Can a taxpayer use separate accounting instead of Illinois's statutory apportionment formula just because separate accounting produces a lower or different tax liability?

Plain-English summary

This GIL is one of a small group of near-identical letters the Illinois Department of Revenue issued on September 15, 2015, in response to essentially the same alternative-apportionment petition submitted on behalf of related or similarly-situated LLCs taxed as partnerships. The fuller Plain-English writeup lives on the companion ruling, IT 15-0012-GIL (same date, same subject) — see that ruling in this library for the complete summary, Q&A, and citations, since the substantive analysis here is word-for-word the same.

In short: the taxpayer asked to use "separate accounting" instead of Illinois's statutory apportionment formula on its Form IL-1065 for the tax year ended December 31, 2014, arguing the standard formula produced a "grossly distorted result." The Department denied the request for two independent reasons: (1) merely showing a different result isn't enough — a taxpayer must prove by clear and cogent evidence that the statutory formula causes a grossly distorted, unreasonable result, which this petition's bare assertion didn't do; and (2) the petition, filed September 1, 2015, missed the 120-day-before-the-return-due-date deadline under 86 Ill. Adm. Code 100.3390(e)(1) for the 2014 partnership return (due October 15, 2015 with the automatic six-month extension).

What this means for you

See the companion ruling IT 15-0012-GIL in this library for the full practical discussion of what this means for taxpayers considering an alternative-apportionment petition, including the timing trap around partnerships' automatic filing extension.

Common questions

Q: Is this ruling different from IT 15-0012-GIL?
A: No — the operative text, statutes, and outcome are the same (both petitions were denied on the same substantive and timeliness grounds). Only the requesting taxpayer differs, and both are redacted in the published letter.

Citations and references

• Section 304(f) of the Illinois Income Tax Act (IITA), 35 ILCS 101 et seq.: authorizes petitions for alternative allocation and apportionment methods, including separate accounting, when the standard method does not fairly represent business activity or market in Illinois.
• 86 Ill. Adm. Code 1200.120(b) and (c): governs General Information Letters, confirming they provide general information and are not binding on the Department.
• 86 Ill. Adm. Code Section 100.3390(c): alternative apportionment may not be used merely because it reaches a different result than the statutory formula.
• 86 Ill. Adm. Code Section 100.3390(e)(1)-(2): sets the 120-day filing deadline and the amended-return fallback if a petition is untimely.
• 86 Ill. Adm. Code Section 100.5030(b): grants partnerships an automatic six-month filing extension for Illinois income tax returns.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2015.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2015/it-15-0013-gil.pdf

Original ruling text

IT 15-0013 GIL 9/15/2015

Alternative Apportionment

Petition to use separate accounting cannot be granted merely because separate accounting
reaches a different tax liability than the statutory apportionment method.

September 15, 2015

Re:

YYYY
Petition for Alternative Apportionment

Dear Ms. XXXX:
This is in response to your letter dated September 1, 2015, in which you request permission to
use separate accounting to allocate income to Illinois, 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 have been asked to request permission to use an alternative apportionment
formula for Form IL-1065 for the tax year ended December 31, 2014. Using the
prescribed sales apportionment factor produces a grossly distorted result that is
not indicative of the actual Illinois activity for the year. The taxpayer requests
permission to use a specific allocation method in order to properly allocate Illinois
activity to the partners.
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, 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 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.
Subsection (c) of that regulation provides:
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
or 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.
Because your request merely states that separate accounting for the taxpayer’s Illinois income
more accurately reflects its Illinois activity, this petition does not meet this regulatory
requirement and cannot be granted at this time.
Also, 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 1, 2015, and will allow the taxpayer to use the requested method on original returns
due on or after December 30, 2015, if ultimately granted. Under 86 Ill. Adm. Code Section
100.5030(b), partnerships are granted an automatic six-month extension of time to file their

Illinois income tax returns, which are otherwise due on the fifteenth day of the fourth month after
the end of the taxable year. Accordingly, the return for a partnership for its taxable year ending
December 31, 2014, is October 15, 2015, and your petition was not timely for that taxable year.
Because you did not file a timely petition for permission to use separate accounting on the 2014
return, 86 Ill. Adm. Code Section 100.3390(e)(2) requires you to file the 2014 return using the
statutory apportionment method and to petition to use separate accounting by filing an amended
return using the desired separate accounting method and including with the amended return a
petition to use that method.
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