Could a taxpayer exclude future installment payments from 2009 estimated tax after electing to recognize the entire sale gain in 2009?

Plain-English summary

The taxpayer could not remove the tax tied to later cash payments from the 2009 estimated-tax computation after electing to recognize the full sale gain in 2009. Electing out of the installment method required recognizing the entire gain in the sale year, using the fair market value of the buyer's installment obligation in the amount realized.

Illinois required estimated installments based generally on the lesser of 90% of current-year tax or 100% of prior-year tax, with an annualized-income method for uneven income. IDOR could not rewrite Form IL-2210 to treat part of the recognized 2009 gain as future-year income merely because cash would arrive later.

The facts also did not establish reasonable cause. The March 2009 sale occurred before the first estimated-tax installment, the election and consequences could have been anticipated near the sale date, and paying based on 100% of the 2008 tax could have avoided the penalty. The taxpayer could still file a refund claim and protest a denial.

What this means for you

Coordinate the federal installment-sale election with estimated taxes immediately when the sale occurs. If electing out, model full year-of-sale gain and consider the prior-year safe harbor or annualized-income installments before payment deadlines.

Common questions

Q: Could Form IL-2210 exclude gain attributable to cash received in later years?
A: No. The election made the full gain 2009 income for this purpose.

Q: Did making the election near the return deadline establish reasonable cause?
A: No. IDOR said the election and its tax consequences could reasonably have been anticipated near the sale date.

Q: Could the taxpayer challenge the penalty?
A: Yes, by filing a refund claim and protesting if the claim was denied.

Citations and references

• 35 ILCS 5/804(a)-(e)
• 35 ILCS 735/3-8
• IRC § 453(d)
• 86 Ill. Adm. Code 700.400
• Treas. Reg. § 15a.453-1(d)
• Form IL-2210

Subject

Estimated Tax

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/ig100022.pdf

Original ruling text

IT 10-0022-GIL 10/14/2010 ESTIMATED TAX
General Information Letter: Estimated tax was required to be paid on the entire gain
realized by the taxpayer on a sale that qualifies for the installment method of reporting,
if the taxpayer elects not to use the installment method.
October 14, 2010
Dear:
This is in response to your letter dated September 14, 2010 in which you request penalty abatement
in regard to your 2009 estimated tax liability. The nature of your request and the information provided
requires that we respond with a General Information Letter (GIL). A GIL is designed to provide
general information, is not a statement of Department policy and is not binding on the Department.
See 2 Ill. Adm. Code § 1200.120(b) and (c).
Your letter states:
It was suggested by Revenue Tax Specialist Mr. Z that I write to you for a review of the facts
surrounding the 2009 Illinois Tax Return filed on April 15th by my wife and I. I have discussed
the underlying issue with both Mr. Z and Ms. Y (Chicago Revenue Tax Specialist II) both have
indicated that their authority limits do not allow variations from 2210 in calculating taxes or
penalties due. Both have indicated that pre-payment of future taxes as encountered by election
of the federal waiver for applying the Installment Method on Installment Sales (Publication 537)
does not exactly fit Form 2210 which assumes the income was actually received in the tax
year (2009) and is not being pre-paid for installment sale income for future years (2010) and
(2012).
In my case, I turned in company stock in March 2009 and received a two year note with
projected payments as follows: nine in 2009, twelve in 2010 and three in 2011. The total long
term capital gains associated with the entire sale was $1,078,509. I was actually paid 8 of the
scheduled 2009 payments for a 2009 related income of $357,341. For federal reasons, I felt it
was in my best interest to Elect Out of the Installment Method (page 5 Publication 538) which I
elected to do on April 14th, 2010 just prior to paying 2009 taxes. Until that point in time when
the opt out election was made, I had paid sufficient Illinois estimated taxes on that basis and
was owed a refund of $749.00. When I elected to pre-pay the future 2010 and 2011 taxes
($721,249), my tax bill increased and I paid the full amount $20,888 on 4/15/2010 at the
Chicago office of the Illinois Department of Revenue.
What I am requesting is consideration for some sort of variation or modification from standard
Form 2210 where the total “2009” taxes are divided by four (line 8). If the amount of future
taxes paid in 2009 were removed from line 1 (resulting in a figure of $10,587), it would show
that the proper withholding and estimated taxes were more than adequate for the actual
income received in 2009 and that the payment of the extra $20,888 was for taxes that,
otherwise would have been earned in 2010 and 2011.
Please call my cell XXX-XXX-XXXX if you have any questions. I am currently recovering from
a quintuple heart bypass experienced in STATE and am not receiving mail sent to the CITY1
address. I can get mail for the next 8 weeks during recovery at P.O. Box XXX, CITY2, STATE
XXXXX. Can I be the only Illinois resident that ever elected out of the Installment Sale on the
federal return? I have attached several pages of the federal publication 538 that explains
Installment Sales and Opting Out of Installment Sales for your convenience. Opting Out can be

IT 10-0022-GIL
October 14, 2010
Page 2
done with no penalty up to April 15 of the following tax year (4/15/2010) which is what I did.
Please remove the Illinois’ penalty.

RULING
Section 804(a) of the Illinois Income Tax Act (“IITA”; 35 ILCS 5/804(a)) imposes a penalty for
underpayment of estimated tax.
In general. In case of any underpayment of estimated tax by a taxpayer, except as provided in
subsection (d) or (e), the taxpayer shall be liable to a penalty in an amount determined at the
rate prescribed by Section 3-3 of the Uniform Penalty and Interest Act upon the amount of the
underpayment (determined under subsection (b)) for each required installment.
Section 804(b) defines “underpayment” as the amount of the “required installment” that is not paid on
or before the last day prescribed for payment. The “required installment” is generally defined in
Section 804(c)(1) as 25% of the required annual payment. The “required annual payment” means the
lesser of:
(i) 90% of the tax shown on the return for the taxable year, or if no return is filed, 90% of the
tax for such year, or
(ii) 100% of the tax shown on the return of the taxpayer for the preceding taxable year if a
return showing a liability for tax was filed by the taxpayer for the preceding taxable year and
such preceding year was a taxable year of 12 months. 35 ILCS 5/804(c)(1)(B)
IITA Section 804(c)(2) states that the required installment shall be the annualized income installment
where that amount is less than 25% of the required annual payment. This provision allows taxpayers
who receive their income unevenly throughout the year to align their estimated tax obligation with
receipt of their income.
IITA Section 804(e) provides an exception to the penalty imposed under Section 804(a).
The penalty imposed for underpayment of estimated tax by subsection (a) of this Section shall
not be imposed to the extent that the Director or his or her designate determines, pursuant to
Section 3-8 of the Uniform Penalty and Interest Act that the penalty should not be imposed.
Section 3-8 of the Uniform Penalty and Interest Act (“UPIA” ; 35 ILCS 735/3-8) provides that no
penalty shall be imposed if reasonable cause exists.
The penalties imposed under the provisions of Sections 3-3, 3-4, 3-5, and 3-7.5 of this Act
shall not apply if the taxpayer shows that his failure to file a return or pay tax at the required
time was due to reasonable cause. Reasonable cause shall be determined in each situation in
accordance with the rules and regulations promulgated by the Department. A taxpayer may
protest the imposition of a penalty under Section 3-3, 3-4, 3-5, or 3-7.5 on the basis of
reasonable cause without protesting the underlying tax liability.
Department Regulations Section 700.400 (86 Ill. Adm. Code 700.400) provides rules regarding

IT 10-0022-GIL
October 14, 2010
Page 3
reasonable cause. Subsection (b) of Section 700.400 states:
The determination of whether a taxpayer acted with reasonable cause shall be made on a
case by case basis taking into account all pertinent facts and circumstances. The most
important factor to be considered in making a determination to abate a penalty will be the
extent to which the taxpayer made a good faith effort to determine his proper tax liability and to
file and pay his proper liability in a timely fashion.
Subsection (c) of Section 700.400 states:
A taxpayer will be considered to have made a good faith effort to determine and file and pay
his proper tax liability if he exercised ordinary business care and prudence in doing so. A
determination of whether a taxpayer exercised ordinary business care and prudence is
dependent upon the clarity of the law or its interpretation and the taxpayer’s experience,
knowledge, and education. Accordingly, reliance on the advice of a professional does not
necessarily establish that a taxpayer exercised ordinary business care and prudence, nor does
reliance on incorrect facts such as an erroneous information return.
Subsection (f) of Section 700.400 sets forth various factors the Department considers in determining
the existence of reasonable cause, including:
Could the event cited have been reasonably anticipated? Was the event one that should have
been anticipated (e.g. a vacation or scheduled absence) or was it unexpected, unavoidable, or
otherwise unplanned (e.g. an emergency or disaster).
Applying the above provisions to the facts stated in your letter, there is no basis for excluding certain
income and associated tax from the computation of estimated tax required under IITA Section 804.
Estimated tax payments must be made on the basis of the lesser of 90% of the tax shown on the
return for the taxable year, or 100% of the tax shown on the return for the preceding taxable year, and
must be paid in either four equal installments or determined in accordance with the annualized
installment method. Therefore, the Department may not determine your estimated tax liability by
modifying the Form IL-2210 as proposed in your letter.
In addition, the facts stated in your letter are not sufficient to establish reasonable cause under IITA
Section 804(e) and UPIA Section 3-8. You cite your election out of the installment method of
accounting under Internal Revenue Code Section 453(d) as the cause of your failure to timely pay the
required amount of estimated tax. Under federal income tax law, where an election out of the
installment method is made, the taxpayer must recognize the entire amount of gain in the year of
sale. Treas. Reg. § 15a.453-1(d). Gain is computed using as the amount realized the fair market
value of the buyer’s installment obligation. Treas. Reg. § 15a.453-1(d)(2). The election must be made
by the due date (including extensions) for filing the taxpayer’s return for the taxable year in which the
sale occurs, and is made by reporting on the return the full amount realized from the sale. Treas.
Reg. 15a.453-1(d)(3).
In this case, the installment sale occurred on March 29, 2009, prior to the due date of the first
installment of 2009 estimated tax. Although the election out of the installment method must be made
by the extended due date of the 2009 return, the election and its tax consequences could reasonably
have been anticipated on or near the date of sale in March 2009. An estimated tax penalty could have

IT 10-0022-GIL
October 14, 2010
Page 4
been avoided by making payments based upon 100% of the tax shown on the return for the 2008
taxable year. Therefore, the facts stated in your letter do not support the conclusion that you
exercised ordinary business care and prudence to determine and file and pay your proper tax liability.
You have indicated that you were not assessed a federal estimated tax penalty. The documentation
you provided related to your federal return is not sufficient to determine the amount of your federal
estimated tax obligation. The instructions for federal Form 1040, Line 76, set forth several exceptions
to the estimated tax penalty, any one of which may have been applicable in your case.
You are free to challenge the Department’s penalty determination. To do so, you should file a claim
for refund for the amount of penalty. If your claim is denied, you have the right to protest the claim
denial in an administrative hearing.
As stated above, this is a GIL. A GIL does not constitute a statement of policy that applies, interprets
or prescribes the tax laws, and it is not binding on the Department. If you wish to obtain a PLR which
will bind the Department, please submit a request conforming to the requirements of 2 Ill. Adm. Code
§ 1200.110(b).

Sincerely,

Brian L. Stocker
Associate Counsel (Income Tax)