Did a partnership that invested its Illinois Lottery winnings avoid replacement tax as either a lottery pool or an investment partnership?

Plain-English summary

The entity was a taxable partnership and did not qualify as an investment partnership. The lottery-only exclusion did not apply because the partnership did more than collect and distribute winnings; it invested them.

An investment partnership then had to derive at least 90% of gross income from interest, dividends, and gains on qualifying investment securities, along with separate asset and dealer-status tests. Lottery winnings exceeded 10% of this partnership's gross income, so it failed the income test.

IDOR found no provision exempting the lottery winnings or qualifying-investment income of a partnership otherwise subject to Illinois tax. The partnership therefore owed personal property tax replacement income tax on all of that income.

What this means for you

Test the entity as a whole. Separately labeling lottery and investment components does not convert one operating partnership into two exempt or excluded entities.

Common questions

Q: Was the entity excluded as a lottery pool?
A: No, because it invested the winnings rather than merely collecting and distributing them.

Q: Why did it fail investment-partnership status?
A: More than 10% of gross income consisted of lottery winnings, so less than 90% was qualifying investment income.

Citations and references

• 35 ILCS 5/205(b)
• 35 ILCS 5/201(a)–(d)
• 35 ILCS 5/1501(a)(11.5), (16)

Subject

Partnerships

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-12-0032.pdf

Original ruling text

IT 12-0032-GIL 12/03/2012 PARTNERSHIPS
General Information Letter: A partnership that derives income from both lottery
winnings and investment income is not excluded from partnership treatment as an entity
formed for the sole purpose of playing the lottery, and if it derives more than 10% of its
gross income from lottery winnings, it is not an investment partnership.
December 3, 2012
Dear:
This is in response to your letter dated November 29, 2012. The nature of your request 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. tax.illinois.gov.
In your letter you have stated the following:
After receiving your email correspondence of November 2, 2012, I have researched the
matter further regarding the Illinois Lottery winnings. I have read over Sections
1501(a)(16) and 1501(a)(11.5) of the Illinois Income Tax Act. The act clearly states that
“the term "partnership" does not include a syndicate, group, pool, joint venture, or other
unincorporated organization established for the sole purpose of playing the Illinois State
Lottery,” therefore; it is not subject to replacement tax. The winnings are not taxable
under a partnership, but are to be paid by the individual “partner” winners.
These winnings in turn were invested entirely; therefore this in turn has created an
investment partnership, again not subject to replacement tax under the Illinois Income
Tax Act. The proceeds are taxed under the individual “partner” recipients.
Taxes on all winnings and investment income have been paid to the State of Illinois on
an individual level. If each were to be taxed separately, would you agree that each is a
non-taxable entity for the State of Illinois under partnership taxation? If so, we can show
the lottery winnings under the partnership and the investment income being received as
a nominee for the individual partners. The investment income can be set up as a
separate investment entity going forward.
Please take in to consideration the individual components that are each non-taxable in
their own right and have been so that we may come to an equitable resolution of this
matter.
Response
Section 205(b) of the Illinois Income Tax Act (35 ILCS 5/205) provides that partnerships are not
subject to the regular Illinois income tax imposed under Section 201(a) and (b) of the Illinois Income
Tax Act (35 ILCS 5/201), but that partnerships other than “investment partnerships” are subject to the
personal property tax replacement income tax imposed under Section 201(c) and (d) of the Illinois
Income Tax Act.
Section 1501(a)(16) of the Illinois Income Tax Act (35 ILCS 5/1501) defines “partnership” as follows:

IT 12-0032-GIL
December 3, 2012
Page 2
The term "partnership" includes a syndicate, group, pool, joint venture or other
unincorporated organization, through or by means of which any business, financial
operation, or venture is carried on, and which is not, within the meaning of this Act, a
trust or estate or a corporation; and the term "partner" includes a member in such
syndicate, group, pool, joint venture or organization.
The term "partnership" includes any entity, including a limited liability company formed
under the Illinois Limited Liability Company Act, classified as a partnership for federal
income tax purposes.
As stated in your letter, the PARTNERSHIP is a partnership which does not merely collect and
distribute Illinois lottery winnings, but invests those winnings. Accordingly, it is a partnership for
purposes of the Illinois Income Tax Act.
Section 1501(a)(11.5)(A) of the Illinois Income Tax Act defines “investment partnership” as follows:
The term "investment partnership" means any entity that is treated as a partnership for
federal income tax purposes that meets the following requirements:
(i) no less than 90% of the partnership's cost of its total assets consists of
qualifying investment securities, deposits at banks or other financial institutions, and
office space and equipment reasonably necessary to carry on its activities as an
investment partnership;
(ii) no less than 90% of its gross income consists of interest, dividends, and gains
from the sale or exchange of qualifying investment securities; and
(iii) the partnership is not a dealer in qualifying investment securities.
Section 1501(a)(11.5)(B) of the Illinois Income Tax Act defines “qualifying investment securities” as
follows:
the term "qualifying investment securities" includes all of the following:
(i) common stock, including preferred or debt securities convertible into common
stock, and preferred stock;
(ii) bonds, debentures, and other debt securities;
(iii) foreign and domestic currency deposits secured by federal, state, or local
governmental agencies;
(iv) mortgage or asset-backed securities secured by federal, state, or local
governmental agencies;
(v) repurchase agreements and loan participations;
(vi) foreign currency exchange contracts and forward and futures contracts on
foreign currencies;
(vii) stock and bond index securities and futures contracts and other similar
financial securities and futures contracts on those securities;
(viii) options for the purchase or sale of any of the securities, currencies,

IT 12-0032-GIL
December 3, 2012
Page 3
contracts, or financial instruments described in items (i) to (vii), inclusive;
(ix) regulated futures contracts;
(x) commodities (not described in Section 1221(a)(1) of the Internal Revenue
Code) or futures, forwards, and options with respect to such commodities, provided,
however, that any item of a physical commodity to which title is actually acquired in the
partnership's capacity as a dealer in such commodity shall not be a qualifying
investment security;
(xi) derivatives; and
(xii) a partnership interest in another partnership that is an investment
partnership.
Because more than 10% of its income is comprised of lottery winnings, the PARTNERSHIP is not an
investment partnership.
There is nothing in the Illinois Income Tax Act that could be read to exempt from taxation lottery
winnings or income from “qualifying investment securities” received by a partnership that is otherwise
subject to Illinois taxation, so the PARTNERSHIP is subject to Illinois’ personal property tax
replacement income tax on all such income.
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 are
not under audit and you wish to obtain a binding Private Letter Ruling regarding your factual situation,
please submit all of the information set out in items 1 through 8 of Section 1200.110(b). If you have
any further questions, you may contact me at (217) 782-7055.
Sincerely,

Paul S. Caselton
Deputy General Counsel – Income Tax