In Metropolitan Life Insurance Co. v. Hamer, No. 1-11-0400, 2012 WL 716021 (Ill.App. 1 Dist. Mar. 5, 2012) the First District Appellate Court of Illinois affirmed the lower court’s grant of summary judgment in favor of Metropolitan Life Insurance (“Met Life”), holding that because Met Life did not know that it had any taxes due during the given amnesty period, it could not have participated in the amnesty program and thus should not be subject to the double interest penalty.
In 2003, in an effort to raise revenue for the State of Illinois, the Illinois legislature passed the Tax Delinquency Amnesty Act (“Amnesty Act”). 35 ILCS 745/10 (West 2008). Section 10 of the Amnesty Act provides:
[U]pon payment by a taxpayer of all taxes due from that taxpayer to the State of Illinois for any taxable period ending after June 30, 1983 and prior to July 1, 2002, the Department [of Revenue] shall abate and not seek to collect any interest or penalties that may be applicable and the Department shall not seek civil or criminal prosecution for any taxpayer for the period of time for which amnesty has been granted to the taxpayer. (Emphasis added.)
The legislature additionally amended section 3-2 of the Uniform Penalty and Interest Act (35 ILCS 735/3-2(f) (West 2008)) to provide a double interest penalty for those taxpayers that had a tax liability eligible for amnesty under the Amnesty Act but did not pay the liability during the amnesty period. To participate in the amnesty program, taxpayers had to make their full payment during the amnesty period, which was from October 1, 2003, through November 15, 2003.
In May 2002, the Illinois Department of Revenue began Met Life’s audit for tax years 1998 and 1999. The Department's audit was not complete until 2004, when the auditor determined that Met Life owed additional state income tax for tax years 1998 and 1999. In May 2008, the Department notified Met Life that it was also assessing Met Life a double interest penalty for failing to take advantage of the amnesty program open in 2003.
Met Life brought an action against the Department of Revenue, director of the Department, and state Treasurer (collectively “Department” or “Appellants”), seeking declaratory and injunctive relief, alleging that it had been improperly charged the statutory double interest penalty because the Department's audit was not completed until long after the amnesty period had passed, and thus it could not have participated in the amnesty program. The Circuit Court of Cook County entered summary judgment in favor of Met Life, and the Department appealed.
The decision by the Appellate Court of Illinois hinged on the meaning of the phrase “all taxes due” in Section 10. This phrase was neither defined by the Amnesty Act nor defined by case law. Appellants argued that taxes become due when the tax return for that tax year is due and because Met Life could have paid the amount due during the 2003 amnesty period when it filed its returns, the double interest penalty applied. Appellants relied, in part, on an emergency rule promulgated by the Department to implement the Amnesty Act, arguing it supported the Department’s contention that Met Life, which was under audit during the amnesty period, should have made a good faith estimate of its tax liability to avoid the penalty. The rule provides, in part, that taxpayers “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…” and “taxpayers under audit during the Amnesty Program Period, who are unsure of the exact amount of a tax liability should make a good faith estimate of the amount of the liability.” 86 Ill Adm. Code 521.105(j) & (k).
The Court, unpersuaded by Appellants’ reliance on Section 521.105, stated that the rule lacked logical interpretation and exceeded the legislative intent behind the Amnesty Act by requiring payment of a good faith estimate of an unknown amount. The Court concluded, instead, that the phrase “all taxes due” means those taxes that a taxpayer knew were due and owing during the amnesty period. Because, in this case, Met Life did not know that it had taxes due during the time of the amnesty program, it could not have participated in the amnesty program and thus should not have been subject to the double interest penalty.
Numerous states, including California, Texas, Ohio, and New York have had their own amnesty programs similar to that in Illinois. Courts and administrative bodies may not, however, reach the same conclusion as the First District Appellate Court of Illinois regarding amnesty penalties. Taxpayers should, therefore, be well informed of applicable law and seek consultation during amnesty programs in order to later avoid significant amnesty penalties.
If you have any questions regarding the contents of this newsletter, please contact the following attorneys in the firm’s State and Local Tax Practice Group.