Could entities use separate accounting for Illinois property sales without showing how the statutory formula distorted their income?

Plain-English summary

The entities did not provide the evidence needed for separate accounting. Their request said their only possible Illinois activity involved selling properties and that separate books would more accurately reflect income and losses.

Section 304(f) and Regulation 100.3390 required much more: clear and cogent proof that the statutory formula attributed income to Illinois unreasonably and out of proportion to Illinois business, plus proof that the proposed method fairly measured Illinois activity.

IDOR denied the incomplete petition and invited supplementation. It also noted the then-applicable requirement to file at least 120 days before the first affected return's due date.

What this means for you

Quantify the statutory result, the alleged distortion, and the replacement result. Separate books alone do not establish that an alternative is fair.

Common questions

Q: Did the petition establish distortion?
A: No.

Q: Could the entities supplement it?
A: Yes.

Citations and references

• 35 ILCS 5/304(f)
• 86 Ill. Adm. Code 100.3390(c), (e)(1)

Subject

Alternative Apportionment

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-11-0026.pdf

Original ruling text

IT 11-0026GIL 12/21/2011 ALTERNATIVE APPORTIONMENT
General Information Letter: A request to use separate accounting cannot be granted
without some evidence of distortion.
December 21, 2011
Dear:
This is in response to your letter dated December 15, 2011, in which you request permission for the
above-listed taxpayers to use separate accounting rather than the statutorily-mandated
apportionment formula, pursuant to Section 304(f) of the Illinois Income Tax Act (the "IITA"; 35 ILCS
101 et seq.). The nature of your letter and the information you have provided require that we respond
with a General Information Letter, which is designed to provide general information, is not a statement
of Department policy and is not binding on the Department. See 86 Ill. Adm. Code 1200.120(b) and
(c), which may be found on the Department's web site at www.revenue.state.il.us. For the reasons
discussed below, your petition cannot be granted at this time.
In your letter you have stated the following:
On behalf of our client, the above named taxpayer, we are requesting the use of
separate accounting, under ILTA Section 304(f), for the attached entity’s which may or
may not have a filing requirement in the state of Illinois in the following tax years. In
order to accurately reflect state income and losses, we are requesting to apportion
income and losses using the separate books and records method of accounting. The
only activities any of the entity’s (See Attached List) could have in the state of Illinois
consist of selling properties sold within the state.
Response
Section 304(f) of the IITA provides:
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 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;

(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.
Taxpayers who wish to use an alternative method of apportionment under this provision are required
to file a petition complying with the requirements of 86 Ill. Adm. Code Section 100.3390, which may
be found on the Department's web site at www. iltax.com. 86 Ill. Adm. Code Section 100.3390(c)
provides:

IT 11-0026-GIL
December 21, 2011
Page 2
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 or 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 this
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.
Your petition does not meet the requirements of this provision, and so cannot be granted at this time.
You will need to supplement your petition to meet these requirements.
Please note that 86 Ill. Adm. Code Section 100.3390(e)(1) requires a petition to be filed at least 120
days prior to the due date (including extensions) for the first return for which permission is sought to
use the alternative apportionment method. A petition filed December 15, 2011 will allow a taxpayer to
use the requested method on original returns due on or after April 13, 2012, if granted.
As stated above, this is a general information letter which 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 still
believe that your petition should be granted, please supplement the petition in accordance with the
provisions of 86 Ill. Adm. Code Section 100.3390. If you have any questions, you may contact me at
(217) 524-3951.

Sincerely,

Paul S. Caselton
Deputy General Counsel -- Income Tax