Does the sale of jointly-owned real estate by a sale-leaseback company count in its Illinois sales-factor apportionment, and if so, how?

Plain-English summary

This Illinois private letter ruling addresses a company (referred to as "Taxpayer") whose regular business is buying real property and immediately leasing it back to the seller under sale-leaseback deals, later reselling the property for a gain. Taxpayer expanded into larger deals with outside investors, forming a joint venture ("DEF," a Delaware LLC) with an unrelated partner to buy, lease, and eventually sell a piece of real property in New Jersey. Taxpayer held its 40% interest through a disregarded single-member LLC, and the partner held 60%. DEF sold the property in 2016 for a gain, reported on the installment method, with Taxpayer and DEF treated as part of the same Illinois unitary business group.

Taxpayer asked the Department four questions: (1) whether its share of the sale proceeds belongs in its Illinois sales-factor apportionment at all, or should be excluded as an "incidental or occasional sale"; (2) if included, whether on a gross-proceeds or net-gain basis; (3) how the proceeds should be sourced (Illinois vs. elsewhere); and (4) whether the answer would change if DEF were classified as a real estate "dealer" instead of an "investor" for federal tax purposes.

The Department ruled against exclusion. Because DEF's whole purpose was to buy, lease, and sell real property as part of Taxpayer's ordinary sale-leaseback business -- not a one-off disposal like selling a factory, plant, or subsidiary -- the sale did not qualify for the "incidental or occasional sale" exclusion under 86 Ill. Adm. Code 100.3380(c)(2). Since the JV Real Property was tangible real property rather than an intangible, the ruling requires including the gross proceeds (not just net gain) in the sales factor. Because the property itself was located in New Jersey, those gross proceeds go into the sales factor denominator only, and are excluded from the Illinois numerator, under 35 ILCS 5/304(a)(3)(C-5)(i). Finally, the Department said the dealer-versus-investor distinction for federal tax purposes would not change any of this -- either way, Taxpayer's distributive share of DEF's gross receipts flows through and is apportioned at the partner level under 86 Ill. Adm. Code 100.3380(d)(2)(A).

What this means for you

Real estate investment and sale-leaseback companies

If selling real property is a recurring part of your ordinary business model -- not an isolated, one-time exit -- expect the proceeds to count in your Illinois sales factor rather than being excludible as an "incidental or occasional sale." The Department distinguished this scenario from selling a factory, plant, or subsidiary stock, which are more likely one-off events unrelated to a company's regular revenue-generating activity.

Joint venture and partnership structures

If your company holds real estate through a joint venture or LLC taxed as a partnership, and the JV is unitary with your business, your distributive share of the JV's income and apportionment factors (including sales-factor gross receipts) flow up and combine with your own for Illinois apportionment purposes, per 86 Ill. Adm. Code 100.3380(d). It generally does not matter which member has voting/managing control versus economic ownership percentage -- what matters is the unitary relationship.

Accountants and corporate tax directors

Note the specific mechanics confirmed here: (1) gross proceeds, not net gain, go into the sales factor for a sale of real property (net gain is reserved for intangibles under 86 Ill. Adm. Code 100.3380(c)(5)); (2) sourcing follows the location of the real property itself under 35 ILCS 5/304(a)(3)(C-5)(i), so out-of-state property sales inflate the denominator without inflating the Illinois numerator; and (3) federal dealer-vs-investor characterization (installment sale treatment under IRC Section 453 vs. ordinary income) does not itself change Illinois sales-factor treatment.

Common questions

Q: Does this ruling mean all real estate sales must be included in an Illinois taxpayer's sales factor?
A: Not automatically -- this ruling turned on the fact that buying, leasing, and reselling property was the taxpayer's and its joint venture's regular, ongoing business activity. The Department noted that sales of a factory, plant, or subsidiary stock can still be excluded as incidental or occasional sales because those are not typically the reason the business exists.

Q: Why did the sale proceeds go in the denominator but not the numerator?
A: Because the sold property was located in New Jersey, not Illinois. Under 35 ILCS 5/304(a)(3)(C-5)(i), sales of real property are sourced to Illinois only if the property itself is located in Illinois; otherwise the receipts count in the denominator (total everywhere sales) but not the Illinois numerator.

Q: Did it matter whether the joint venture was a "dealer" or "investor" in real property for federal tax purposes?
A: No. The Department stated that even if the JV were treated as a dealer rather than an investor for federal purposes, Taxpayer's Illinois sales-factor treatment of its distributive share of the sale would not change.

Q: Can another Illinois taxpayer with a similar joint venture rely on this ruling?
A: No. This is a Private Letter Ruling issued under 2 Ill. Adm. Code 1200.110, and it binds the Illinois Department of Revenue only as to the specific taxpayer who requested it, and only to the extent the facts that taxpayer disclosed were correct and complete. Other taxpayers cannot rely on it directly -- it can only illustrate how the Department reasons about similar facts. A different taxpayer with similar facts should seek its own guidance or ruling.

Citations and references

Statutes:

• 35 ILCS 5/304(a)(3) -- sales factor fraction (Illinois sales / everywhere sales)
• 35 ILCS 5/304(a)(3)(C-5)(i) -- real property sales sourced to where the property is located
• 35 ILCS 5/1501(a)(21) -- definition of "sales" as gross receipts not allocated under Sections 301-303
• 35 ILCS 5/1501(a)(27)(A) -- definition of "unitary business group"
• 35 ILCS 5/1501(a)(16) -- "partnership" includes joint ventures/LLCs taxed as partnerships

Regulations:

• 86 Ill. Adm. Code 100.3380(c)(2) -- incidental/occasional sale exclusion from the sales factor
• 86 Ill. Adm. Code 100.3380(c)(5) -- net gain (not gross receipts) basis for sales of intangibles
• 86 Ill. Adm. Code 100.3380(d)(1)-(2) -- combined apportionment for unitary partners/partnerships
• 86 Ill. Adm. Code 100.3370(a)(1)(F), (b), (c) -- sales factor numerator/denominator mechanics
• 2 Ill. Adm. Code 1200.110 -- private letter ruling procedure and binding effect

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2018.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2018/it-18-0002-plr.pdf

Original ruling text

IT 18-0002-PLR 05/03/2018 ALTERNATIVE APPORTIONMENT

Occasional Sale Rule not applicable to sale in the regular course of business.

May 3, 2018

Re: Request for Private Letter Ruling
COMPANY.

Dear XXXXxX:

This is in response to your letter dated December 18, 2017 in which you request a Private Letter
Ruling on behalf of TAXPAYER. Review of your request for a Private Letter Ruling indicates that
all information described in paragraphs 1 through 8 of subsection (b) of 2 Ill. Adm. Code 1200.110
is contained in your request. This Private Letter Ruling will bind the Department only with respect
to TAXPAYER. Issuance of this ruling is conditioned upon the understanding that TAXPAYER
and/or any related taxpayer(s) is not currently under audit or involved in litigation concerning the
issues that are the subject of this ruling request.

The facts and analysis as you have presented states as follows:

The purpose of this letter is to request a private letter ruling from the Illinois Department of Revenue
(“Department”), pursuant to Section 1200.100 of Title 2 of the Illinois Administrative Code,
confirming how TAXPAYER should treat the gross proceeds from the sale of a building from a
unitary partnership.

Disclosure

1. This private letter ruling (PLR) is not requested with regard to hypothetical or alternative
   proposed transactions.

2. The Taxpayer is not currently engaged in litigation with the Department with respect to this
   or any other tax matter.

3. The Taxpayer is not currently under audit by the Department with respect to this matter for
   the year in question, March 31, 2017.

4. The Taxpayer requests that certain information be redacted from the PLR prior to

dissemination to others. The Taxpayer requests that its name, all contractual parties’ names,
its exhibits, and the name of its representative be redacted.

5. The Taxpayer knows of no authority contrary to the authorities referred to and cited below.

6. To the best of the knowledge of both Taxpayer and Taxpayer's representative, the
   Department has neither previously ruled on the same or a similar issue for the taxpayer or
   a predecessor, nor has any representative previously submitted the same or a similar issue
   to the Department but withdrew it before a letter ruling was issued.

Facts

Corporate Structure and General Purpose

IT 18-0002-PLR
Page 2

Taxpayer is a C corporation headquartered in Chicago, Illinois. Taxpayer is in the business of
purchasing real property and immediately leasing the property back to the seller of such property
under a sale-leaseback arrangement. Under this historic business model, Taxpayer collects rental
income and fees from the seller (lessee), with the ultimate goal of selling the property within a
relatively short period of time for a gain. For federal income tax purposes, Taxpayer is a dealer in
real properties. Taxpayer is ultimately wholly owned by ABC, a C corporation headquartered in
Chicago, Illinois.

Recently, Taxpayer has expanded the scope of its portfolio to include larger transactions with
outside investors. Due to the size of these transactions, Taxpayer has required each outside
investor to serve as a formal joint venture (JV) partner with Taxpayer. The transaction that is the
subject of this ruling request (the “JV” transaction) was one of the first of these larger transactions.
However, the JV transaction is not unusual in nature as compared to Taxpayer’s core business,
and is not the only transaction undertaken by Taxpayer during the year.

The JV Transaction

The JV Transaction originated when Taxpayer entered into a contract of sale with a third party to
purchase a property located in CITY 1, New Jersey on May 11, 2015 (the “UV Real Property”). To
facilitate the JV Transaction, Taxpayer formed a JV, DEF, a Delaware limited liability company, on
the date on which the JV Real Property was purchased. In contemplation of the JV Transaction,
Taxpayer also formed GHI, a solely-owned Delaware limited liability company, disregarded for
federal and Illinois income tax purposes, owned by TAXPAYER to directly hold a 40% membership
interest in DEF. Taxpayer’s unrelated JV partner (“Partner”) held the remaining 60% membership
interest in DEF. For purposes of this Private Letter Ruling request, since TAXPAYER is a
disregarded entity, we will reference its member, Taxpayer, as the recipient of the flow of income
and apportionment from DEF.

TAXPAYER and Partner executed a limited liability company operating agreement governing the
operation of DEF. TAXPAYER Member and Partner confirmed that DEF was specifically formed
for the purpose of acquiring, leasing, holding, and selling the JV Real Property. Under the
agreement, Taxpayer served as the manager and tax matters partner of DEF. As manager and as
discussed in the operating agreement, Taxpayer has the sole authority to sell the property. On
February 18, 2016, JV sold the JV Real Property for a gain that was reported by JV for federal and
Illinois income tax purposes under the installment method described in Section 453. Under the
terms of the sale, payments will be received on a seller-financed note in tax periods beyond 2016.
DEF will recognize the gain realized on the sale using a gross profit percentage calculated at the
time of the sale as proceeds from the note are received.

Federal and Illinois Corporate Income Tax Posture

Taxpayer files as part of a federal consolidated income tax return and Illinois combined unitary
corporation income return with ABC. Its year end is March 31, 2017. DEF files partnership
information returns to report its income and activity, which is included on Taxpayer’s federal and
Illinois returns. DEF is a calendar-year taxpayer. The sale generated by the JV transaction occurred
during the DEF’s tax year ended December 31, 2016, but would be included in the March 31, 2017
year end tax return, in accordance with Treas. Reg. §1.706-1(a)(1).

IT 18-0002-PLR
Page 3

For federal income tax purposes, DEF is treated as an investor of real property on its informational
returns. As an investor, the sale of the property is accounted for using the installment method. Gain
is recognized over several years as funds from a seller-financed note are received. The treatment
as an investor stands in contrast to how a dealer is required to report income. Under a dealer
characterization, the sale would not qualify for installment treatment and instead be accounted for
as the sale of inventory in the ordinary course of a trade or business, with all of the resulting gain
recognized in the year of sale. So while the sale itself occurs whether investor or dealer
characterization is appropriate, the federal income tax treatment of such sale may be substantially
different under either scenario.

For purposes of this Private Letter Ruling request, we have assumed that Taxpayer, TAXPAYER
Member and DEF are part of the same “unitary business group,” under the definition of such term
as “a group of persons related through common ownership whose business activities are integrated
with, dependent upon and contribute to each other.” See 35 Ill. Comp. Stat. 5/1501(a)(27)(A).

Questions

1. Will the sale arising from the JV Transaction includible in Taxpayer's sales factor for purposes
   of Illinois corporation income tax apportionment, or excludible from Taxpayer’s sales factor as an
   incidental or occasional sale?

2. If includible in Taxpayer's sales factor, then is the sale arising from the JV Transaction includible
   on a gross proceeds or net gain basis?

3. If includible in Taxpayer's sales factor on a gross proceeds basis, then how are the gross receipts
   from the JV Transaction sourced?

4. lf DEF is treated as a dealer of real property instead of an investor, would Taxpayer’s sales factor
   treatment of the sale from the JV Transaction be different?

Analysis
Treatment of DEF’s Income/Sales Factor to Taxpayer as Unitary Business

DEF, asa JV, is a limited liability company filing Federal Tax Form 1065, U.S. Return of Partnership
Income. IITA Section 1501(a)(16) defines the term “partnership” to include a joint venture, including
a limited liability company formed under the Illinois Limited Liability Company Act, classified as a
partnership for federal income tax purposes. As such, the JV is addressed as a partnership in the
context of this Private Letter Ruling.

If DEF is treated as an investor in real property, it will include a capital gain from the sale of the
building on a Form K-1 it issues to TAXPAYER Member. The partner/member then must determine
how it should treat the Form K-1 that it receives. In general, most states will look at the relationship
between the member and the partnership. If a unitary relationship exists, income is generally
apportioned at the partner level. This means the income and apportionment received from the
partnership are combined with those of the partner/member in determining the partner/member’s
state-sourced income. Conversely, if a unitary relationship does not exist, the income from the
partnership is generally apportioned at the partnership level and then distributed to the

IT 18-0002-PLR
Page 4

partner/member. The partner/member will then include this post-apportioned income and combine
that income with its own apportioned income. Ill. Admin. Code tit. 86 100.3380(d) discusses
inclusion of shares of partnership unitary business income and factors in combined unitary business
income and factors of partners. Specifically, Ill. Admin. Code tit. 86 § 100.3380(d)(1) states:

“IITA Section 304(e) provides that whenever 2 or more persons are engaged in a unitary business
as described in IITA Section 1501(a)(27), a part of which is conducted in this State by one or more
members of the group, the business income attributable to this State by any member or members
shall be apportioned by means of the combined apportionment method. Because partnerships may
be members of a unitary business group within the meaning of IITA Section 1501(a)(27), this
provision requires a partnership to use combined apportionment when it is engaged in a unitary
business with one or more of its partners.”

Adding, Ill. Admin. Code tit. 86 § 100.3380(d)(2)(A) states the partner’s distributive share of the
business income and apportionment factors of the partnership shall be included in that partner’s
business income and apportionment factors.

Inclusion of Proceeds from JV Transaction in Taxpayer's Sales Factor

Since we have assumed that a unitary relationship exists between DEF and Taxpayer, and the
income and apportionment factor received from DEF should be combined with Taxpayer’s own
income and apportionment factor, the next issue to be considered is whether the sale arising from
the JV transaction is includible in Taxpayer’s sales factor for purposes of Illinois corporation income
tax apportionment, or excludible from Taxpayer's sales factor as in incidental or occasional sale.
Ill. Admin. Code tit. 86 § 100.3380(c)(2) states that, “when gross receipts arise from an incidental
or occasional sale of assets used in the regular course of the person’s trade or business, those
gross receipts shall be excluded from the sales factor. For example, gross receipts from the sale
of a factory or plant will be excluded. Gross receipts from an incidental or occasional sale of stock
in a subsidiary will also be excluded.” The recently amended Illinois regulation provides several
reasons when it is appropriate to exclude the gross receipts from the sales factor including:

e when sales are not made in the market for the person’s goods, services or other ordinary sources
of business income.

e to the extent that gains realized on the sale of assets in a taxpayer's business are the recapture
of depreciation deductions, the taxpayer's economic income was understated in the years when
those deductions were taken. In this situation, the recapture gains should be allocated using a
method approximating the factor used in apportioning the deductions.

e to the extent the gain on the sale is from goodwill or similar intangibles, including the gross
receipts will not reflect the market for the taxpayer's ordinary sources of business income.

e for sales of assets that are made in connection with a partial or complete withdrawal from the
market in the state where the assets are located, including the gross receipts from these sales
would increase the business income apportioned to that state when the taxpayer’s market in that
state has decreased.

We do not believe the sale of the property at the DEF level would be considered an incidental or
occasional sale of assets described above, as the sole purpose of the JV was to purchase and
lease back the property, and ultimately sell the property, in accordance with its business plan. The
JV Transaction is markedly different from the sale of a factory or plant, as those types of assets
are generally not the primary product a company sells or the reason it started a business.
Additionally, the sale of a subsidiary can occur if a business is trying to exit a particular product line

IT 18-0002-PLR
Page 5

or market. The actual sale of the subsidiary is generally not what the company is in the business to
do.

While DEF will exit the market in New Jersey by selling the JV Real Property, this is emblematic of
how Taxpayer’s specific industry works. (It should be noted that Taxpayer still has nexus in New
Jersey independent of DEF). At any given time, Taxpayer holds property in numerous states, and
could purchase a property in a particular state (including Illinois, or even New Jersey again), by
setting up a limited liability company structure to hold the property. This is very different than a
company selling off an unprofitable subsidiary or product line and determining that it wants to exit
a particular market. The sale of the JV Real Property is the sole revenue-generating asset of DEF,
and ownership of this asset was the sole reason that DEF was formed. Once this asset is sold,
DEF no longer owns any revenue-generating assets. Accordingly, Taxpayer’s share of the sale
arising from the JV Transaction would be includible in Taxpayer’s sales factor, and would not be
excludible from Taxpayer's sales factor as an incidental or occasional sale.

Inclusion of Gross Proceeds in Sales Factor

The second issue to consider is whether the sale arising from the JV Transaction is includible in
Taxpayer's sales factor on a gross proceeds or net gain basis. 35 Ill. Comp. Stat. §5/1501(a)(21)
defines “sales” to mean all gross receipts of the taxpayer not allocated under Sections 301, 302
and 303. 35 Ill. Comp. Stat. § 5/304(a)(3) defines the sales factor to be “a fraction, the numerator
of which is the total sales of the person in this State during the taxable year, and the denominator
of which is the total sales of the person everywhere during the taxable year. Ill. Admin. Code tit 86
§ 100.3380(c)(5) requires the net gain to be used for sales of intangibles. However, III Admin Code
tit 86 § 100.3370(a)(1)(F) requires the inclusion of gross receipts from sales of equipment, and
gives the example of a trucking express company selling its trucks under a regular replacement
program. Since the JV Real Property is not an intangible asset and instead constitutes real
property, Taxpayer's share of the gross proceeds from the sale arising from the JV Transaction
would be includible in Taxpayer’s sales factor.

Sourcing of Gross Proceeds in Sales Factor

The third issue to consider is how the gross receipts from the JV Transaction are sourced for
purposes of Taxpayer’s sales factor. 35 Ill. Comp. Stat. 5/304(a)(3)(C-5)(i) requires that sales from
the sale or lease of real property are sourced to Illinois if the underlying property is located in Illinois.
Since the property sold under the JV Transaction is located in New Jersey, Taxpayer’s share of the
gross proceeds from such sale would be included in Taxpayer’s sales factor denominator, and
excluded from Taxpayer’s sales factor numerator.

Effect of Dealer Versus Investor Characterization

Finally, if DEF is treated as a dealer of real property instead of an investor, Taxpayer would not
change its sales factor apportionment treatment of the sale arising from the JV Transaction, and
would still be able to include the gross receipts from the sale of the JV Real Property in its gross
receipts. For federal income tax purposes, the receipts would be reported on line 1 of the federal
form 1065. The income and receipts received from Taxpayer's interest in DEF, a member of
Taxpayer’s unitary business group as previously described, would be apportioned at the partner
level to Taxpayer as described in Ill. Admin. Code tit. 86 § 100.3380(d)(2)(A).

IT 18-0002-PLR
Page 6

RULING

Department Regulations Section 100.3380 provides special rules for purposes of computing the
apportionment factor under Section 304 of the Illinois Income Tax Act (“IITA”; 35 ILCS 5/304).
Department Regulations Section 100.3380(d)(2) provides the following special rule where a
partnership is engaged in a unitary business with one or more of its partners:

[E]xcept in a case in which substantially all of the interests in the partnership (other than a publicly-
traded partnership under 26 USC 7704) are owned or controlled by members of the same unitary
business group, when the activities of a partnership and any of its partners’ business activities
constitute a unitary business ... [t]he partner’s distributive share of the business income and
apportionment factors of the partnership shall be included in that partner’s business income and
apportionment factors.

In addition, Department Regulations Section 100.3380(c)(2) provides:

When gross receipts arise from an incidental or occasional sale of assets used in the regular course
of the person’s trade or business, those gross receipts shall be excluded from the sales factor. For
example, gross receipts from the sale of a factory or plant will be excluded. Gross receipts from an
incidental or occasional sale of stock in a subsidiary will also be excluded. Exclusion of these gross
receipts from the sale factor is appropriate for several reasons, more than one of which may apply
to a particular sale, including:

(A) incidental or occasional sales are not made in the market for the person’s goods, services
or other ordinary sources of business income;

(B) to the extent that gains realized on the sale of assets used in a taxpayer's business are
comprised of recapture of depreciation deductions, the economic income of the taxpayer
was understated in the years in which those deductions were taken. The recapture gains
that reflect a correction of that understatement should be allocated using a method
approximating the factors that were used in apportioning the deductions. If the business
otherwise remains unchanged, including the gross receipts from the sale in the sales
factor numerator of the state in which the assets were located would allocate a
disproportionate amount of the recapture gains to that state compared to how the
deductions being recaptured were allocated;

(C) to the extent the gain on the sale is attributable to goodwill or similar intangibles
representing the value of customer relationships, including the gross receipts from the
sale in the sales factor will not reflect the market for the taxpayer’s goods, services or
other ordinary sources of business income to the extent the sourcing of the receipts from
that sale differs from the sales factor computed without regard to that sale; and

(D) in the case of sales of assets that are made in connection with a partial or complete
withdrawal from the market in the state in which the assets are located, including the
gross receipts from those sales in the sales factor would increase the business income
apportioned to that state when the taxpayer’s market in that state has decreased.

IT 18-0002-PLR
Page 7

The purpose of Department Regulations Section 100.3380(c)(2) is to exclude from both the
numerator and denominator of the sales factor gross receipts from transactions that, while
generating business income, do not arise from transactions and activity that may be regarded as
the taxpayer's regular or ordinary course of business. As indicated above, incidental or occasional
sales are not made in the market for the taxpayer's ordinary sources of business income. You
represent that the sole purpose of DEF was to purchase and lease back the JV Real Property, and
to ultimately sell the property within a short period of time. You indicate that the JV Real Property
is DEF’s sole income producing asset, and that the transactions related to the property are the only
transactions in which DEF engaged. In addition, you represent that the activities of DEF are part of
the same unitary business in which the Taxpayer engages. You represent that Taxpayer's regular
unitary business activities involve the purchase and leaseback of real property with the ultimate
goal of selling the property within a short period of time. You represent that, for federal income tax
purposes, these business activities qualify Taxpayer as a dealer in real properties.+

When assets are used in the conduct of a unitary business, whether or not gross receipts from the
sale of such assets arise from an incidental or occasional sale is determined by reference to the
activities of the unitary business in which the assets are employed. Based on the facts you
represent, DEF’s sale of the JV Real Property is not an incidental or occasional sale. Rather, the
sale occurred in the regular course of the unitary business conducted by DEF and Taxpayer.
Accordingly, gross receipts from the sale of the JV Real Property should not be excluded from the
DEF’s sales factor under Department Regulations Section 100.3380(c)(2), and Taxpayer must take
into account its distributive share of such gross receipts in accordance with Department
Regulations Section 100.3380(d)(2).

Department Regulations Section 100.3370(b) states that the denominator of the sales factor shall
include the total gross receipts derived by the taxpayer from transactions and activity in the regular
course of its trade or business, except receipts excluded under Section 100.3380(c). Department
Regulations Section 100.3370(c) states:

The numerator of the sales factor shall include the gross receipts attributable to this State and
derived by the person from transactions and activity in the regular course of its trade or business.

(6) For taxable years ending on or after December 31, 2008, gross receipts from transactions not
governed by the provisions of subsection (c)(1), (2), (3) or (4) are in this State if any of the following
criteria are met:

A) Sales from the sale or lease of real property are in this State if the property is located in
this State. (IITA Section 304(a)(3)(C-5)(i))

Under these provisions, DEF should include gross receipts (not net gain) from the sale of the JV
Real Property in its sales factor denominator. Because the JV Real Property is located in New
Jersey, the gross receipts are not included in DEF’s sales factor numerator. DEF’s status as a
dealer in real property for federal income tax purposes does not alter the sales factor apportionment
treatment as set forth in this ruling.?

1 Under Internal Revenue Code § 1221(a)(1), the term capital asset does not include “property held by the taxpayer primarily for
sale to customers in the ordinary course of his trade or business.”

? While not dispositive, DEF’s asserted federal position as a dealer in real property would be evidence that the sale of the JV
Real Property occurred in the ordinary course of the taxpayer’s trade or business.

IT 18-0002-PLR
Page 8

This ruling shall bind the Department as provided herein. The facts upon which this ruling is based
are subject to review by the Department during the course of any audit, investigation or hearing
and this ruling shall bind the Department only if the material facts as recited and incorporated in
this ruling are correct and complete. This ruling shall bind the Department for all taxable years,
except as limited pursuant to 2 III. Adm. Code 1200.110(d) and (e).This ruling will cease to bind the
Department if there is a pertinent change in statutory law, case law, rules or in the material facts
recited in this ruling.

Sincerely,

Brian L. Stocker
Chairman, PLR Committee (Income Tax)

IT 18-0002-PLR
Page 9