Did Illinois separately recognize foreign subsidiaries that had elected federal disregarded-entity status?

Plain-English summary

Illinois followed the federal election that disregarded each foreign subsidiary as separate from its corporate owner. Section 102 generally gave Illinois tax terms the same meaning used in federal income-tax law, and the regulation treated a federally disregarded entity and its corporate owner as one corporation for Illinois Income Tax Act purposes.

The disregarded entities therefore did not compute separate Illinois base income. Their income and losses were treated as the parent's items. Their activities and apportionment factors were also included when the parent calculated Illinois business income.

The GIL did not decide whether a disregarded entity had to register, file an annual report, or pay a fee under non-income-tax law. It directed those questions to the Illinois Secretary of State.

What this means for you

A federal check-the-box election can affect more than the state return's entity count. It can also pull the disregarded operation's property, payroll, sales, and income into the owner's Illinois apportionment computation.

Income-tax disregard does not automatically eliminate corporate-law filings or fees.

Common questions

Q: Did the foreign disregarded entities file separate Illinois income-tax returns?
A: No, under the treatment described; their items were included with the corporate owner.

Q: Were their apportionment factors ignored?
A: No. Their activities were treated as the owner's activities.

Q: Did the GIL resolve annual-report and registration duties?
A: No. It referred those issues to the Secretary of State.

Citations and references

• 35 ILCS 5/102 — federal definitions generally control
• 35 ILCS 5/203 — Illinois base income
• 35 ILCS 5/304(a) — multistate apportionment
• 86 Ill. Adm. Code 100.9750(b)(1)(A) — disregarded entity and owner treated as one corporation
• Treas. Reg. § 301.7701-3(a) — federal entity-classification election

Subject

Definitions

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2014.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2014/it-14-0012.pdf

Original ruling text

IT 14-0012 GIL 09/19/14 Definitions
An entity that is disregarded for federal income tax purposes and treated as part of its parent
corporation is treated identically for Illinois income tax purposes.
September 19, 2014
Re:

Check-the-box – Disregarded entity (DE) state tax compliance

Dear Xxxx:
This is in response to your letter dated June 12, 2013 in which you request a legal tax ruling whether
regarding the treatment of certain foreign disregarded entities. The Department’s 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). The nature of your letter and the information
provided require that we respond with a General Information Letter.
Your letter states as follows:
IRS has just approved 2 of our controlled foreign companies (CFC) as disregarded entities;
COMPANY 1 and a newly formed COMPANY 2, organized and incorporated in COUNTRY.
For federal corporation income tax purposes, the IRS would treat both companies as a
branch/division or to be an entity not separate from its owner.
Facts: COMPANY 2 is a wholly owned by COMPANY 1 and COMPANY 1 is a wholly owned
by COMPANY 3 a STATE company, head quarter in CITY, respectively. COMPANY 3
registered and has been filing the corporation income tax return in the state of Illinois.
Both, COMPANY 2 and COMPANY 1 operates entirely in COUNTRY and they have no
permanent business establishment in the US, such as no property or employees or any related
business activity transactions with our COMPANY 3. The management of their activities and
book and records are operated and maintained outside US respectively. COMPANY 1 has
been filing form 5471 with COMPANY 3 tax return as of 12/31/2012.
Tax compliance: For federal tax purposes, our calendar year beginning 2013 operating
income or loss from COMPANY 1 and COMPANY 2 will be included and combined with
COMPANY 3 in filing Form 1120. We have done a tax research and read the tax instructions
with respecting to the state tax compliance on this subject issue, but we are not able to reach a
clear understanding as to what we should do to meet the tax compliance regulations in the
state. We request that you help to provide answers and further guidance as follows:
1) Does the state conform to federal laws by allowing the DE operating income or loss
combined and reported with US parent company?, if not, what is the requirement for tax
filing?

2) Are apportionment factors percentage included DE in denominators?
3) Is DE required to file a separate return or annual report and pay the fee accordingly? If
yes, what form should be used?
4) Are there any other ILL. tax compliance issues on this subject we should be aware of it?
RESPONSE
Section 102 of the Illinois Income Tax Act (“IITA”) provides:
Except as otherwise expressly provided or clearly appearing from the context, any term used
in this Act shall have the same meaning as when used in a comparable context in the United
States Internal Revenue Code of 1954 or any successor law or laws relating to federal income
taxes and other provisions of the statutes of the United States relating to federal income taxes
as such Code, laws and statutes are in effect for the taxable year.
Department of Revenue Regulations Section 100.9750(b)(1) states that any entity treated as a
corporation for federal income tax purposes must be treated as a corporation for all purposes of the
IITA, and that no entity (other than a cooperative) that is not treated as a corporation for federal
income tax purposes may be treated as a corporation for purposes of the IITA. Any entity that elects
not to be treated as a corporation separate and distinct from its owners is not a corporation separate
and distinct from its owners for Illinois income tax purposes. Consequently, an entity that elects to be
disregarded as an entity separate and distinct from its corporate owner pursuant to Treasury
Regulations Section 301.7701-3(a) and its corporate owner are a single corporation for all purposes
of the IITA. 86 Ill. Adm. Code § 100.9750(b)(1)(A).
Section 304(a) of the IITA provides:
For tax years ending on or after December 31, 1998, and except as otherwise provided by this
Section, persons other than residents who derive business income from this State and one or
more other states shall compute their apportionment factor by weighting their property, payroll,
and sales factors as provided in subsection (h) of this Section.
Under IITA Sections 102 and 203, the federal treatment of a disregarded entity and its owner applies
for Illinois income tax purposes. An entity that is disregarded for federal income tax purposes is
disregarded as an entity for Illinois purposes, and the items of base income of the disregarded entity
are considered the items of the owner and are taken into account in computing the Illinois base
income of the owner. The same treatment extends to the determination of the apportionment factor of
the owner of a disregarded entity. The activities of the disregarded entity are considered the activities
of the owner for purposes of applying the apportionment provisions of Article 3 of the IITA.
For purposes of the IITA, the disregarded entities are treated as disregarded. All items of income and
loss, as well as the apportionment factors of the disregarded entities, would be included on the parent
company’s return. As for registration, annual report and fee issues, you should contact the Illinois
Secretary of State.
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 have
any further questions, you may contact me at (217) 524-7580.
Sincerely,

Matthew Crain
Associate Counsel (Income Tax)