How could an Illinois resident avoid double tax if Iowa taxed Conservation Reserve Program payments from Iowa farmland?

Plain-English summary

Illinois properly taxed the resident's Conservation Reserve Program payments, but a qualifying Iowa income tax on the same income could generate an Illinois credit and refund claim. Illinois residents allocated all items entering base income to Illinois, so the location of the farmland in Iowa—or hypothetically Georgia—did not remove the income from Illinois taxation.

IDOR could not determine whether Iowa law also authorized Iowa to tax the payments. To mitigate double taxation, Section 601(b)(3) allowed a resident a credit for income tax paid to another state on income also taxed by Illinois, subject to the statutory limitation and provided the creditable tax was not deducted in determining base income.

The taxpayer needed to complete Schedule CR. If Iowa tax increased, the taxpayer could file an amended Form IL-1040-X within the limitations period to claim the resulting Illinois refund.

What this means for you

Report out-of-state income as required for an Illinois resident, then separately calculate the credit for qualifying income tax actually paid to the other state. Preserve the other-state assessment and file the Illinois amended return before the refund deadline.

Common questions

Q: Did Illinois residence make the CRP payments taxable by Illinois?
A: Yes. IDOR said the resident correctly paid Illinois tax regardless of whether the land was in Iowa or Georgia.

Q: Did the GIL decide whether Iowa could tax the payments?
A: No. IDOR said Illinois law could not control Iowa's taxing jurisdiction.

Q: How was the Illinois credit claimed?
A: By completing Schedule CR and, for an earlier year, filing Form IL-1040-X within the limitations period.

Citations and references

• 35 ILCS 5/203(a)
• 35 ILCS 5/301(a)
• 35 ILCS 5/601(b)(3)

Subject

Credits – Foreign Tax

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2011.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2011/it-11-0007.pdf

Original ruling text

IT 11-0007-GIL 03/22/2011 CREDITS – FOREIGN TAX
General Information Letter: Taxpayer under audit by Iowa is entitled to an Illinois refund
if, as the result of the audit, the taxpayer’s Iowa tax and, therefore, the credit allowable
for taxes paid to another state are increased and a timely refund claim is filed.
March 22, 2011
Dear:
This is in response to your letter dated January 11, 2011 in which you state the following:
I have a question regarding which state has taxation authority. I have a farm in Iowa and the
only income generated from that farm is the CRP payment (USDA Conservation reserve
Program Payment for land idled from production). The State of Iowa does not recognize this
payment as farm income and classes this income as non-farm income. Another example of
non-farm income in the Iowa Tax code would be the production and sale of Christmas trees.
So, if I were to raise and sell Christmas trees wholesale to a distributor in California, which
state would have the superior right of taxation of the income generated from the sale of those
trees. I live in the State of Illinois, and thus by business would be based in Illinois. Would the
State of Illinois have the superior right of taxation or Iowa? The CRP payment would be a
similar scenario situation in that the income is generated from the federal government of which
the State of Iowa has only 1/50th claim. If I were to own land in say, Georgia, would the
scenario be the same. I realize this line of reasoning is a logical progression, and the tax laws
do not always follow logic.
Since I felt the State of Illinois had the superior right, I have paid tax on this income to the
State of Illinois for many, many years. If the State of Iowa demands the claim of these back
taxes, how do I make a claim to the State of Illinois to recover money paid, which the State of
Iowa would demand at their maximum tax rate. If there would be no mechanism to do this, it
would amount to double taxation.
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.
Under the Illinois Income Tax Act (“IITA”; 35 ILCS 5/101 et seq.) a resident of Illinois is taxable on
income received from farm land in Iowa. Specifically, Section 301(a) provides:
All items of income or deduction which were taken into account in the computation of base
income for the taxable year by a resident shall be allocated to this State.
Under IITA Section 203(a), “base income” is the amount reported on Line 9 of the Form IL-1040, and
is equal to the individual’s “adjusted gross income” as properly reported on his or her federal income
tax return and on Line 1 of the Form IL-1040, after taking into account the modifications reported on
Lines 2 through 8.

IT 11-0007-GIL
March 22, 2011
Page 2

CRP payments are agricultural program payments reported by the Farm Service Agency on Form
1099-G and includable in income either on Line 17 (rental real estate) or 18 (farm income/loss) of
Form 1040. As an Illinois resident, you have correctly paid Illinois tax on the CRP payments
regardless of whether the land is in Iowa or Georgia. This would also be true under the hypothetical
scenario you mention in your letter regarding an Illinois based business selling Christmas trees raised
in Iowa to a distributor in California.
Your next question is if Iowa demands back taxes on CRP payments already received and for which
you already paid Illinois taxes on, can you request a credit from Illinois on taxes paid to Illinois to
avoid double taxation (tax paid once to Illinois and again to Iowa). Illinois law cannot and does not
control the question of whether Iowa also has jurisdiction to tax CRP income under some principle of
Iowa law. To ameliorate the circumstances where double taxation of income does occur, Illinois
provides for its residents a tax credit for taxes paid to other states at IITA Section 601(b)(3):
(3) Foreign tax. The aggregate amount of tax which is imposed upon or measured by income
and which is paid by a resident for a taxable year to another state or states on income which is
also subject to the tax imposed by subsections 201(a) and (b) of this Act shall be credited
against the tax imposed by subsections 201(a) and (b) otherwise due under this Act for such
taxable year. For taxable years ending prior to December 31, 2009, the aggregate credit
provided under this paragraph shall not exceed that amount which bears the same ratio to the
tax imposed by subsections 201(a) and (b) otherwise due under this Act as the amount of the
taxpayer's base income subject to tax both by such other state or states and by this State
bears to his total base income subject to tax by this State for the taxable year. For taxable
years ending on or after December 31, 2009, the credit provided under this paragraph for tax
paid to other states shall not exceed that amount which bears the same ratio to the tax
imposed by subsections 201(a) and (b) otherwise due under this Act as the amount of the
taxpayer's base income that would be allocated or apportioned to other states if all other states
had adopted the provisions in Article 3 of this Act bears to the taxpayer's total base income
subject to tax by this State for the taxable year. The credit provided by this paragraph shall not
be allowed if any creditable tax was deducted in determining base income for the taxable year.
Any person claiming such credit shall attach a statement in support thereof and shall notify the
Director of any refund or reductions in the amount of tax claimed as a credit hereunder all in
such manner and at such time as the Department shall by regulations prescribe.
Please note that there is a difference in calculating the credit for taxable years ending prior to
December 31, 2009 versus taxable years ending on or after December 31, 2009. The Illinois
Schedule CR, Credit for Tax Paid to Other States, must be completed to receive a credit for taxes
paid to Iowa. Illinois Publication 111 describes Schedule CR in more detail. You may file a claim for
refund by completing an amended return, IL-1040-X, within the statute of limitations period. All forms
and publications can be found on the Illinois Department of Revenue website www.tax.illinois.gov
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.

IT 11-0007-GIL
March 22, 2011
Page 3
Sincerely,

Heidi Scott
Associate Counsel -- Income Tax