Could a construction subcontractor use separate accounting because its only Illinois contract produced a loss?

Plain-English summary

IDOR refused the subcontractor's separate-accounting request because the petition was procedurally invalid and, independently, did not prove distortion. The company had one Illinois construction contract that generated a stated gross loss while its overall federal S-corporation return showed net operating income. It used a net-income/loss method on its original Illinois return.

The petition was not filed at least 120 days before the extended return due date, and the original return did not use and pay under the statutory apportionment formula. IDOR instructed the company to file an amended Form IL-1120-ST-X using the statutory method, then file a second amended return attaching the alternative-apportionment petition as a refund claim.

Even a timely petition would have been summarily rejected. Its only basis was that separate accounting produced a different result because the Illinois job lost money. It did not provide clear and cogent evidence that the statutory formula taxed extraterritorial values or attributed income to Illinois out of proportion to Illinois business, nor prove that the proposed method fairly reflected Illinois activity.

What this means for you

Follow the exclusive petition route and continue using the statutory method until permission is granted. Support the petition with evidence of formula distortion across the taxpayer's business, not merely a loss on one Illinois project or a different percentage.

Common questions

Q: Could the company use separate accounting first and ask permission afterward?
A: No. Because the petition was late, the original return had to use and pay under the statutory formula.

Q: Was the Illinois project's loss enough to prove distortion?
A: No. IDOR treated that as showing only that another method reached a different result.

Q: Was there a route to present a new petition?
A: Yes. IDOR described filing one amended return under the statutory method and then a second amended return with the petition as a refund claim.

Citations and references

• 35 ILCS 5/304(f)
• 86 Ill. Adm. Code 100.3390(b), (c), (d), (e)
• Form IL-1120-ST-X

Subject

Alternative Apportionment

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/ig100028.pdf

Original ruling text

IT 10-0028-GIL 10/26/2010 ALTERNATIVE APPORTIONMENT
General Information Letter: Alternative apportionment may not be granted on a petition
that does not conform to the regulatory requirements.
October 26, 2010
Dear:
This is in response to your letter dated September 23, 2010 in which you request permission to use
an alternative method of allocation or apportionment. Department of Revenue (“Department”)
regulations require that the Department issue only two types of letter rulings, Private Letter Rulings
(“PLRs”) and General Information Letters (“GILs”). PLRs are issued by the Department in response to
specific taxpayer inquiries concerning the application of a tax statute or rule to a particular fact
situation. A PLR is binding against the Department, but only as to the taxpayer who is the subject of
the request for ruling and only to the extent the facts recited in the PLR are correct and complete.
GILs do not constitute statements of Department policy that apply, interpret or prescribe the tax laws
and are not binding against the Department. See 2 Ill. Adm. Code 100.1200(b) and (c).
Your letter states as follows:
COMPANY, Inc. is a STATE corporation doing business as a construction subcontractor. The
Company rarely does business outside the State of STATE.
During 2009 the Company was awarded a construction contract in Illinois. This is the first and
only time the Company has been contracted to perform a job in Illinois. The contract in Illinois
produced a gross loss for the Company of $1,336,960. However, overall the Company net
operating income in its 1120S of $10,777,631 (Line 21, 1120S) based on profits from all of its
operations.
Based on this, the apportionment methods prescribed by IITA, Sections 304(a) through 304(d)
and (h) do not fairly reflect the Company’s business activity in Illinois and in fact represent a
grossly distorted picture of the Company’s earnings (in this case a lack thereof) in Illinois. Due
to the facts as outlined above, the Company has used an alternative method, based on net
income (loss) to report its earnings in Illinois.
We are sending this letter on behalf of the Company to respectfully request that the alternative
method based on net income (loss) be allowed in order to more accurately reflect the fact that
the Company experienced a large gross loss in Illinois in 2009.
RULING
Section 304(f) of the Illinois Income Tax Act (“IITA”; 35 ILCS 5/304(f)) states:
If the allocation and apportionment provisions of subsections (a) through (e) and of subsection
(h) do not fairly represent the extent of a person’s business activity in this State, the person
may petition for, or the Director may, without a petition, permit or require in respect of all or any
part of the person’s business activity, if reasonable:
(1) Separate accounting;
(2) The exclusion of any one or more factors;

IT 10-0028-GIL
October 26, 2010
Page 2

(3) The inclusion of one or more additional factors which will fairly represent the
person’s business activities in this State; or
(4) The employment of any other method to effectuate an equitable allocation and
apportionment of the person’s business income.
Department Regulations Section 100.3390(b) states as follows regarding the petition for alternative
apportionment:
The petition procedures provided in this Section are exclusive means by which a taxpayer may
petition for an alternative apportionment formula. Any attempt to invoke an alternative
apportionment formula by a method or procedure other than as specified in this Section shall
not be considered a valid petition under IITA Section 304(f). Pursuant to Section 304(f), the
Director has sole and exclusive authority to grant a petition for an alternative apportionment
formula.
Department Regulations Section 100.3390(e) states as follows regarding the time for filing a petition:
A taxpayer petition for use of a separate accounting method or any other alternative
apportionment method will not be considered by the Director unless such petition has been
timely filed. A taxpayer who petitions the Director for an alternative apportionment formula
does so subject to the Department’s right to verify, by audit of the taxpayer’s return and
supporting books and records within the applicable statute of limitations, the facts submitted as
the basis of the petition. A petition for alternative allocation and apportionment is timely filed if
the petition is filed:
(1)

120 days prior to the due date of the tax return (including extensions) for which
permission to use such alternative method is sought. A taxpayer who does not petition
more than 120 days prior to the due date of the original return must file the return and
pay tax according to the statutorily approved allocation or apportionment method.

(2)

as an attachment to a return amending an original return which was filed using the
statutory allocation and apportionment rules. A taxpayer who has not filed a petition for
alternative apportionment under subsection (e)(1) or whose subsection (e)(1) petition
has been rejected, may thereafter file such petition with an amended return and the
Department will consider the petition along with any other issues raised in the claim for
refund pursuant to the procedures set forth at Section 100.9110 of this Part.

(3)

as part of a protest to a notice of deficiency issued as a result of the audit of the
taxpayer’s return and supporting books and records; provided that the audit adjustments
being protested result in the need for the petition for alternative apportionment.
Alternative apportionment may not be raised in a protest to a notice of deficiency if such
petition could have been submitted under subsection (e)(1) or (e)(2) above (i.e. the
petition for an alternative apportionment formula is not necessitated by the proposed
adjustments made to the taxpayer’s return during the course of the audit).

Applying the provisions above to the facts stated in your letter, your petition has not been filed 120

IT 10-0028-GIL
October 26, 2010
Page 3
days prior to the extended due date of Taxpayer’s 2009 return. In addition, both your letter and the
Taxpayer’s return indicate that the Taxpayer did not file its original return and pay tax according to the
statutorily approved allocation or apportionment method. Therefore, your petition is not timely and will
not be considered. In order to file a timely petition under Regulations Section 100.3390(e), you should
first file an amended Form IL-1120-ST-X using the statutorily prescribed apportionment formula to
compute and pay the required amount of Illinois tax. You may then file a second amended return
including your petition for alternative apportionment as the basis of a claim for refund.
You may note, however, that even if your letter had contained a timely filed petition, the facts as
stated therein do not establish that the apportionment provisions of IITA Sections 304(a) through (e)
do not fairly represent the extent of Taxpayer’s business activity in Illinois. Regulations Section
100.3390(c) sets forth a taxpayer’s burden of proof:
Burden of Proof.
A departure from the required apportionment method is allowed only
where such methods do not accurately and fairly reflect business activity in Illinois. An
alternative apportionment method may not be invoked, either by the Director or by a taxpayer,
merely because it reaches a different apportionment percentage than the required statutory
formula. However, if the application of the statutory formula will lead to a grossly distorted
result in a particular case, a fair and accurate alternative method is appropriate. The party (the
Director or the taxpayer) seeking to utilize an alternative apportionment method has the burden
[of] going forward with the evidence and proving by clear and cogent evidence that the
statutory formula results in the taxation of extraterritorial values and operates unreasonably
and arbitrarily in attributing to Illinois a percentage of income which is out of all proportion to
the business transacted in the State. In addition, the party seeking to use an alternative
apportionment formula must go forward with the evidence and prove that the proposed
alternative apportionment method fairly and accurately apportions income to Illinois based
upon business activity in this State.
In addition, Regulations Section 100.3390(d) states:
A petition will be summarily rejected if its sole basis for support rests on the fact that an
alternative method reaches a different apportionment percentage that the required statutory
formula.
In this case, your petition contains as its sole basis for support the fact that a separate accounting
method reaches a different apportionment percentage than the required statutory formula. Therefore,
even if your petition had been timely it must be summarily rejected according to Regulations Section
100.3390(d).
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
100.1200 and 86 Ill. Adm. Code 100.3390.
Sincerely,
Brian L. Stocker
Associate Counsel (Income Tax)