Does a taxpayer with multiple related rental-property LLCs need to file a formal petition for alternative apportionment in order to apportion each property's income separately?

Plain-English summary

An LLC that owned three related rental real estate entities asked the Illinois Department of Revenue for permission to use an "alternative method of allocation or apportionment," filing what it called a Petition for Alternative Apportionment under IITA Section 304(f) (35 ILCS 5/304(f)) and Department Regulation Section 100.3390. One entity (COMPANY 1) owned vacant land and buildings in Chicago, with no income or loss reported because the property was vacant. COMPANY 1 was the sole member of two other entities: COMPANY 2, which owned commercial rental property in one Illinois city, and COMPANY 3, which owned commercial rental property in another state. The taxpayer explained that each property was operated as a genuinely separate business, with its own bank account, its own complete set of books, and income and expenses reported separately on federal Form 8825, even though the balance sheets were combined for federal reporting purposes. Because the properties were separate businesses, the taxpayer argued, allocating their combined income by gross revenue did not fairly represent the business activity actually conducted in Illinois, so it had already used separate accounting to allocate income between Illinois and the other state and wanted the Department's blessing to keep doing so.

The Department responded with a General Information Letter (GIL) rather than granting the requested petition. It explained that under IITA Section 304(a), a taxpayer's business income is normally apportioned to Illinois using a single sales-factor formula. But Department Regulation Section 100.3010(b)(1) provides an important exception: when a taxpayer actually conducts two or more separate trades or businesses, the income of each separate business must be apportioned on its own, using the factors relevant to that particular business, rather than being lumped together and apportioned as a single combined enterprise.

The key point of the ruling is that this separate-business apportionment under Regulation 100.3010(b)(1) is not the same thing as "alternative apportionment" under Section 304(f), and a taxpayer does not need to file a petition for alternative apportionment to use it. If the rental properties described in the taxpayer's letter genuinely are separate trades or businesses, Regulation 100.3010(b)(1) already requires them to be apportioned separately, automatically, without any special permission from the Department. The Department pointedly did not decide whether these particular properties actually qualified as separate businesses. That determination has to be made by applying the multi-factor test in Regulation 100.3010(b)(3), and the Department left that fact-specific analysis to the taxpayer. If, after applying that test, the properties turn out to be a single unitary business instead, then their income must be combined and apportioned together under Section 304(a) as one business, and any request to deviate from that would then require a proper alternative-apportionment petition satisfying the burden of proof in Regulation Section 100.3390(c), filed at least 120 days before the relevant return's due date under Regulation Section 100.3390(e)(1).

Because this is a GIL, the Department noted it is not a statement of Department policy, does not interpret or prescribe the tax laws, and is not binding on the Department. It merely points the taxpayer to the regulations that answer the question raised.

What this means for you

If you operate multiple, genuinely separate rental properties or business lines

Before assuming you need the Department's advance permission to apportion each property or business line's income separately, check whether your situation fits the "separate trade or business" framework in Regulation 100.3010(b). If it does, Regulation 100.3010(b)(1) requires separate apportionment on its own terms, no petition for alternative apportionment under Section 304(f) is needed. The ruling's own example is instructive: a corporation with independently managed, unrelated operating divisions (aerospace manufacturing, tobacco growing, and motion picture distribution) was treated as three separate trades or businesses, each apportioned on its own.

Don't assume the answer for yourself

Whether your properties or business lines actually qualify as separate trades or businesses (as opposed to a single unitary business that happens to be organized into multiple legal entities) is a factual question you must work through under Regulation 100.3010(b)(3), which looks at the particular facts of each case. Hallmarks the taxpayer pointed to here, separate bank accounts, separate books and records, separate operating agreements, and separate federal identification numbers, are the kind of facts relevant to that analysis, but this GIL does not confirm they are sufficient. If your properties turn out to be a single unitary business, their income must be combined and apportioned together under Section 304(a), and separate accounting would then require a genuine alternative-apportionment petition meeting the burden of proof in Regulation 100.3390(c).

If you do need alternative apportionment

If your facts don't fit the separate-trade-or-business exception and you still believe the standard apportionment formula doesn't fairly represent your Illinois business activity, you may petition the Director for alternative apportionment under Section 304(f), including separate accounting, exclusion or inclusion of factors, or another equitable method. Remember the procedural deadline: a petition must be filed at least 120 days before the due date (including extensions) of the first return for which you're seeking to use the alternative method.

Common questions

Do I need Department permission to apportion two separate rental properties' income separately?
Not if they truly are separate trades or businesses under Regulation 100.3010(b)(1). In that case, separate apportionment is simply how the law already applies; no alternative-apportionment petition is required.

How do I know if my properties count as "separate trades or businesses"?
The Department did not decide that question for this taxpayer. You have to apply the fact-specific rules in Regulation 100.3010(b)(3) to your own situation.

What happens if my properties are actually a single unitary business?
Then their income must be combined and apportioned together under IITA Section 304(a), using the standard single sales-factor formula, rather than apportioned separately.

If I do need to ask for alternative apportionment, what's the deadline?
Regulation 100.3390(e)(1) requires the petition to be filed at least 120 days before the due date (including extensions) of the first return for which you want to use the alternative method.

Citations and references

• 35 ILCS 5/304(f) (Illinois Income Tax Act Section 304(f)) - authorizes petitions for, or Department-initiated, alternative allocation or apportionment methods, including separate accounting, exclusion or inclusion of factors, or another equitable method.
• 35 ILCS 5/304(a) (IITA Section 304(a)) - sets the standard apportionment formula (the sales factor) for business income derived from Illinois and other states.
• 35 ILCS 5/304(a)(3) (IITA Section 304(a)(3)) - defines the sales factor as Illinois sales divided by total sales everywhere.
• 2 Ill. Adm. Code 100.1200(b) and (c) - distinguishes binding Private Letter Rulings (PLRs) from non-binding General Information Letters (GILs).
• Department Regulations Section 100.3010(b)(1) - requires separate apportionment of the business income of each separate trade or business a taxpayer conducts.
• Department Regulations Section 100.3010(b)(3) - provides the rules for determining whether activities constitute a single trade or business or more than one separate trade or business.
• Department Regulations Section 100.3390(c) - sets the burden of proof a taxpayer must satisfy to obtain alternative apportionment.
• Department Regulations Section 100.3390(e)(1) - requires an alternative-apportionment petition to be filed at least 120 days before the due date (including extensions) of the first affected return.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2017.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2017/it-17-0006-gil.pdf

Original ruling text

IT 17-0006-GIL 05/02/2017 ALTERNATIVE APPORTIONMENT
Apportionment of Separate Businesses under Regulation 100.3010(b) Does Not Require
Petition for Alternative Apportionment. (This is a GIL)
May 2, 2017
Re:

Petition for Alternative Apportionment

Dear Xxxxx:
This is in response to your letter dated February 7, 2017 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:
The above referenced taxpayer received a notice for the 20XX tax year regarding Business
income Apportioned to Illinois. Per my discussions with the Illinois Department of Revenue and
in researching the Illinois Tax Regulations, we are writing this letter as a Petition for Alternative
Allocation or Apportionment under Sec. 100.3390, IITA Sec. 304(f), for 2016 going forward.
We would also like to request the same method for the tax year 20XX. A power of attorney is
enclosed authorizing me to act on behalf of the LLC.
COMPANY has three separate business activities involving rental real estate. COMPANY 1
owns vacant land and buildings in Chicago, IL. All activity has been capitalized as the property
is vacant, therefore there was no income or loss reported for this activity in 20XX.
COMPANY 1 is the sole member of COMPANY 2. COMPANY 2 owns commercial rental
property in CITY 1, IL
COMPANY 1 is also the sole member of COMPANY 3. COMPANY 3 owns a commercial
rental property in CITY 2, STATE.
Allocating the combined income of these entities by gross revenue does not fairly represent
the business activities in the state of Illinois. These rental properties are operated completely
separately. They are managed separately with all income and expenses kept through
accounting records for each of the rental properties. A complete set of books is maintained for
each property. They each have separate bank accounts. The land, building and other fixed
assets of the CITY 1, IL property are owned by COMPANY 4. The CITY 3, IL property is
owned by COMPANY 1. The tenant leases are signed and negotiated with the three LLC’s,
however, the CITY 3. IL property is currently vacant.
Enclosed are copies of the balance sheets and income statements for the three LLC’s. On the
federal tax return filed; each of the rental properties income and expense activities are
reported separately on form 8825, including separate depreciation schedules for each. A copy
of the federal return filed for 20XX is enclosed. The balance sheets of the three separate LLC’s

IT 17-0006-GIL
Page 2
are then combined for reporting on the federal return. They are maintained separately, just
combined for reporting on the federal tax return balance sheet.
COMPANY 1, COMPANY 3 and COMPANY 4 all have separate operating agreements and
federal identification numbers. Copies of the operating agreements are attached. The intention
has always been to keep the businesses separate.
These three rental properties are operated as separate businesses with all income and
expenses maintained by property. The rental income from the property in CITY 2, STATE
(COMPANY 4) is from rental activities in the state of STATE.
In 20XX, we reported on the IL 1065 the net loss from COMPANY 3 (located in CITY 1, IL) in
the amount of $$$. Attached please find copies of the income statement as well as the balance
sheet for this property. COMPANY 4 (located in CITY 2, STATE) had net income of $$$ in
20XX. The net income of COMPANY 1 (combining all three properties) was $$$ in 20XX. On
the 20XX IL-1065 we reported a loss of $$$ on line 46, base income or loss allocable to
Illinois. We allocated the income in Illinois and STATE using a separate accounting allocation,
which is an allowable method under Sec. 100.3380 and Sec. 100.3390.
We are requesting that the separate accounting method be used in the tax year 20XX and
going forward as this method most clearly represents the activities in each state. We would like
to request that this method be allowed for the 20XX tax return filed. Allocating based on gross
income does not reflect the actual income earned in each state.
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.
IITA Section 304(a) provides that when a nonresident derives business income from Illinois and one
or more other states, such income shall be apportioned to Illinois by multiplying the income by the
taxpayer’s apportionment factor. For taxable years ending on and after December 31, 1998, except in
the case of an insurance company, financial organization, transportation company, or federally
regulated exchange, the apportionment factor is equal to the sales factor. IITA Section 304(a)(3)
defines the sale factor as a fraction, the numerator of which is the total sales of the person in Illinois
during the taxable year, and the denominator of which is the total sales of the person everywhere
during the taxable year.

IT 17-0006-GIL
Page 3
In applying Section 304(a), Department Regulations Section 100.3010(b)(1) provides that when a
taxpayer conducts two or more separate businesses, the business income of each such business
must be separately apportioned. Section 100.3010(b)(1) states:
A person may have more than one “trade or business.” In such cases, it is necessary to
determine the business income attributable to each separate trade or business. In the case of
a person other than a resident, the income of each business is then apportioned by a formula
that takes into consideration the instate and outstate factors relating to the trade or business
the income of which is being apportioned.
Example: The person is a corporation with three operating divisions. One division is engaged
in manufacturing aerospace items for the federal government. Another division is engaged in
growing tobacco products. The third division produces and distributes motion pictures for
theaters and television. Each division operates independently; there is no strong central
management. Each division operates in this State as well as in other states. In this case, it is
fair to conclude that the corporation is engaged in three separate “trades or businesses.”
Accordingly, the amount of business income attributable to the corporation’s trade or business
activities in this State is determined by applying an apportionment formula to the business
income of each business.
Department Regulations Section 100.3010(b)(3) provides rules for determining whether activities
constitute a single trade or business or more than one separate trade or business. This determination
is made based on the particular facts of each case.
Your petition for alternative apportionment is based on the position that the rental properties
constitute separate trades or businesses. Assuming that position is correct, Department Regulations
Section 100.3010(b)(1) provides for the business income of each such trade or business to be
apportioned separately. It is not necessary to file a petition for alternative apportionment in order to
apply the provisions of Section 100.3010(b)(1).
This letter does not constitute a determination that the separate properties described in your letter in
fact constitute separate businesses. You must make that determination applying the rules set forth in
Regulations Section 100.3010(b)(3). If applying those rules you determine that the three properties
constitute a single unitary business, then the income from each property must be combined and
apportioned applying Section 304(a) to the activities as a single business. In order to obtain an
alternative apportionment, you must satisfy the burden of proof set forth in Department Regulations
Section 100.3390(c). Please note that Regulations 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.
As stated above, this is a GIL. A GIL does not constitute a statement of policy that applies, interprets
or prescribes the tax laws, and it is not binding on the Department.
Sincerely,

Brian Stocker
Associate Counsel (Income Tax)