Illinois
Caveney v. Bower
- Year:
- 2003
- Case No.:
- No. 92963
- Court:
- Supreme Court of Illinois
- Subject:
- Illinois research credit — S corporation shareholder pass-through, statutory retroactivity
The Illinois Supreme Court held that S corporation shareholders could not personally claim Illinois's research and development tax credit for expenses incurred by the corporation under the pre-1999 version of the statute, and that a 1999 amendment adding a shareholder pass-through provision did not apply retroactively.
Download source PDFJack and Margaret Caveney were shareholders of Panduit Corporation, which elected subchapter S status for the 1993 through 1995 tax years. The Caveneys claimed a credit against their personal Illinois income tax liability under section 201(k) of the Illinois Income Tax Act for research and development expenditures incurred by Panduit. The State disallowed the claims and assessed roughly $1.09 million in back taxes and interest, which the Caveneys paid under protest before suing for a refund.
No Pass-Through Under the Pre-Amendment Statute
The Illinois Supreme Court held that, prior to a 1999 amendment, section 201(k) authorized a credit only for research expenses actually incurred by the taxpayer claiming the credit. Because the expenses were incurred by Panduit — which as an S corporation was itself exempt from Illinois income tax — and not by the Caveneys personally, neither Panduit nor its shareholders could claim the credit. The court noted that two other tax credit provisions enacted before section 201(k) expressly included shareholder pass-through language, while section 201(k) originally did not, indicating the omission was deliberate.
The 1999 Amendment Did Not Apply Retroactively
The 1999 amendment to section 201(k) added an explicit pass-through provision extending the credit to S corporation shareholders. The court held that this was a substantive change in the law and, applying Illinois's general savings statute along with the retroactivity framework of Landgraf v. USI Film Products, 511 U.S. 244 (1994), concluded that the amendment did not apply retroactively to the Caveneys' 1993–1995 tax years.
The court also rejected the Caveneys' argument that the pre-amendment statute violated the uniformity clause of the Illinois Constitution, finding that the original version of section 201(k) applied uniformly to all taxpayers without any improper classification.
Significance: Caveney v. Bower established that Illinois's research credit pass-through to S corporation shareholders is purely a creature of the 1999 statutory amendment, with no retroactive effect — a foundational precedent for how Illinois treats flow-through entities claiming the state research credit.