Could a manufacturer replace an unusually high nine-day Illinois sales factor with its lower prior-year factor because the short period was unrepresentative?

Plain-English summary

A short taxable year and a higher-than-normal Illinois sales factor did not by themselves justify alternative apportionment. The manufacturer had a nine-day tax year after a reorganization. Illinois sales were concentrated in those days, producing a 6.7391% factor compared with 3.8347% in the prior year.

The Department said the statutory formula was meant to measure Illinois's relative share of the market for the specific taxable year being apportioned. There was no requirement that the result match historical averages, and unusually high Illinois sales during the short period naturally produced a higher factor.

The proposed alternative—using the prior year's factor—also lacked support. The petition did not explain why 2011 sales better represented the market for the 2012 short year than the short year's own sales. The taxpayer could submit more evidence, subject to the rule requiring a petition at least 120 days before the relevant return's due date, including extensions.

What this means for you

To depart from the statutory factor, show both defects: why the normal formula misstates the current-year market and why the proposed replacement measures that market more fairly. Historical variance alone is not enough.

Common questions

Q: Did a nine-day year automatically justify relief?
A: No.

Q: Was a prior-year average accepted as fairer?
A: No.

Q: Could the taxpayer submit more evidence?
A: Yes, subject to the petition-timing rule.

Citations and references

• 35 ILCS 5/304(f) — alternative apportionment
• 86 Ill. Adm. Code 100.3390(c), (e) — burden of proof and petition timing

Subject

Alternative Apportionment

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2013.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2013/it-13-0012.pdf

Original ruling text

IT 13-0012 GIL 10/24/2013 Alternative Apportionment
A petition to use an alternative method of apportionment cannot be granted without a showing that
the statutory method fails to reflect the market for the taxpayer’s goods, services or other sources of
business income and a showing that the requested alternative better reflects that market.
October 24, 2013
Re:

Petition for Alternative Apportionment

Dear Xxxx:
This is in response to your letter dated September 3, 2013 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 issued the 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). For the reasons discussed below, your
petition cannot be granted at this time.
Your letter states as follows:
We are writing to you on behalf of our client, COMPANY A. and Subsidiaries (“COMPANY A”).
XXXXXXX and you had a discussion a number of months ago relating to this matter.
COMPANY A is seeking the Illinois Department of Revenue’s approval of an alternative
apportionment formula under IITA § 304(f) and 86 Ill. Adm. Code § 100.3390(e)(2).
Per your conversations with XXXXXXX, we have enclosed the following;
● COMPANY A’s original 2012 Form IL-1120 for the short year January 1, 2012 through
January 9, 2012 (“short year”);
● Form IL-1120-V “Payment Voucher for Corporation Income and Replacement Tax”;
● A check payable to the “Illinois Department of Revenue” in the amount of $95,722.00; and,
● A 2012 Form 1120-X for the above mentioned short year.
As you can see from the amended return, if COMPANY A’s request is granted it would pay
$XX,XXX in tax rather than the $XX,XXX on the original return. Below are the facts that we
believe support our request for an alternative apportionment formula.
Facts
COMPANY A is headquartered in STATE. It designs and manufactures compressors for
residential and light commercial air conditioning, heat pump and refrigeration applications. It is
one of the largest compressor manufacturers in the world and the only one that can claim its
units are made in the U.S.A.
In early 2012 COMPANY A underwent a reorganization, which resulted in the short year period
of nine days. During this brief period, COMPANY A had $XXX,XXX in Illinois sales out of
$X,XXX,XXX in total sales. This resulted in a greatly inflated apportionment percentage of
6.7391% for the short period. Historically, COMPANY A’s Illinois apportionment factor has

been lower. For the tax year 2011, it was 3.8347. The ratio of Illinois sales for the entire 2012
calendar year were essentially what they had been in prior years, however, because a fair
portion of the Illinois sales were concentrated in the first few days of January; this contributed
to the significant inflation of the apportionment factor for the short year. As a result, COMPANY
A requests that the Company use its prior year’s apportionment percentage for purposes of
apportioning income for the short year.
During the first nine days in January of 2012, COMPANY A made $XXX,XXX in sales to Illinois
customers. If they had sought specific accounting (“revenue only”) to apportion their income;
COMPANY A would have paid $X,XXX in replacement tax and $XX,XXX in income tax, for a
total of $XX,XXX. COMPANY A’s proposal to use the 2011 apportionment percentage results
in $XX,XXX in replacement tax and $XX,XXX in income tax for a total due of $XX,XXX.
COMPANY A seeks the ability to use the prior year’s apportionment percentage because it
more fairly represents the business it transacted in Illinois.
Prior to the reorganization, COMPANY A amassed a significant Net Operating Loss (“NOL”) at
the federal and state levels. For the short period ending 1/9/XX, COMPANY A offset its income
with the NOL on its federal return and its state returns in other jurisdictions. However,
COMPANY A could not use its Illinois NOL to offset the income from the short year in Illinois,
as Illinois NOLs were limited to $100,000 by the legislature for the period in question. The
federal and state NOLs were eliminated due to the reorganization. As a result, COMPANY A
was placed in the unenviable position of having an Illinois NOL to offset the Illinois income, but
it was unable to use in the short year and it will never be able to use it due to it being
eliminated by the reorganization. Other Illinois taxpayers with Illinois NOLs are simply deferring
the benefit of their NOLs to a future date. COMPANY A however, has permanently lost the
benefit of its Illinois NOL.
Summary
Given the circumstances in this instance, the standard apportionment formula in the Illinois
Income Tax Act operates unreasonably and arbitrarily in attributing income to Illinois that is out
of all proportion to the business transacted within the state. For the short year, the statutorily
prescribed formula grossly distorts the sales activity in the state and as a result the income
apportioned to Illinois. That coupled with the suspension of the NOL placed COMPANY A in a
situation described above.
As a result, we request your authorization allowing COMPANY A to use the apportionment
percentage from 2011 to apportion Illinois income for the short year 2012. Additionally, we
request that the Department refund $XX,XXX of the tax submitted with this letter and
accompanying returns.

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, for taxable years ending before December 31, 2008, fairly represent the extent of a
person’s business activity in this State, or, for taxable years ending on or after December 31,
2008, fairly represent the market for the person’s goods, services, or other sources of business
income, 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;
(3) The inclusion of one or more additional factors which will fairly represent the person’s
business activities or market 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(c) states, regarding the burden of proof of the party
seeking to utilize an alternative apportionment method:
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 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.
Although Regulations section 100.3390(c) does not reflect the changes made to IITA Section 304(f)
under P.A. 98-478, the taxpayer’s burden of proof will remain generally unchanged, except that the
relevant inquiry shifts to whether the statutory formula fairly reflects the market for the taxpayer’s
goods, services, or other sources of business income.
The facts stated in your letter are not sufficient to satisfy the burden set forth in section 100.3390(c).
Your letter indicates that because an unusually high proportion of Illinois sales were made during the
course of an unusually short taxable year, the taxpayer’s Illinois apportionment factor is substantially
higher than its historical average. From this you argue that the statutory formula grossly distorts the
sales activity in Illinois and the income apportioned to Illinois. However, whether an amount of income
apportioned to Illinois for a taxable year properly reflects the taxpayer’s Illinois market does not
depend on the market for the taxpayer’s goods in prior taxable years. The intent of the apportionment
provisions is to produce an apportionment percentage that reflects Illinois’ relative share of the market
for the taxpayer’s goods for the particular taxable year being apportioned. It is certainly not an
unexpected result, then, that for a taxable year in which the taxpayer makes an unusually large
amount of Illinois sales relative to the amount of its out-of-state sales, it will have an unusually high
apportionment percentage. There is no requirement that the apportionment provisions produce a
factor in line with historical averages.
In addition, your petition fails to show that the proposed alternative method fairly and accurately
apportions income to Illinois. You propose that instead of using the apportionment percentage for the
2012 short taxable year, the taxpayer be permitted to use its apportionment percentage from the
2011 taxable year. You indicate that the latter is more consistent with the taxpayer’s historically lower
Illinois sales factor. However, it is the income for the taxpayer’s 2012 short taxable year that is being

apportioned and taxed. It is not clear why the amount of Illinois sales in 2011 better reflects the
market for the taxpayer’s goods during the 2012 short year than the amount of sales for the 2012
short year itself.
For the reasons stated above, your request for an alternative apportionment method cannot be
granted. However, if you have additional information related to this request that was not previously
submitted, you may supplement your petition and we will reconsider your request. 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 September 19, 2013, and will allow the taxpayer to use
the requested method on original returns due on or after January 17, 2014 if ultimately granted.

Sincerely,

Brian Stocker
Chair, PLR Committee

13gc0106

cc:

Kevin Anguish
Income Tax Processing
2-219

bc:

Daily file
Correspondence file: Grant Thornton LLP
IITA file : 304(f) Alternative Allocation Petition Denials #4