{ "id": 4267884, "name": "NATIONAL HOLDINGS, INC., Plaintiff-Appellee, v. KENNETH E. ZEHNDER, Director of the Department of Revenue, et al., Defendants-Appellants", "name_abbreviation": "National Holdings, Inc. v. Zehnder", "decision_date": "2007-01-19", "docket_number": "No. 4\u201406\u20140148", "first_page": "977", "last_page": "988", "citations": [ { "type": "official", "cite": "369 Ill. App. 3d 977" } ], "court": { "name_abbreviation": "Ill. App. Ct.", "id": 8837, "name": "Illinois Appellate Court" }, "jurisdiction": { "id": 29, "name_long": "Illinois", "name": "Ill." }, "cites_to": [ { "cite": "841 N.E.2d 22", "category": "reporters:state_regional", "reporter": "N.E.2d", "year": 2005, "pin_cites": [ { "page": "27" } ], "opinion_index": 0 }, { "cite": "362 Ill. App. 3d 540", "category": "reporters:state", "reporter": "Ill. App. 3d", "case_ids": [ 4260821 ], "year": 2005, "pin_cites": [ { "page": "545" } ], "opinion_index": 0, "case_paths": [ "/ill-app-3d/362/0540-01" ] }, { "cite": "368 Ill. App. 3d 629", "category": "reporters:state", "reporter": "Ill. App. 3d", "weight": 10, "year": 2006, "pin_cites": [ { "parenthetical": "wherein the Department acknowledged the business-liquidation exception set forth in Blessing/White" }, { "page": "629" }, { "page": "629" }, { "page": "629" }, { "page": "630" }, { "page": "631" }, { "page": "633-35" }, { "page": "634" }, { "page": "636" }, { "page": "636" } ], "opinion_index": 0 }, { "cite": "88 N.M. 521", "category": "reporters:state", "reporter": "N.M.", "case_ids": [ 2837656 ], "weight": 2, "year": 1975, "opinion_index": 0, "case_paths": [ "/nm/88/0521-01" ] }, { "cite": "642 A.2d 472", "category": "reporters:state_regional", "reporter": "A.2d", "case_ids": [ 7863029, 775525 ], "weight": 3, "year": 1994, "pin_cites": [ { "page": "477" }, { "page": "476-77" } ], "opinion_index": 0, "case_paths": [ "/a2d/642/0472-01", "/pa/537/0205-01" ] }, { "cite": "537 Pa. 205", "category": "reporters:state", "reporter": "Pa.", "case_ids": [ 775525 ], "weight": 3, "year": 1994, "pin_cites": [ { "page": "214" }, { "page": "213-14" } ], "opinion_index": 0, "case_paths": [ "/pa/537/0205-01" ] }, { "cite": "695 N.E.2d 481", "category": "reporters:state_regional", "reporter": "N.E.2d", "weight": 22, "year": 1998, "pin_cites": [ { "page": "484" }, { "page": "484" }, { "page": "484" }, { "page": "485" }, { "page": "485" }, { "page": "486" }, { "page": "483" }, { "page": "483" }, { "page": "483" }, { "page": "483" }, { "page": "483-84" }, { "page": "486" }, { "page": "486" }, { "page": "486" }, { "page": "487" }, { "page": "486-87" }, { "page": "486-87" }, { "page": "487" }, { "page": "486" }, { "page": "486" }, { "page": "486-87" }, { "page": "487" } ], "opinion_index": 0 }, { "cite": "182 Ill. 2d 262", "category": "reporters:state", "reporter": "Ill. 2d", "case_ids": [ 864528 ], "weight": 22, "year": 1998, "pin_cites": [ { "page": "268" }, { "page": "268" }, { "page": "268" }, { "page": "270" }, { "page": "271" }, { "page": "272" }, { "page": "265" }, { "page": "265" }, { "page": "265" }, { "page": "265-66" }, { "page": "266-67" }, { "page": "272" }, { "page": "272" }, { "page": "273" }, { "page": "274" }, { "page": "273" }, { "page": "273" }, { "page": "274" }, { "page": "272" }, { "page": "273" }, { "page": "273" }, { "page": "274" } ], "opinion_index": 0, "case_paths": [ "/ill-2d/182/0262-01" ] }, { "cite": "729 N.E.2d 897", "category": "reporters:state_regional", "reporter": "N.E.2d", "year": 2000, "pin_cites": [ { "page": "902" } ], "opinion_index": 0 }, { "cite": "313 Ill. App. 3d 433", "category": "reporters:state", "reporter": "Ill. App. 3d", "case_ids": [ 186555 ], "year": 2000, "pin_cites": [ { "page": "438" } ], "opinion_index": 0, "case_paths": [ "/ill-app-3d/313/0433-01" ] }, { "cite": "768 N.E.2d 332", "category": "reporters:state_regional", "reporter": "N.E.2d", "weight": 14, "year": 2002, "pin_cites": [ { "page": "336" }, { "page": "336" }, { "page": "336" }, { "page": "341", "parenthetical": "Texaco-Cities \"tacitly recognizes the distinctive nature of corporate liquidations resulting in a discontinuation of business activity\"" }, { "page": "335" }, { "page": "335" }, { "page": "335" }, { "page": "339" }, { "page": "340" }, { "page": "343" }, { "page": "343" }, { "page": "343" }, { "page": "341", "parenthetical": "supreme court's treatment of the decision in Laurel Pipe Line \"suggests the functional test assumes a different application in cases where the taxpayer's disposition of assets amounts to a corporate liquidation in cessation of business\"" }, { "page": "343" } ], "opinion_index": 0 }, { "cite": "329 Ill. App. 3d 714", "category": "reporters:state", "reporter": "Ill. App. 3d", "case_ids": [ 1472338 ], "weight": 14, "year": 2002, "pin_cites": [ { "page": "718" }, { "page": "718-19" }, { "page": "719" }, { "page": "726" }, { "page": "717" }, { "page": "717" }, { "page": "717" }, { "page": "723" }, { "page": "724" }, { "page": "728" }, { "page": "728" }, { "page": "728" }, { "page": "725" }, { "page": "728" } ], "opinion_index": 0, "case_paths": [ "/ill-app-3d/329/0714-01" ] }, { "cite": "816 N.E.2d 659", "category": "reporters:state_regional", "reporter": "N.E.2d", "weight": 10, "year": 2004, "pin_cites": [ { "page": "663" }, { "page": "663" }, { "page": "663" }, { "page": "663" }, { "page": "663" }, { "page": "666", "parenthetical": "reaffirming Blessing/White" }, { "page": "667" }, { "page": "668" }, { "page": "666", "parenthetical": "the Department was unable to answer why the supreme court distinguished Laurel Pipe Line rather than simply rejecting it as unpersuasive" }, { "page": "667-68" } ], "opinion_index": 0 }, { "cite": "352 Ill. App. 3d 521", "category": "reporters:state", "reporter": "Ill. App. 3d", "case_ids": [ 5457381 ], "weight": 10, "year": 2004, "pin_cites": [ { "page": "525" }, { "page": "525-26" }, { "page": "526" }, { "page": "526" }, { "page": "526" }, { "page": "530" }, { "page": "531" }, { "page": "532" }, { "page": "530" }, { "page": "531-32" } ], "opinion_index": 0, "case_paths": [ "/ill-app-3d/352/0521-01" ] }, { "cite": "758 N.E.2d 848", "category": "reporters:state_regional", "reporter": "N.E.2d", "year": 2001, "pin_cites": [ { "page": "851" } ], "opinion_index": 0 }, { "cite": "197 Ill. 2d 466", "category": "reporters:state", "reporter": "Ill. 2d", "case_ids": [ 259095 ], "year": 2001, "pin_cites": [ { "page": "470-71" } ], "opinion_index": 0, "case_paths": [ "/ill-2d/197/0466-01" ] }, { "cite": "751 N.E.2d 203", "category": "reporters:state_regional", "reporter": "N.E.2d", "year": 2001, "pin_cites": [ { "page": "208" } ], "opinion_index": 0 }, { "cite": "322 Ill. App. 3d 376", "category": "reporters:state", "reporter": "Ill. App. 3d", "case_ids": [ 126353 ], "year": 2001, "pin_cites": [ { "page": "381" } ], "opinion_index": 0, "case_paths": [ "/ill-app-3d/322/0376-01" ] }, { "cite": "837 N.E.2d 99", "category": "reporters:state_regional", "reporter": "N.E.2d", "year": 2005, "pin_cites": [ { "page": "106" } ], "opinion_index": 0 }, { "cite": "216 Ill. 2d 294", "category": "reporters:state", "reporter": "Ill. 2d", "case_ids": [ 3827797 ], "year": 2005, "pin_cites": [ { "page": "305" } ], "opinion_index": 0, "case_paths": [ "/ill-2d/216/0294-01" ] } ], "analysis": { "cardinality": 917, "char_count": 27195, "ocr_confidence": 0.784, "pagerank": { "raw": 4.7817273071113374e-08, "percentile": 0.3002441455080972 }, "sha256": "4a5d7b6be67284b963348e471d3836ea0e7b27c9d4616f82b5d8628444e7b6cb", "simhash": "1:b2bc7f72ad25a494", "word_count": 4264 }, "last_updated": "2023-07-14T20:04:07.948493+00:00", "provenance": { "date_added": "2019-08-29", "source": "Harvard", "batch": "2018" }, "casebody": { "judges": [], "parties": [ "NATIONAL HOLDINGS, INC., Plaintiff-Appellee, v. KENNETH E. ZEHNDER, Director of the Department of Revenue, et al., Defendants-Appellants." ], "opinions": [ { "text": "JUSTICE TURNER\ndelivered the opinion of the court:\nIn October 1998, plaintiff, National Holdings, Inc. (National Holdings), filed a complaint pursuant to the State Officers and Employees Money Disposition Act (Act) (30 ILCS 230/1 through 6a (West 1998)) against defendants, Kenneth E. Zehnder, Director of the Department of Revenue of the State of Illinois, and Judy Baar Topinka, Illinois State Treasurer (collectively Department), following the Department\u2019s notice of income-tax deficiency under the Illinois Income Tax Act (Income Tax Act) (35 ILCS 5/101 through 1701 (West 1994)). National Holdings made a protested payment of $527,549 pursuant to the Act. The parties later filed cross-motions for summary judgment, and in January 2006, the trial court granted summary judgment in favor of National Holdings.\nOn appeal, defendants argue the trial court erred in holding National Holdings\u2019 gain was nonbusiness income. We affirm.\nI. BACKGROUND\nAt all times relevant to the litigation, all of the capital stock of National Holdings was owned and controlled by Loblaw Companies, Ltd. (Loblaw), a Canadian company. National Holdings, a Delaware corporation, owned 100% of the capital stock of National Tea Co. (National Tea), an Illinois corporation. National Tea owned 100% of the capital stock of National Super Markets, Inc. (Super Markets), a Michigan corporation. Prior to June 1995, National Tea and Super Markets were engaged in the retail grocery business with stores in several states, including 15 in Illinois. National Tea and Super Markets, along with other affiliated corporations, filed combined Illinois income-tax returns as a unitary business group. National Holdings paid Illinois income tax on that part of the group\u2019s income apportioned to Illinois.\nOn June 12, 1995, Super Markets and National Tea conveyed title and ownership of their assets to Schnuck Markets, Inc., pursuant to an asset-purchase agreement and received payment of $398,798,000. Of that amount, $191,368,465 was retained in a liability reserve for Super Markets and National Tea to pay certain historical liabilities. The net proceeds of the sale totaled $207,429,535. Super Markets and National Tea ceased to operate their retail grocery business and were thereafter involved only in the collection of receivables, the payment of liabilities, and other administrative activities.\nOn September 25, 1995, Super Markets distributed all of its assets to National Tea, and its corporate existence under Michigan law terminated. On September 29, 1995, National Tea\u2019s board of directors declared the net proceeds from the sale of the stores totaling $207,429,535 as a dividend and paid it all to National Holdings.\nIn November 1995, National Holdings contributed the net-sale proceeds to Glendel, Inc. (Glendel), a wholly owned subsidiary of Loblaw. Glendel\u2019s only assets consisted of those proceeds, which were invested by a third-party fiduciary in interest-bearing debt securities that included United States treasury bills, bonds, notes, and other low-risk government securities. None of the proceeds from the sale of assets was ever used in conducting business in the United States. The sale represented a complete disposition of Loblaw\u2019s retail business in the United States.\nIn October 1996, National Holdings filed a combined Illinois income-tax return for itself and its subsidiaries that included National Tea and Super Markets. On its 1995 return, National Holdings reported nonbusiness income of $100,888,747 from the sale of Super Markets\u2019 and National Tea\u2019s retail grocery-store assets. Of that amount, $7,834,664 was allocated as taxable nonbusiness Illinois income. None of the income from the sale of assets to Schnuck Markets was reported as business income in filing any state income-tax return outside Illinois.\nIn September 1998, upon audit of National Holdings\u2019 1995 Illinois income-tax return, the Department\u2019s auditor recharacterized the $100,888,747 gain from the sale of assets as apportionable business income. The Department determined its decision resulted in $13,855,455 in additional income being apportioned to Illinois. Thereafter, the Department issued a notice of deficiency to National Holdings, asserting a deficiency of $527,549 that consisted of $446,671 in taxes plus $80,878 in interest. National Holdings paid the amount under protest (see 30 ILCS 230/2a (West 1998)) and filed its complaint contesting the Department\u2019s characterization of the gain as business income. The trial court later enjoined defendants from transferring the money into the treasury\u2019s general fund.\nIn June 2005, the parties jointly filed a stipulation of facts and agreed the sole issue was whether the gain from the sale of the retail grocery stores constituted business or nonbusiness income as defined by section 1501(a)(1) of the Income Tax Act (35 ILCS 5/1501(a)(l) (West 1994)). In September 2005, National Holdings filed a motion for summary judgment. In October 2005, defendants filed their motion for summary judgment.\nIn January 2006, the trial court found for plaintiff and against defendants. The court found National Tea and Super Markets sold all their assets to Schnuck Markets in June 1995 and all proceeds of this liquidation sale were distributed to National Holdings. Also, these proceeds were never used to conduct business in the United States and were distributed to shareholders. Based on case law and the plain language of section 1501(a), the court held the gain from the asset sale was nonbusiness income because it was a cessation of a business and not used in National Holdings\u2019 ongoing business operations. This appeal followed.\nII. ANALYSIS\nA. Standard of Review\n\u201cSummary judgment is proper where, when viewed in the light most favorable to the nonmoving party, the pleadings, depositions, admissions, and affidavits on file reveal that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law.\u201d Northern Illinois Emergency Physicians v. Landau, Omahana & Kopka, Ltd., 216 Ill. 2d 294, 305, 837 N.E.2d 99, 106 (2005). When both parties move for summary judgment, \u201cthey agree that (1) no material issue of fact exists; and (2) only a question of law is involved.\u201d Subway Restaurants of Bloomington-Normal, Inc. v. Topinka, 322 Ill. App. 3d 376, 381, 751 N.E.2d 203, 208 (2001). On appeal, our review of a trial court\u2019s order granting summary judgment is de novo. Harrison v. Hardin County Community Unit School District No. 1, 197 Ill. 2d 466, 470-71, 758 N.E.2d 848, 851 (2001).\nB. Business or Nonbusiness Income Defendants argue the trial court erred in finding National Holdings\u2019 gain was nonbusiness income. We disagree.\nThe Income Tax Act, derived from the Uniform Division of Income for Tax Purposes Act (UDITPA), \u201caddresses when income of a nonresident corporation conducting business within Illinois is subject to taxation by the State.\u201d American States Insurance Co. v. Hamer, 352 Ill. App. 3d 521, 525, 816 N.E.2d 659, 663 (2004); see also Blessing/White, Inc. v. Zehnder, 329 Ill. App. 3d 714, 718, 768 N.E.2d 332, 336 (2002). \u201cUnder the statute, foreign corporations are required to pay taxes in proportion to the amount of their income-producing activities.\u201d American States, 352 Ill. App. 3d at 525-26, 816 N.E.2d at 663.\nThe Income Tax Act establishes two methods, apportionment and allocation, by which corporate income will be divided among Illinois and other jurisdictions wherein the taxpayer conducts business. American States, 352 Ill. App. 3d at 526, 816 N.E.2d at 663; Blessing/White, 329 Ill. App. 3d at 718-19, 768 N.E.2d at 336.\n\u201cWhen income is allocated, it is all assigned to one particular state for taxing purposes, generally the commercial domicile of the company or the situs of the income-producing property. 35 ILCS 5/303 (West 1996). When a business\u2019 income is apportioned, it is divided up for taxing purposes among the various states in which the business operates. 35 ILCS 5/304(a) (West 1996). Apportionment is intended to assign the amount of income to a state that is proportional to the amount of income-producing activities in that state. Business income is apportioned and nonbusiness income is allocated.\u201d Automatic Data Processing, Inc. v. Department of Revenue, 313 Ill. App. 3d 433, 438, 729 N.E.2d 897, 902 (2000).\nThe taxpayer bears the burden of establishing that income is nonbusiness income. Texaco-Cities Service Pipeline Co. v. McGaw, 182 Ill. 2d 262, 268, 695 N.E.2d 481, 484 (1998).\nPrior to July 30, 2004, the Income Tax Act defined \u201cbusiness income\u201d as:\n\u201cincome arising from transactions and activity in the regular course of the taxpayer\u2019s 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\u2019s regular trade or business operations.\u201d 35 ILCS 5/1501(a)(l) (West 1994).\nIncome falling within this definition is subject to apportionment through the use of a three-factor formula that takes into account the corporation\u2019s property, payroll, and sales. American States, 352 Ill. App. 3d at 526, 816 N.E.2d at 663; Blessing/White, 329 Ill. App. 3d at 719, 768 N.E.2d at 336. We note that, effective July 30, 2004, the General Assembly amended section 1501(a)(1) and now defines \u201cbusiness income\u201d as \u201call income that may be treated as apportionable business income under the Constitution of the United States.\u201d 35 ILCS 5/1501(a)(l) (West 2004).\n\u201cNonbusiness income\u201d has been defined as \u201call income other than business income or compensation.\u201d 35 ILCS 5/1501(a)(13) (West 1994). \u201cFor taxing purposes, nonbusiness income is allocated to a particular state, generally the state in which the corporation is domiciled or in which the income-producing property is situated.\u201d American States, 352 Ill. App. 3d at 526, 816 N.E.2d at 663.\nBoth parties acknowledge, as did the trial court, that the seminal case interpreting the terms \u201cbusiness income\u201d and \u201cnonbusiness income\u201d as defined in section 1501(a) is our supreme court\u2019s decision in Texaco-Cities. In that case, the court followed the approach of other jurisdictions that have adopted UDITPA and found the earlier version of section 1501(a)(1) encompassed two alternative and distinct approaches for determining whether gain realized from the sale of a capital asset may be apportioned. Texaco-Cities, 182 Ill. 2d at 268, 695 N.E.2d at 484. The first approach, the \u201ctransactional\u201d test, is reflected in the first clause of the definition stating business income is \u201cincome arising from transactions and activity in the regular course of the taxpayer\u2019s trade or business.\u201d 35 ILCS 5/1501(a)(l) (West 1994); Texaco-Cities, 182 Ill. 2d at 268, 695 N.E.2d at 484. In the case sub judice, the Department does not contend the gain at issue constitutes business income under the transactional test. Instead, the Department argues National Holdings\u2019 gain from the sale of National Tea\u2019s and Super Markets\u2019 assets constitutes business income under the functional test.\nUnder that second approach, the \u201cfunctional\u201d test, found in the second clause of section 1501(a)(1), business income is defined as including \u201cincome from tangible and intangible property if the acquisition, management, and disposition of the property constitute integral parts of the taxpayer\u2019s regular trade or business operations.\u201d 35 ILCS 5/1501(a)(1) (West 1994); Texaco-Cities, 182 Ill. 2d at 270, 695 N.E.2d at 485. The supreme court noted \u201cthe words \u2018acquisition, management, and disposition\u2019 suggest elements typically associated with the \u2018keeping\u2019 of corporate property, or *** the \u2018conditions of ownership\u2019 of corporate property.\u201d Texaco-Cities, 182 Ill. 2d at 271, 695 N.E.2d at 485.\n\u201cThe functional test classifies as business income all gain from the disposition of a capital asset if the asset was \u2018used by the taxpayer in its regular trade or business operations.\u2019 *** [T]he second clause of section 1501(a)(1) focuses upon the role or function of the property [disposed of] as being integral to regular business operations. The use of a capital asset in the taxpayer\u2019s regular trade or business indisputably renders that asset an integral part of the taxpayer\u2019s regular business operations.\u201d Texaco-Cities, 182 Ill. 2d at 272, 695 N.E.2d at 486.\nIn Texaco-Cities, 182 Ill. 2d at 265, 695 N.E.2d at 483, the taxpayer, a Delaware corporation with its principal offices in Texas, was in the business of transporting crude oil and other petroleum products by pipelines, some of which ran through Illinois. During the 1983 tax year, the taxpayer sold major segments of its pipeline assets, including its entire contingent of pipeline assets in Illinois. Texaco-Cities, 182 Ill. 2d at 265, 695 N.E.2d at 483. The taxpayer realized a gain of $9,987,176 and reported the income from its sale as nonbusiness income on its tax return for 1983. Texaco-Cities, 182 Ill. 2d at 265, 695 N.E.2d at 483. The Department conducted an audit and reclassified the gain as business income subject to apportionment, finding the sale constituted an integral part of the taxpayer\u2019s business operations. Texaco-Cities, 182 Ill. 2d at 265-66, 695 N.E.2d at 483. The taxpayer filed a protest, but ultimately, the Department\u2019s characterization of the gain as business income was upheld by the trial and appellate courts. Texaco-Cities, 182 Ill. 2d at 266-67, 695 N.E.2d at 483-84.\nThe supreme court found the functional test contained in \u201csection 1501(a)(1) focuses upon the role or function of the property as being integral to regular business operations.\u201d Texaco-Cities, 182 Ill. 2d at 272, 695 N.E.2d at 486. Thus, the taxpayer\u2019s use of a capital asset in its regular trade or business \u201cindisputably renders that asset an integral part of the taxpayer\u2019s regular business operations.\u201d Texaco-Cities, 182 Ill. 2d at 272, 695 N.E.2d at 486.\nThe supreme court noted Texaco-Cities was in the business of pipeline transportation, the pipelines sold were used to transport petroleum in the regular course of business, and thus the pipelines were used for the production of income. Texaco-Cities, 182 Ill. 2d at 273, 695 N.E.2d at 486. Applying a functional test, the court held the gain represented apportionable business income under the Income Tax Act. Texaco-Cities, 182 Ill. 2d at 274, 695 N.E.2d at 487.\nThe supreme court then examined and distinguished the Pennsylvania Supreme Court\u2019s decision in Laurel Pipe Line Co. v. Commonwealth of Pennsylvania, Board of Finance & Revenue, 537 Pa. 205, 642 A.2d 472 (1994). There, the proceeds from the sale of an independent pipeline by a company in the business of transporting petroleum were determined to be nonbusiness income. The court in Laurel Pipe Line found the sale a liquidation of a separate and distinct aspect of the taxpayer\u2019s business, that being all of its pipeline operations in a specific region, and thus it could be \u201ccharacterized as a partial liquidation which has changed the structure of the taxpayer\u2019s business.\u201d Laurel Pipe Line, 537 Pa. at 214, 642 A.2d at 477, citing McVean & Barlow, Inc. v. New Mexico Bureau of Revenue, 88 N.M. 521, 543 P.2d 489 (1975).\nIn distinguishing Texaco-Cities from Laurel Pipe Line, the Illinois Supreme Court found the sale by Texaco-Cities did not represent a liquidation and cessation of its business operations or a separate and distinct portion thereof. Texaco-Cities, 182 Ill. 2d at 273, 695 N.E.2d at 486-87. Further, the court found \u201cthe sales proceeds were invested right back into that business rather than being disseminated to its shareholders.\u201d Texaco-Cities, 182 Ill. 2d at 273, 695 N.E.2d at 486-87. The court concluded the gain from the sale was properly classified as business income. Texaco-Cities, 182 Ill. 2d at 274, 695 N.E.2d at 487.\nFollowing the decisions in Texaco-Cities and Laurel Pipe Line, courts have recognized a business-liquidation exception to the functional test. See Blessing/White, 329 Ill. App. 3d at 726, 768 N.E.2d at 341 (Texaco-Cities \u201ctacitly recognizes the distinctive nature of corporate liquidations resulting in a discontinuation of business activity\u201d); American States, 352 Ill. App. 3d at 530, 816 N.E.2d at 666 (reaffirming Blessing/White); Shakkour v. Hamer, 368 Ill. App. 3d 629 (2006) (wherein the Department acknowledged the business-liquidation exception set forth in Blessing/White).\nIn Blessing/White, 329 Ill. App. 3d at 717, 768 N.E.2d at 335, Blessing/White, Inc., a New Jersey corporation, was engaged in human-resource consultation with a sales office in Chicago. In 1989, Blessing/White sold substantially all of its assets that had been used in the regular course of business and as part of its income-producing activities in Illinois. Thereafter, Blessing/White ceased its business activities and distributed nearly all of the sale proceeds to Blessing and White. Blessing/White, 329 Ill. App. 3d at 717, 768 N.E.2d at 335. After an audit, the Department reclassified the gain as business income apportionable to Illinois and assessed a tax deficiency. Blessing/White, 329 Ill. App. 3d at 717, 768 N.E.2d at 335.\nIn examining the Texaco-Cities case, the First District noted the supreme court determined \u201cthe functional test for business income is satisfied where the asset disposed of was used by the taxpayer as an integral part of its regular trade or business operations.\u201d Blessing/White, 329 Ill. App. 3d at 723, 768 N.E.2d at 339. However, the First District found the supreme court\u2019s opinion allowed the use of a modified form of the functional test \u201cwhen the disposition of assets was made pursuant to a corporate liquidation in cessation of business.\u201d Blessing/White, 329 Ill. App. 3d at 724, 768 N.E.2d at 340.\nIn the case before it, the First District found the disposition of assets amounted to a liquidation of Blessing/White\u2019s business property, \u201creflecting an extraordinary, one-time corporate event and marking the cessation of the company\u2019s business activities, including those conducted in Illinois.\u201d Blessing/White, 329 Ill. App. 3d at 728, 768 N.E.2d at 343. Further, the proceeds were not used to support an ongoing business concern but were disbursed in their entirety to the shareholders. Blessing/White, 329 Ill. App. 3d at 728, 768 N.E.2d at 343. Thus, as the liquidation of assets was not integral to the company\u2019s regular business operations, the gain did not constitute business income under the functional approach. Blessing/White, 329 Ill. App. 3d at 728, 768 N.E.2d at 343.\nIn American States, 352 Ill. App. 3d at 531, 816 N.E.2d at 667, the First District interpreted Texaco-Cities to stand for the proposition that without \u201cevidence that the sale was a cessation of a separate and distinct portion of Texaco-Cities\u2019 business,\u201d a gain would be properly classified as business income. The First District found the transaction at issue \u201cinvolved the cessation of a separate and distinct portion of the business of the former shareholders of American States\u201d and concluded the gain constituted nonbusiness income. American States, 352 Ill. App. 3d at 532, 816 N.E.2d at 668.\nIn the First District\u2019s recent opinion in Shakkour, 368 Ill. App. 3d at 629, the taxpayer, a nonresident of Illinois, was a general partner of O\u2019Connor Partners, an Illinois partnership. O\u2019Connor Partners was owned in part by O\u2019Connor & Associates, also an Illinois partnership, which developed intellectual property known as the \u201cTrading Technology.\u201d Shakkour, 368 Ill. App. 3d at 629. O\u2019Connor Partners and Swiss Bank organized a limited partnership known as SBC/OC Services, L.P Later, O\u2019Connor & Associates contributed the Trading Technology to O\u2019Connor Partners as a capital contribution. Shakkour, 368 Ill. App. 3d at 629. In 1992, O\u2019Connor Partners sold its general partnership interest in SBC/OC Services and the Trading Technology to Swiss Bank. The Trading Technology was sold for fixed and contingent payments, and Swiss Bank took over use of it from O\u2019Connor Partners.\nThe taxpayer did not report her distributive share of O\u2019Connor Partners\u2019 income received from the sale of the Trading Technology as business income on her Illinois income-tax return but did report it on her New York and Connecticut returns. Shakkour, 368 Ill. App. 3d at 630. The Department issued a notice of deficiency, and Shakkour paid under protest. The trial court found the sale of the Trading Technology was an extraordinary event marking the cessation of O\u2019Connor Partners\u2019 business activities and the sale proceeds were distributed to the partners. Shakkour, 368 Ill. App. 3d at 631. The court found the sale fell within the business-liquidation exception to the functional test and Shakkour\u2019s share was not allocable to Illinois.\nOn appeal, the First District examined the holdings in the like cases of Blessing/White and American States. Shakkour, 368 Ill. App. 3d at 633-35. In noting Blessing/White's focus on the modified form of the functional test, the court found O\u2019Connor Partners disposed of the Trading Technology asset, the disposition marked the cessation of business operations, and the proceeds were not reinvested in operations but were distributed to shareholders. Shakkour, 368 Ill. App. 3d at 634. The court concluded \u201cthe sale was an extraordinary event that was a marked departure from its previous business of licensing the Trading Technology,\u201d and the income should be classified as nonbusiness income. Shakkour, 368 Ill. App. 3d at 636.\nIn this case, defendants contend the First District\u2019s decisions in Blessing/White and American States should not be followed because Texaco-Cities did not recognize the business-liquidation exception. We disagree.\nIn Texaco-Cities, the supreme court found the functional test for business income is focused on whether the asset disposed of was used by the taxpayer as an integral part of its regular business operations. Texaco-Cities, 182 Ill. 2d at 272, 695 N.E.2d at 486. However, a complete reading of the opinion indicates a modified form of the functional test is appropriate if the disposition of assets was made pursuant to a corporate liquidation in cessation of the business.\nThe supreme court\u2019s discussion and ultimate distinguishment of Laurel Pipe Line to the facts before it is quite telling. In Laurel Pipe Line, the Pennsylvania Supreme Court considered the totality of circumstances surrounding the sale and noted the sales proceeds had been distributed to shareholders rather than being used to acquire assets or income for use in future business operations. See Texaco-Cities, 182 Ill. 2d at 273, 695 N.E.2d at 486, citing Laurel Pipe Line, 537 Pa. at 213-14, 642 A.2d at 476-77. In contrast, the Illinois Supreme Court found Texaco-Cities remained in the pipeline-transportation business and the sales proceeds were invested back into the business rather than being disbursed to shareholders. Texaco-Cities, 182 Ill. 2d at 273, 695 N.E.2d at 486-87. Further, and contrary to cases relied on by Texaco-Cities, the court found the evidence before it did not indicate the sale amounted to a cessation of a separate and distinct portion of Texaco-Cities\u2019 business. Texaco-Cities, 182 Ill. 2d at 274, 695 N.E.2d at 487. Thus, the court implied that, had there been evidence that the sale was a cessation of business operations, the result of the case would have been different and quite likely in line with Laurel Pipe Line. See American States, 352 Ill. App. 3d at 530, 816 N.E.2d at 666 (the Department was unable to answer why the supreme court distinguished Laurel Pipe Line rather than simply rejecting it as unpersuasive); Blessing/White, 329 Ill. App. 3d at 725, 768 N.E.2d at 341 (supreme court\u2019s treatment of the decision in Laurel Pipe Line \u201csuggests the functional test assumes a different application in cases where the taxpayer\u2019s disposition of assets amounts to a corporate liquidation in cessation of business\u201d).\nThe interpretation of the supreme court\u2019s plain language is unmistakable, and any arguments by defendants as to the continued validity of the business-liquidation exception, considering the change in the statute and the case law of foreign jurisdictions, are better directed to the supreme court. See Robbins v. Allstate Insurance Co., 362 Ill. App. 3d 540, 545, 841 N.E.2d 22, 27 (2005). As we find the First District\u2019s authority on this matter persuasive, we agree a gain from the liquidation and cessation of business operations \u2014 or a distinct and separate portion thereof \u2014 constitutes nonbusiness income under the business-liquidation exception to the functional test.\nC. Business-Liquidation Income\nDefendants argue that even if the business-liquidation exception to the functional test for business income was valid, it would not apply here because the proceeds were reinvested in Loblaw\u2019s ongoing business. National Holdings argues the sale of National Tea\u2019s and Super Markets\u2019 assets were in liquidation of their retail grocery business.\nIn deciding whether the gain from the sale of property was business or nonbusiness income, the First District looks at whether (1) the sale was in liquidation of the taxpayer\u2019s business and (2) the proceeds were disbursed to the shareholders. Shakkour, 368 Ill. App. 3d at 636; American States, 352 Ill. App. 3d at 531-32, 816 N.E.2d at 667-68; Blessing/White, 329 Ill. App. 3d at 728, 768 N.E.2d at 343. We adopt and apply the First District\u2019s approach to our facts here.\nIn June 1995, National Tea and Super Markets entered into an asset-purchase agreement with Schnuck Markets and thereafter ceased to operate their retail grocery business. Super Markets distributed all of its assets to National Tea. National Tea\u2019s board of directors passed a resolution in which the liquidating sale proceeds were declared as a dividend and paid to National Holdings. National Holdings owned 100% of the capital stock of Super Markets and National Tea. In November 1995, National Holdings contributed the proceeds to Glendel as its only asset. The proceeds were invested in interest-bearing debt securities and were never used in conducting a business in the United States. In June 2000, Glendel and National Holdings were liquidated, and the proceeds were contributed to Glen Huron Bank, organized and domiciled in Barbados. Accordingly, we find the proceeds of the liquidation were not reinvested in the ongoing retail grocery business of the taxpayer, and the trial court correctly applied the liquidation exception to the functional test.\nIII. CONCLUSION\nFor the reasons stated, we affirm the trial court\u2019s judgment.\nAffirmed.\nKNECHT and COOK, JJ., concur.", "type": "majority", "author": "JUSTICE TURNER" } ], "attorneys": [ "Lisa Madigan, Attorney General, of Chicago (Gary S. Feinerman, Solicitor General, and Brian F. Barov (argued), Assistant Attorney General, of counsel), for appellants.", "Robert F. Denvir, Stephen V D\u2019Amore (argued), and Alan V Lindquist, all of Winston & Strawn, LLFJ of Chicago, for appellee." ], "corrections": "", "head_matter": "NATIONAL HOLDINGS, INC., Plaintiff-Appellee, v. KENNETH E. ZEHNDER, Director of the Department of Revenue, et al., Defendants-Appellants.\nFourth District\nNo. 4\u201406\u20140148\nArgued December 12, 2006.\nOpinion filed January 19, 2007.\nRehearing denied February 20, 2007.\nLisa Madigan, Attorney General, of Chicago (Gary S. Feinerman, Solicitor General, and Brian F. Barov (argued), Assistant Attorney General, of counsel), for appellants.\nRobert F. Denvir, Stephen V D\u2019Amore (argued), and Alan V Lindquist, all of Winston & Strawn, LLFJ of Chicago, for appellee." }, "file_name": "0977-01", "first_page_order": 993, "last_page_order": 1004 }