividend could have been "sheer carelessness” on Venture’s part, or it could have been a calculated decision "perhaps because a liquidating dividend had certain financial advantages.” The Department does not indicate what those financial advantages might be. It would appear to be easy for a corporation that does business in many states to overlook Illinois’ unusual definition of paid-in capital.
Although Venture’s assets have now been permanently reduced by $262,500,000, its paid-in capital can never be changed to reflect that reduction. Once the distribution was made, it was too late for Venture to acquire and cancel any shares. Section 14.25 of the 1983 Business Act is construed "as requiring the cancellation of a corporation’s shares to occur prior to or contemporaneously with the reduction in paid-in capital.” Caterpillar, 266 Ill. App. 3d at 319, 640 N.E.2d at 677. It is clear, after Caterpillar, that Illinois law distinguishes between (1) liquidating distributions and (2) distributions accompanied by the acquisition and cancellation of shares. The second reduces paid-in capital, the first does not. The question now before the court is whether that distinction violates the uniformity clause of the Illinois Constitution. Ill. Const. 1970, art. IX, § 2. The constitutional issue was not addressed in Caterpillar.
Where a good-faith uniformity challenge is made, the taxing body must produce a justification for its classifications. The taxpayer then has the burden to persuade the court that the taxing body’s explanation is insufficient as a matter of law or unsupported by the facts. Geja’s Cafe, 153 Ill. 2d at 248-49, 606 N.E.2d at 1216. The Department’s proffered justification here is that a liquidating distribution is "essentially a forbidden transaction,” that "Illinois no longer permits liquidating dividends or any other reduction of paid-in capital unaccompanied by the redemption of shares.”
Liquidating distributions are certainly legal in Illinois. Section 9.10 of the 1983 Business Act specifically allows any distributions to shareholders, so long as those distributions do not violate the corporation’s articles of incorporation, render the corporation insolvent, reduce the corporation’s net assets below zero, or affect the rights of preferred shareholders. Ill. Rev. Stat. 1985, ch. 32, par. 9.10. Sections 9.15(a) and (c) of the 1983 Business Act allowed paid-in capital to be reduced by liquidating dividends "as permitted by law” (the limitations found in section 9.10). Ill. Rev. Stat. 1985, ch. 32, pars. 9.15(a), (c). Section 9.15 of the 1983 Business Act was repealed in 1987 (Pub. Act 84—1412, art. 14, § 2, eff. January 1, 1987 (1986 Ill. Laws 3470, 3510)), but section 9.10 remains intact. Under current law liquidating distributions can be made in Illinois, they just do not reduce paid-in capital.
The 1983 Business Act made major changes in Illinois law. The 1983 Business Act abandoned the idea that creditors and preferred shareholders could be protected by forcing the corporation to retain assets in the form of "stated capital” and "paid-in surplus.” C. Murdock, 2 Ill. Bus. Corp. Act Ann., app. F, § 1.80(j), at 372 (3d ed. Supp. 1984). Even before the 1983 Business Act, that protection could be avoided by the authorization of shares with a nominal par value or without par value, and by other shareholder action. The 1983 Business Act cut the heart out of the franchise tax. The franchise tax was based on the level of corporate capital, and once there was no statutory requirement that capital accounts be maintained, there was nothing to prevent reduction of paid-in capital to the minimum level. The only reason corporate capital was important, after the 1983 Business Act, was in computing the franchise tax and license fee. J. Van Vliet, New Illinois Business Corporation Act Needs More Work, 61 Chi.-Kent L. Rev. 42 (1985).
In 1987, the legislature responded to protect the franchise tax. The response was not to repeal the 1983 Business Act or to ensure that corporate capital was held at certain levels. Instead the legislature repealed section 9.15 of the 1983 Business Act, which had provided that paid-in capital could be reduced by liquidating distributions and other methods, and changed the section 1.80(j) definition of paid-in capital to state that reductions could only be "effected by an acquisition of its own shares.” Pub. Act 84—1412, art. 14, § 1, eff. January 1, 1987 (1986 Ill. Laws 3470, 3501). The 1987 amendments addressed form and not substance. Paid-in capital could be reduced, just not by liquidating distributions. The 1987 amendments attempted to slow corporate reductions of paid-in capital, not by requiring that paid-in capital be maintained at some level, but by placing impediments in the way of reduction. (Distributions accompanied by the acquisition and transfer of stock are more difficult than other distributions, especially if the company is widely held.) The 1987 amendment also appears to be a trap for the unwary.
Always before, the statute had been concerned with substance, the level of capital in the corporation. Reductions could be made by any method, so long as they were "effected in a manner permitted by law” (Ill. Rev. Stat. 1981, ch. 32, pars. 157.2—11, 157.2—12), that is, so long as a certain level was maintained. For the first time in 1987, the concern was with the form of the transaction, not with the level of remaining capital.
"[T]he classification must be based on a real and substantial difference between the people taxed and those not taxed.” (Emphasis in original.) Searle, 117 Ill. 2d at 468, 512 N.E.2d at 1246. There is no difference as far as corporate capital is concerned between a corporation which passes out capital through a liquidating distribution and one which does so through a distribution accompanied by the acquisition and cancellation of stock. Both distributions are legal in Illinois, and both reduce the level of capital in the corporation. The only difference between the two forms of distribution is in tax consequences. The Department’s argument is that liquidating distributions result in taxation, while distributions in connection with acquisition and cancellation do not, because the statute says so. That is not sufficient justification under the uniformity clause. Disparity in tax treatment may not be justified simply because it generates state income. Searle, 117 Ill. 2d at 477-78, 512 N.E.2d at 1250.
The majority argues that the concept of paid-in capital may have some significance in regard to protection of shareholders or creditors. That is not correct. The $262,500,000 in this case is out of the corporation. Those funds are no longer available to Venture’s shareholders or creditors, and there is no cause of action for their removal, because those funds were legally distributed. The fact that for Illinois franchise tax purposes Venture’s paid-in capital is considered to be $319,029,539 provides no protection for anyone.
The Department’s argument that Illinois is not "obligated to arrange its corporate law, and its franchise tax in particular, to conform to the law in other jurisdictions” is off the mark. Illinois corporations, as well as Delaware corporations, are allowed to make liquidating distributions. The refusal to allow Illinois corporations to reduce paid-in capital unless that reduction is accomplished by a distribution accompanied by acquisition and cancellation of shares violates the uniformity clause. Venture’s argument is not based on its status as a foreign corporation.