dissenting:
Before the audits that gave rise to this consolidated appeal, the City of Chicago department of revenue (the Department) had never before treated the employees of distinct, but affiliated, corporate entities (owning separate McDonald’s franchises) as working for a single employer under the Chicago Employer’s Expense Tax Ordinance (EETO) as enacted by the Chicago city council. Chicago Municipal Code §3 — 20—010 et seq. (eff. July 1, 1995). Under the EETO, an employer is required to pay the expense tax only if it has “50 or more *** full-time employees *** within the city of Chicago.” Chicago Municipal Code §3—20—030(A) (eff. July 1, 1995).
Following the audits in 2004, the Department issued assessments in early 2005 against the corporate plaintiffs for unpaid EETO taxes, penalties and interest from January 1, 1999, to June 20, 2004. Liability under the EETO stems from the Department’s calculations that the combined employees of the affiliated corporations met the ordinance threshold of 50.
On August 25, 2005, the Department issued “Tax Ruling No. 2,” effective September 15, 2005, introducing the concept of “unitary business group,” which the Department contends supports its earlier tax assessments against the corporate plaintiffs. The Department’s Tax Ruling No. 2 provides in pertinent part:
“Section 4. For the purpose of calculating the 50-employee threshold contained in Section 3—20—030(A), employees will be combined if they are employed by members of a single ‘unitary business group,’ as that term is defined below.
Section 5. The term ‘unitary business group’ means a group of persons related through common ownership or control, whose business activities are in the same general line (such as *** food service ***), and whose members are functionally integrated through the exercise of centralized management (where, for example, authority over such matter as purchasing, financing, tax compliance, product line, personnel, marketing and/or capital investment is not left to each member). Common ownership in the case of corporations is the direct or indirect control or ownership of more than 50% of the outstanding voting stock of the persons carrying on unitary business activity.
Section 6. In accordance with Section 3—4—189 of the Code, a consolidated employer’s expense tax return shall be filed on behalf of all members of the unitary business group.
Section 7. This ruling is intended to clarify rather than change existing law.” Chicago Department of Revenue Employer’s Expense Tax Ruling No. 2, §§4, 5, 6, 7 (eff. Sept. 15, 2005).
The majority finds it important that section 7 is included in the tax ruling. 407 Ill. App. 3d at 951. I do as well, but for an entirely contrary reason. I find the Chicago department of revenue “doth protest too much.” William Shakespeare, Hamlet, act 2, sc. 2. Unless the Department means to suggest that it has the authority to “change existing law,” I find its avowal that it is not doing that to suggest the opposite. Tax Ruling No. 2 clarified nothing, but it changed the law under the EETO as it applied to the corporate plaintiffs before us.
Notably, the Department fails to inform us how the need for “clarification” arose. What part of the EETO is so ambiguous that a “clarification” was needed? Nor does the Department inform us what triggered its decision to treat the employees of affiliated corporations operating separate McDonald franchises as all working for the same employer. Certainly the Department knows it may only adopt, promulgate, and enforce rules and regulations pertaining to the administration and enforcement of existing municipal ordinances. Chicago Municipal Code §3—4—150(A)(1) (amended May 12, 1999). It is axiomatic that the Department may not change existing law.
The plaintiffs correctly point out in their main brief that “[t]he term ‘unitary business group’ is a statutory term used in relation to Illinois corporate income tax since 1982.” See 35 ILCS 5/1501(a) (West 2008). Its statutory origin means the term was recognized in legislation passed by the Illinois legislature. The Department makes no claim of a similar enactment by the Chicago city council. As the plaintiffs state, “This unitary business group scheme appears nowhere in Chicago’s municipal ordinances.”
Nor does the Department contend it relied on tax returns filed with the Illinois Department of Revenue to support its 2005 tax assessment of the corporate plaintiffs based on the Department’s contention that they constitute a “unitary business group” to warrant combining the employees of affiliated corporations as working for a single employer. See Filtertek, Inc. v. Department of Revenue, 186 Ill. App. 3d 208, 213, 541 N.E.2d 1385 (1989) (“The finding of a unitaiy business group is necessary before a State may apportion the income of two or more corporations for tax purposes.”).
Of course, there is a world of difference between the Illinois Department of Revenue’s decision to apportion the income of two or more multistate corporations under the Illinois tax code and the Department’s decision to combine the employees of distinct, but affiliated, corporations for the purpose of imposing the Chicago employer’s expense tax. In the former situation, earned income is apportioned between states to avoid states taxing the same income. In the latter situation, no taxes would be due unless the employees of distinct corporate entities are combined. The Department’s use of the concept “unitary business group” only serves to enlarge the definition of employer under the EETO; its aim is not to avoid duplicate taxation. See Caterpillar Tractor Co. v. Lenckos, 84 Ill. 2d 102, 115, 417 N.E.2d 1343 (1981) (the unitary business group concept is used in accounting methods by states “to determine net taxable income in such a way as to avoid the constitutional problems”). Under the guise of “unitary business group,” the Department pierces the corporate veil to examine shareholder ownership of affiliated corporations to determine whom it believes is the “employer” under the EETO.
Based on its determination of shareholder ownership, the Department imposes a new obligation on the group of employers deemed to be part of a “unitary business group.” That group of employers must now file “a consolidated employer’s expense tax return.” The corporate plaintiffs correctly point out that nothing in the ordinance that gave rise to the employer’s expense tax refers to more than one employer; nor is there a provision in the ordinance that provides for consolidation of affiliated corporations to require the filing of a “consolidated” expense tax return.
Of course, it is likely true that each McDonald’s restaurant was incorporated separately, at least in part, to avoid the reach of the EETO. However, when the enabling legislation does not address such tax avoidance schemes, the responsibility to correct a perceived problem lies with the Chicago city council; it does not lie with the Department. The Department cannot arrogate the authority to expand the set of employers that are subject to the EETO so that expense taxes are owed that were not owed before.
While it is true the Department’s 1997 bulletin does not precisely address the circumstances present in this case, there can be no dispute that of the two examples in the bulletin, example No. 2 most closely resembles the circumstances present in this case:
“Example 2: XYC Corp. and ABC Inc. are affiliated companies. XYC Corp. has 100 employees and is responsible for the work performed by their employees as well as the payment of their wages. ABC Inc. has 150 employees and is responsible for the work performed by their employees as well as the payment of their wages. [XYC] Corp. and ABC Inc. should each file an [Employer’s] Expense Tax return because they are two separate entities which control the work performed by their employees and each has control of the payment of their employees wages.” May 1997 Information Bulletin.
Under “Example 2,” separate corporations are “separate entities” because they each exercise control over their respective employees. There is no suggestion in the 1997 bulletin that the corporate veil regarding “affiliated companies” may be pierced to examine whether one shareholder owns more than 50% of each company, which, in turn, means that that shareholder “controls” the employees of all affiliated corporations so as to qualify the affiliated corporations as functioning as a single “employer,” as the Department now argues. There is no suggestion in either example that the percentage ownership of a shareholder has any significance in examining whether affiliate corporations may be combined into a single employer.
Nor does the testimony of the Department auditor, the single witness called by the Department at the administrative hearing, lead me to the conclusion reached by the majority that affiliated corporations should be treated as a single employer under the EETO. The written decision of the administrative hearing officer summarizes the auditor’s testimony. The auditor testified “he was told [by the Department] to consolidate these businesses due to the common ownership[;] *** no other factors were considered.” It is clear that the auditor did not consolidate these businesses because of his own understanding of what the EETO mandated. In fact, as the auditor further demonstrated, the City of Chicago treats each affiliated corporate entity as a distinct entity in other regards. The auditor confirmed that each corporate entity within the “unitary business group” had “its own federal tax ID number.” The auditor admitted that each corporation paid separate license fees to the city and that each corporation was considered a taxpayer. According to the auditor, the instructions to the form required to be filed under the EETO “do not contain a reference to the term ‘unitary business group’.” The term “unitary business group” did not exist in the Department’s lexicon before it issued Tax Ruling No. 2. In fact, as the hearing officer noted, “Tax Ruling #2 did not exist when [the auditor] did his assessment.” The auditor admitted “that if the entities were not combined there would be no EETO liability and therefore no penalties or interest.”
I reject as meaningless the Department’s statement that Tax Ruling No. 2 was “intended to clarify rather than change existing law.” In an entirely unprecedented manner, the Department expanded the definition of “employer” under the EETO in Tax Ruling No. 2 in a transparent effort to capture expense taxes it believes should be paid, though the EETO provides no basis to consolidate affiliated corporate entities into a single “employer.”
I respectfully dissent from the contrary decision of my colleagues.