Could Illinois residents claim a credit for Indiana tax on nonprofessional gambling winnings when their other reported loss was entirely Illinois-sourced?

Plain-English summary

The Illinois residents received no credit for Indiana tax on their nonprofessional gambling winnings. Illinois did not simply compare taxes paid to the two states. Section 601(b)(3) limited the credit to the portion of Illinois tax attributable to income that Illinois's own allocation and apportionment rules would source outside Illinois.

Under the rule described in the GIL, nonprofessional gambling winnings were not placed in Schedule CR's out-of-state column. The taxpayers also reported an S-corporation net operating loss, but the corporation apportioned all of its income and loss to Illinois. With no income sourced outside Illinois under Illinois rules, the Schedule CR fraction was zero and no other-state credit was allowed.

What this means for you

Paying another state's tax does not by itself create an Illinois resident credit. The limitation is computed using Illinois sourcing rules, even when the other state taxes the item under a different rule.

The letter expressly distinguished a professional gambler, whose gambling activity could be apportioned as business income under Section 304. It did not decide that situation.

Common questions

Q: Why did Indiana tax paid not automatically generate a credit?
A: Illinois capped the credit using the percentage of income sourced outside Illinois under Illinois law.

Q: Did the gambling winnings go in Schedule CR's out-of-state column?
A: No, not for the nonprofessional gambling winnings described.

Q: Did the S-corporation loss create out-of-state income?
A: No. The GIL said the loss was entirely apportioned to Illinois.

Citations and references

• 35 ILCS 5/601(b)(3) — resident credit and Illinois-sourcing limitation
• 35 ILCS 5/301(c)(2) — residual rule quoted in the GIL
• 35 ILCS 5/302–304 — allocation and apportionment provisions
• 35 ILCS 5/304 — business-income apportionment relevant to professional gamblers

Subject

Credits – Foreign Tax

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-14-0018.pdf

Original ruling text

IT 14-0018 GIL 10/17/2014 Credits – Foreign Tax
The credit for taxes paid to other states may not exceed the amount of Illinois income tax
attributable to income that would be sourced to other states if all other states used Illinois’
allocation and apportionment rules. Because nonbusiness gambling winnings are sourced to the
state of residency under the Illinois Income Tax Act, this limitation does not include Illinois
taxes attributable to gambling winnings. (This is a GIL.)
October 17, 2014

Re:

TAXPAYER
Credit for Taxes Paid to Other States on Gambling Winnings

Dear Xxxx:
This is in response to your letter dated October 9, 2014 in which you request a legal tax ruling
regarding the treatment of gambling winnings. 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:
Per TAXPAYER 2’s instructions, I am forwarding you all the correspondence in regards
to this taxpayer. At issue is the credit for taxes paid to Indiana on gambling winnings of
an Illinois resident.
Your letter dated MONTH XX, 20XX, to TAXPAYER 2 states:
This letter is a follow up, as requested by yourself, in regards to the specific questions I
have on this account. Your letter dated July 15, 2014 (which by the way, was never
received by USMail, I downloaded it from MyTax) states in the second paragraph that
“The state of Illinois does not allow credits for taxes paid on gambling winnings to
another state.” Again, I have never heard of this, and I have been an Illinois tax preparer
for over 28 years.
You directed me to two statutes which you claim support this statement.
•

•

The first is 35 ILCS 5/303. I have printed this statute and enclosed it in this
packet. It appears to me that this statute specifically deals with income earned by
persons OTHER than a resident of the state. The TAXPAYER 1’s are residents
of Illinois.
The second statute you directed to me was Section 301(c)(2). I have printed this
statute and enclosed it in this packet. I can’t discern how this section applies to
the taxpayers since they are full time residents of Illinois.

The Department’s file for these taxpayers indicates that they reported $XX,XXX in Column A of
Line 15 of the Schedule CR, Credit for Tax Paid to Other States, and $XXX,XXX in Column B
of Line 15. Column A is supposed to include the amount of “other income” reported on Line 21
of the federal Form 1040, and Column B is supposed to report the portion of the amount in
Column A that is sourced outside of Illinois using Illinois’ allocation and apportionment rules, as
explained below. The Department adjusted the taxpayer’s return by reducing the amount in
Column B to the $XX,XXX amount shown in Column A, pending receipt of an explanation from
the taxpayers regarding this item, as noted in the letter to the taxpayers dated MONTH 2 XX,
20XX. The documents you have provided indicate that the $XX,XXX is comprised of
$XXX,XXX in gambling winnings, minus a net operating loss deduction of $XXX,XXX, all of
which resulted from losses incurred by a Subchapter S corporation that apportioned all of its
income and loss to Illinois.
RESPONSE
Section 601(b)(3) of the Illinois Income Tax Act (35 ILCS 5/601) allows residents to claim a
credit for income taxes paid to other states. That section also provides:
For taxable years ending on or after December 31, 2009, the credit provided under
this paragraph for tax paid to other states shall not exceed that amount which
bears the same ratio to the tax imposed by . . . this Act as the amount of the
taxpayer's base income that would be allocated or apportioned to other states if all
other states had adopted the provisions in Article 3 of this Act bears to the
taxpayer's total base income subject to tax by this State for the taxable year.
The Schedule CR implements this limitation by having the taxpayer list items of income from all
sources in Column A; write the amount that is sourced to other states using Illinois’ sourcing
rules in Article 3 of the Illinois Income Tax Act in Column B of each line; then writing the total
income and total non-Illinois sourced income on Line 42; and computing the fraction of income
that is from non-Illinois sources. This fraction, multiplied by the taxpayer’s Illinois income tax
liability before credits, yields the limit on the credit allowed for taxes paid to other states.
In Article 3 of the Illinois Income Tax Act, Section 301(c)(2) (35 ILCS 5/302) provides:
Any item of income or deduction which was taken into account in the
computation of base income for the taxable year by any person other than a
resident and which is not otherwise specifically allocated or apportioned pursuant
to Section 302, 303 or 304 . . . in the case of an individual, trust or estate, shall not
be allocated to this State.
Except in the case of a professional gambler, who would apportion his or her gambling winnings
as business income under the provisions of Section 304 of the Illinois Income Tax Act (35 ILCS
5/304), there is no provision in Sections 302, 303 or 304 that would allocate gambling winnings
of a nonresident to Illinois. Thus, if all states used Illinois’ rules for sourcing income, no other
state would tax gambling winnings of a nonresident gambler who is not a professional.
Accordingly, pursuant to the provision in Section 601(b)(3) quoted above, there is no provision
in the instructions to the Schedule CR that allows gambling winnings of a nonprofessional

gambler to be included in Column B of any line. For the vast majority of residents who are taxed
by another state only on gambling winnings, this means that the total income sourced to other
states under Illinois’ rules is zero, and the credit allowed under Section 601(b)(3) is zero.
In this case, because none of the taxpayers’ gambling winnings should be shown as sourced
outside of Illinois in Column B of Line 15 of the Schedule CR, the amount of the taxpayers’
income sourced outside Illinois in Column B of Line 42 of the Schedule CR should be zero, and
no credit for taxes paid to other states is allowed.
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) 524-3951.
Sincerely,

Paul S. Caselton
Deputy General Counsel - Income Tax
Illinois Department of Revenue