A Reversal, An Affirmation and an Illinois Supreme Court Victory
In a complex tax case closely monitored by accounting firms around the country, SRZ continued a winning streak begun years earlier by our esteemed colleague Lewis Baron, who passed away this spring. The case—named after Blessing/White, Inc., a former company Lewis had long served—involved the State of Illinois’ attempt to tax the capital gains and interest income that resulted from the nearly $26 million sale of business assets by this nonresident company. In 1989 its eponymous owners, human resource consultants based in New Jersey with a sales office in Chicago, dissolved their corporation and liquidated its assets—mostly intangibles, such as client relationships, customer lists and proprietary materials—in preparation for their retirement.
The Blessing/White case had an inauspicious beginning before an administrative law judge who ruled in 1996 for the Illinois Department of Revenue and against Lew’s client, citing the proceeds of the sale as business income taxable under Illinois law. Lew, however, obtained a reversal of that ruling in 2001, and this March the appellate court agreed with his arguments, most notably that the gain was nonbusiness income, taxable by the corporate domicile of New Jersey only, not by Illinois. Recently, the Illinois Supreme Court denied the State’s petition for leave to appeal, settling the matter once and for all in the client’s favor.
“Accounting firms can walk away from this case,” says SRZ’s Michael Braun, “with a greater certainty that when there is a winding up of a business, one where the principal location is domiciled outside Illinois, this state cannot tax as capital gains the dissolution of that business.”
Lew tried the initial case before joining SRZ, but consulted with SRZ colleagues regarding procedural questions and tactics for handling the appeal. “Nonetheless,” says Mike Braun, “this win is a tribute to Lew, to his perseverance on the case and to his devotion and dedication to the client.” Mike, who took over following Lew’s death, explains, “Lew did the research, theorizing, drafting and writing, and made all arguments before the various courts.” After Lew’s death, Mike confined his involvement to the strategic decision to leave the state’s petition unanswered. “Sometimes less is more,” he notes.
Although Lew acclaimed the appellate court’s decision, he refused to comment on the case to interested members of the press during the state’s petition to the higher court for a discretionary review. But privately, say colleagues, Lew believed he would prevail.
The many nuances of this case aside, the main question confronting the trial judge, and later the appellate court, was: Are we correctly applying to this new and slightly different set of facts what the Illinois Supreme Court previously said about the sale of business assets of a nonresident corporation?
Eager for an answer, both parties agreed during the circuit court proceedings to let their case idle while the high court considered a relevant case which, when resolved, helped Lew persuade the circuit court to find for Blessing/White. Surprisingly, prior decisions of the Illinois Supreme Court had not fully defined when the distribution of capital assets—to the shareholders in Lew’s case—constituted business income, thus compelling Lew to rely on the awaited decision and on rulings from other jurisdictions that seemed consistent with his case, but not on all points.
“The appellate decision was a sound and reasonable outcome, but never a 100 percent certainty,” Mike Braun says. No doubt Lew, who never wavered in his conviction that justice would prevail, would have applauded the Illinois Supreme Court for proving him right.
When reached for comment, Tod White was happy with the outcome, but pensive about a case “that never should have gone to trial. Lew Baron,” White says, “was a man of great principle. He persuaded my partner and me to fight the State of Illinois because its Department of Revenue was clearly wrong.” No doubt the case was a matter of principle for Norbert Blessing and Tod White, as well, whose legal fees eventually exceeded the erroneously assessed, but never collected, taxes. For more than ten years they authorized Lew Baron to fight the good fight with a diminishing hope of personal gain, but an increasing certainty they would set a precedent from which other business owners would benefit.
With tongue not entirely in cheek, White concludes: “I look forward to receiving a check from the State of Illinois for our trouble.”