Was interest from SBA pass-through certificates or SBA-guaranteed loan interests exempt from Illinois income tax as U.S. government obligation income?

Plain-English summary

Interest from the described SBA certificates and guaranteed loan interests was taxable by Illinois. A federal guarantee or connection to a federal agency was not enough by itself. The Illinois subtraction applied only when federal law specifically prohibited state taxation of the income.

Regulation 100.2470(c) provided an exhaustive list of exempt income and the associated federal statutes. IDOR found no federal law exempting SBA Participation Business Pass-Through Certificates or SBA-guaranteed interest certificates from state income tax.

The corporation therefore had to include the income on Form IL-1120 without the U.S.-government-obligation subtraction.

What this means for you

For each federal-agency instrument, identify a specific federal statute barring state taxation. Do not rely solely on a full-faith-and-credit guarantee or the agency's federal status.

Common questions

Q: Did an SBA guarantee make the interest automatically exempt?
A: No. IDOR required a specific federal tax-immunity statute.

Q: Where did the corporation report the income?
A: As taxable income on Form IL-1120.

Citations and references

• 35 ILCS 5/203(a)(2)(N), (b)(2)(J), (c)(2)(K), (d)(2)(G)
• 86 Ill. Adm. Code 100.2470(c)
• Illinois Publication 101

Subject

Subtraction Modifications – Interest On U.S.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2010.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2010/ig100008.pdf

Original ruling text

IT 10-0008-GIL 04/02/2010 SUBTRACTION MODIFICATIONS – INTEREST ON U.S.
GOVERNMENT OBLIGATIONS
General Information Letter: No federal statute prohibits state taxation of interest paid on
Small Business Administration Participation Business Pass-Through Certificates or
loans guaranteed by the Small Business Administration.
April 2, 2010
Dear:
This is in response to your letter dated February 1, 2010 in which you state the following:
I am trying to determine the taxation of several obligations of the United States Government
that I do not see specifically listed on Publication 101, Income Exempt from Tax. The general
instructions say, “Obligations of the United States” are those obligations issued “to secure
credit to carry on the necessary functions of government.” These exemptions are aimed at
protecting the “Borrowing” and “Supremacy” clauses of the Constitution. However, I do not
see the Small Business Administration specifically listed on page 3 of Publication 101.
I would like to know if the following qualify as exempt from taxation on Form IL-1120:
Small Business Administration Participation Business Pass-through Certificates that
seem to meet the criteria of obligations of the United States Government: i.e. they are
written documents, bear interest, are binding promises by the United States to pay
specified sums at specified dates, and are backed by the full faith and credit of the
United States in support of the promise to pay. These are the CUSIPS: XXXXXXXXX,
XXXXXXXXX, XXXXXXXXX, XXXXXXXXX, XXXXXXXXX.
We also have purchased the SBA guaranteed portion of farm loans and I would like to know if
these qualify as well. An example of which is called “Guaranteed Interest Certificate
Guaranteed by Small Business Administration of the United States Government” #XXXXXX
SBA Loan Number XXXXXXXXXXXX.
According to the Department of Revenue (“Department”) regulations, the Department may issue only
two types of letter rulings: Private Letter Rulings (“PLR”) and General Information Letters (“GIL”).
The regulations explaining these two types of rulings issued by the Department can be found in 2
Ill.Adm.Code §1200, or on the website http://www.tax.illinois.gov/LegalInformation/regs/part1200.
Due to the nature of your inquiry and the information presented in your letter, we are required to
respond with a GIL. GILs are designed to provide background information on specific topics. GILs,
however, are not binding on the Department.
Sections 203(a)(2(N), 203(b)(2)(J), 203(c)(2)(K) and 203(d)(2)(G) of the Illinois Income Tax Act
(“IITA”; 35 ILCS 5/101 et seq.) provide a subtraction modification for amounts included in taxable
income that come from stocks and obligations of the United States Government, as well as the
interest from those obligations, when federal law specifically exempts such income from state income
taxation. The Illinois regulations, specifically 86 Il.Admin.Code 100.2470(c), provides a list that is
intended to be exhaustive of exempt income along with the specific statutes to which each exempt
income item relates. This list does not include a federal statute that exempts Small Business
Administrative Participation Business Pass-through Certificates and Guaranteed Interest Certificates
Guaranteed by Small Business Administration of the United States Government from state income

IT 10-0008-GIL
April 2, 2010
Page 2
taxation. We are not aware of a federal law prohibiting Illinois from taxing income derived from such
Certificates. As a result, the Certificates mentioned in your letter do not qualify as exempt from Illinois
taxation, and income from these Certificates must be included as taxable income on Form IL-1120.
As stated above, this is a general information letter which does not constitute a statement of policy
that either applies, interprets or prescribes tax law. It is not binding on the Department. Should you
have additional questions, please do not hesitate to contact our office.
Sincerely,

Heidi Scott
Staff Attorney -- Income Tax