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Illinois lawsuit says United Airlines runs "sham" to evade tax

(Reuters) - An Illinois mass transit agency on Monday sued United Airlines, saying the world's No. 1 air carrier is operating a "sham" sales office in a smaller city to evade paying millions of dollars in taxes in Chicago, where it is based.

The Regional Transportation Authority, which oversees train, bus and commuter rail service in the Chicago area, said United was improperly seeking to dodge higher sales taxes by "accepting" jet fuel at an office set up in Sycamore, Illinois, where the combined tax rate is 8 percent. That compares with a rate of 9.5 percent in Chicago.

The lawsuit, filed in Cook County Circuit Court on Monday, claims the United office in Sycamore, a city about 55 miles west of Chicago, is a "sham."

The complaint says the United office in Sycamore is staffed by one person but not on a daily basis.

Most states collect taxes based on where products are received, but Illinois is one of a few states that collect them based on where a company says a purchase was accepted, the agency noted.

"The only reason that United Fuels has an office in Sycamore is to attempt to create a sham tax situs for fuel sales in a lower taxing jurisdiction," the lawsuit said.

It also claimed that "all true sales activity" by the carrier in regard to jet fuel, including negotiations with vendors and delivery scheduling, occurs in Chicago.

The complaint also said that AMR Corp unit American Airlines operates a similar office in Sycamore, but American was not named a defendant in this suit.

Jordan Matyas, chief of staff of the RTA, said the agency intends to pursue American once it is out of Chapter 11 bankruptcy protection.

"These are empty offices with part-time employees," Matyas said in an interview. The airlines "are using these empty offices as a ruse to not pay the appropriate tax."

The RTA said it estimates it has lost $96 million since 2005 as a result of the operation of the Sycamore offices by United and American, while the city of Chicago has lost $133 million.

United, whose parent company is United Continental Holdings , believes the agency's lawsuit is "without merit," according to a statement provided by spokeswoman Megan McCarthy.

"The operation of our fuel subsidiary in Sycamore has been examined by tax authorities in the past and has been determined to comply with all applicable laws. We will vigorously defend ourselves against these claims," United's statement added.

American spokeswoman Mary Frances Fagan said the carrier, based in Fort Worth, Texas, does not comment on pending litigation, but added that "what it is doing is permitted under Illinois law."

The RTA suit seeks unspecified monetary damages.

The lawsuit is Regional Transportation Authority v. United Aviation Fuels Corp et al, Circuit Court of Cook County, Illinois, County Department-Chancery Division.

(Reporting by Karen Jacobs; Editing by Phil Berlowitz)

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