Could a corporation use separate accounting because its Illinois office showed a loss while formulary apportionment produced Illinois income?

Plain-English summary

The Illinois office's separate loss did not prove that separate accounting was appropriate. The corporation kept separate records for three locations and asked to use them because the Illinois office showed a significant loss.

Section 304(f) allowed an alternative only when the statutory method did not fairly represent Illinois business activity. IDOR said a different result under separate accounting, without an explanation of why it was more accurate than the formula, did not meet Regulation 100.3390's burden.

The petition also had to satisfy the then-applicable 120-day filing rule. IDOR invited the corporation to supplement its request rather than approving the method.

What this means for you

Support an office-level method with operational and transactional evidence showing both formula distortion and why the separate books fairly measure Illinois activity.

Common questions

Q: Did the Illinois office loss establish distortion?
A: No.

Q: Was the taxpayer barred from supplementing the petition?
A: No.

Citations and references

• 35 ILCS 5/304(f)
• 86 Ill. Adm. Code 100.3390

Subject

Alternative Apportionment

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2012.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2012/it-12-0016.pdf

Original ruling text

IT 12-0016-GIL 07/10/2012 ALTERNATIVE APPORTIONMENT
General Information Letter: Petition for permission to use separate accounting cannot
be granted based only on a showing that separate accounting and formula
apportionment produce different results.
July 10, 2012
Dear:
This is in response to your letter dated July 5, 2012, in which you request permission for Guardian
Family Care, Inc. to use separate accounting for each office of the taxpayer, 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:
We are requesting permission to use an alternative apportionment formula when
computing our Illinois taxable income for form 1120 for the fiscal year ended 4-30-12.
The apportionment methods available to us do not fairly and accurately reflect our
business activity in Illinois.
Our corporation has three locations:
CITY1, STATE
CITY2, STATE
CITY3, Illinois
We keep a separate set of accounting records for each location. Attached is our Profit
and Loss statement from year ended 4-30-12. As you can see, our Illinois location has
a significant loss. For this reason we are requesting permission to use an alternative
apportionment formula when computing our Illinois taxable income for form 1120 for the
fiscal year ended 4-30-12.
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;

IT 12-0016-GIL
July 10, 2012
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.
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. tax.illinois.gov. Merely showing a separate
accounting statement, without any explanation of why the separate accounting is more accurate than
formulary apportionment, is insufficient to meet the burden of proof imposed by that regulation on
taxpayers requesting permission to use an alternative method of apportionment.
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. Your petition was filed July 5, 2012, and will allow the
taxpayer to use the requested method on original returns due on or after November 2, 2012, if
ultimately 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