What does Illinois General Information Letter IT 18-0003-GIL conclude about Alternative Apportionment?

Plain-English summary

A corporation that had relocated its headquarters from California to Illinois sold substantially all of its assets, generating a large gain, most of it goodwill tied to products developed while the company was still domiciled in California. Because the company was commercially domiciled in Illinois at the time of the sale, the gain would ordinarily be allocated entirely to Illinois under 86 Ill. Adm. Code 100.3220(b)(2) and (b)(3). The taxpayer petitioned the Department for permission to use an alternative apportionment method instead, arguing that taxing 100% of the gain in Illinois would be grossly distorted given that most of the R&D, net operating losses, and sales activity underlying that value occurred in California. The taxpayer proposed, in descending order of preference, a 0%, 8%, or 25% Illinois apportionment percentage instead.

The Department denied the petition. Under 35 ILCS 5/304(f), a taxpayer may only get alternative apportionment where the standard method does not fairly represent the market for the taxpayer's goods, services, or other sources of business income. The Department found that the taxpayer's letter contained no information about the market for its goods or services, and therefore gave the Department no basis to conclude that the standard single-sales-factor method under 35 ILCS 5/304(a) failed to fairly reflect that market. Because the petition didn't address the market-based standard at all, it could not be granted "at this time."

Notably, the Department did not simply say no and stop there. It flagged an alternative legal theory the taxpayer hadn't raised: 86 Ill. Adm. Code 100.3380(c)(2) requires that gross receipts from an "incidental or occasional sale" of business assets be excluded from the sales factor altogether, including receipts attributable to goodwill. Since the gain here likely constituted apportionable business income (not nonbusiness income under 100.3220) from what appears to be a one-time sale of substantially all assets, the Department suggested this regulation could exclude the sale proceeds from the sales factor entirely, potentially achieving a result closer to what the taxpayer wanted, without needing an alternative apportionment order at all.

As a GIL, this letter is not a statement of Department policy and does not bind the Department even as to this same taxpayer going forward; it simply responds to the specific letter submitted.

What this means for you

Businesses relocating headquarters across state lines

If your company moves its commercial domicile to Illinois and later sells assets or realizes goodwill built up while domiciled elsewhere, expect that gain to be allocated to Illinois under 100.3220(b)(2)-(b)(3) based on domicile at the time of sale, regardless of where the value was actually created. A bare assertion that this is unfair or "distorted" is not enough to get alternative apportionment; you must show specifically how the standard method fails to reflect the market for your goods or services.

Accountants and tax professionals petitioning for alternative apportionment

This GIL is a reminder that petitions under 35 ILCS 5/304(f) and 86 Ill. Adm. Code 100.3390(a)(4) must be framed around the market-fairness standard, with supporting facts about market distribution, not just an appeal to overall equity or a comparison of where NOLs or R&D costs were historically incurred. Also consider, before petitioning for alternative apportionment, whether the asset sale might already qualify for exclusion from the sales factor as an incidental or occasional sale under 100.3380(c)(2), which could reduce Illinois apportionment without needing Department permission for a nonstandard method.

Corporate tax directors evaluating one-time asset or goodwill sales

Where a sale represents a one-time exit or divestiture rather than a sale made in the ordinary, recurring course of business, review 100.3380(c)(2)'s exclusion for incidental/occasional sales before assuming the standard single-sales-factor method controls. That regulatory path is separate from, and doesn't require, an alternative apportionment petition.

Common questions

Q: Did the Department grant the taxpayer's request for a lower apportionment percentage?
A: No. The Department denied the petition because the taxpayer's letter contained no information about the market for its goods, services, or business income, which is what 35 ILCS 5/304(f) requires to justify an alternative method.

Q: Did the Department completely reject the taxpayer's position?
A: Not entirely. While it denied the alternative apportionment petition, it separately noted that the gain likely constituted business income from an "incidental or occasional sale" of assets, which under 86 Ill. Adm. Code 100.3380(c)(2) would be excluded from the sales factor entirely, a different mechanism that could still reduce the Illinois-sourced portion of the gain.

Q: Can this taxpayer or others rely on this letter going forward?
A: No. This is a General Information Letter issued under 2 Ill. Adm. Code 1200.120. It is not a statement of Department policy, is not binding on the Department, and does not resolve the taxpayer's situation with finality, the Department said the petition "cannot be granted at this time," leaving open other avenues like the 100.3380(c)(2) exclusion.

Q: What must a taxpayer show to get alternative apportionment approved in Illinois?
A: Under 35 ILCS 5/304(f) and 86 Ill. Adm. Code 100.3390(a)(4), the taxpayer must show that the standard allocation and apportionment provisions do not fairly represent the market for its goods, services, or other business income sources, with supporting facts about that market, not just general arguments about historical cost or loss allocation.

Citations and references

Statutes and regulations:

• 35 ILCS 5/304(f) (petition for alternative allocation or apportionment)
• 35 ILCS 5/304(a), (a)(3) (single sales-factor apportionment; definition of sales factor)
• 35 ILCS 5/1501(a)(1) (election to treat all income as business income)
• 86 Ill. Adm. Code 100.3220(b)(2), (b)(3) (allocation of nonbusiness capital gains based on commercial domicile)
• 86 Ill. Adm. Code 100.3380(c)(2) (exclusion of incidental/occasional asset-sale receipts from sales factor)
• 86 Ill. Adm. Code 100.3390(a)(4) (standard for alternative apportionment petitions)
• 2 Ill. Adm. Code 100.1200(b), (c) (GILs are non-binding, not statements of Department policy)

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-18-0003-gil.pdf

Original ruling text

IT 18-0003-GIL (10/23/2018)

ALTERNATIVE APPORTIONMENT

Alternative Apportionment Not Allowed unless Taxpayer Shows Sales Factor does not Fairly
Reflect Market for Goods or Services. (This is a GIL).

October 23, 2018
Re:

Petition for Alternative Apportionment

Dear Xxxxx:
This is in response to your letter dated April 9, 2018 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:
We are writing on behalf of the above taxpayer to petition for an alternative allocation and
apportionment method for tax year ending December 31, 2017 and all future years on the basis
described below.
COMPANY focuses on the development of products with minimally invasive therapies for bone
repair. The corporation began operations in 20XX and was headquartered in CITY, California.
COMPANY was not required to file an Illinois Corporation Income Tax return until it began
generating revenue from Illinois sources during tax year ending December 31, 20XX. During the
tax year ending December 31, 20XX, the corporation moved its headquarters to CITY 1, Illinois
and has timely filed Corporate Income Tax returns since that time.
On June 30, 20XX, COMPANY executed a purchase agreement to sell substantially all of its
assets. According to Illinois Admin Code 100.3220(b)(2) and (b)(3), capital gains from the sale
or exchange of tangible personal property and intangible property are allocated to Illinois if the
taxpayer has its commercial domicile in Illinois at the time of sale. Because COMPANY moved
its commercial domicile to Illinois during the tax year ending December 31, 20XX and was
domiciled in Illinois during 20XX, capital gain would be subject to Illinois Corporate Tax in 20XX
and all future years COMPANY recognizes a gain from the sale.
Based off the Agreement between the Buyer (COMPANY 1) and the Seller (COMPANY), a
majority of the goodwill (Milestone or Earnout payments), relates to the performance of “F&A”
products (see attached pages from the contract agreement). The potential future payouts and
criteria are as follows:
2018: $$ Performance of F&A products
2019: $$ Performance of F&A products
2020: $$ Performance of F&A products

IT 18-0003-GIL
PAGE 2
2018-2028 (Earnout): $$ Max 5% of F&A Products Gross Receipts & 2.5% of Additional
Products.
F&A products are defined in the attached contract as the PRODUCT and the PRODUCT 1
product lines. Based on the dates of FDA approval, these products were developed while the
taxpayer was domiciled in California and not Illinois (see attached PRODUCT and PRODUCT 1
articles for dates). The taxpayer has incurred significant R&D and overhead costs (see Exhibit
1) relating to the development of these products while the taxpayer was domiciled in California;
therefore, the taxpayer respectfully requests the Illinois Department of Revenue for special
apportionment to equate income earned (future payments for goodwill on products developed in
California) with the expenses and net operating losses incurred to develop the product in the
past. If the taxpayer continued to follow the single sales-factor in 2017 and future years, the
Illinois apportioned tax base would be grossly distorted and would not fairly represent where the
taxpayer earned its taxable income. Therefore, we hereby request that the taxpayer be allowed
to use a zero percent apportionment percentage on the sale of the corporation’s intangible
assets for tax year ending December 31, 2017 (and any future years, to the extent that the gain
is reported on the installment method pursuant to IRC Sec. 453).
In addition to the above argument, since the corporation began operations in 20XX, the
corporation has created almost $$ million in federal net operating losses for which it can utilize
against the gain on the sale of its assets. However, because COMPANY recently moved its
commercial domicile from California to Illinois, the corporation cannot equitably utilize state net
operating losses. The attached exhibit shows a summary of Illinois and California net operating
losses as reported on COMPANY’s tax returns since inception. As shown on Exhibit 2, Illinois
only accounts for 8% of the total state net operating losses. Illinois Admin. Code 100.3390(a)(4)
states that a taxpayer may petition for an alternative apportionment method if the employment
of any other method doesn’t represent an equitable allocation and apportionment of the
taxpayer’s income. The gain on the sale of the assets should not be entirely sourced to Illinois
because the majority of the company’s goodwill (discussed above) created since the
corporation’s inception was generated in California. Therefore, if the first argument above is
insufficient, we hereby request that the taxpayer be allowed to use an eight percent
apportionment percentage for the tax year ending December 31, 2017 (and any future years, to
the extent that the gain is reported on the installment method pursuant to IRC Sec. 453).
Furthermore, Exhibit 3 shows the allocation of gross sales between California and Illinois since
the inception of COMPANY in 20XX. The exhibit expresses a gross disparity between sales
sourced to each state and is evident that the majority of taxpayer’s business activity (75% per
Exhibit 3) has occurred in California over the lifespan of the corporation. This further exemplifies
that the single sales-factor would unfairly tax the gain on COMPANY’s asset sale in 2017.
Therefore, if the two arguments above are insufficient, we hereby request that the taxpayer be
allowed to use a twenty-five percent apportionment percentage for tax year ending December
31, 2017 (and any future years, to the extent that the gain is reported on the installment method
pursuant to IRC Sec. 453).

RULING
Section 304(f) of the Illinois Income Tax Act (“IITA” 35 ILCS 5/304(f)) states:

IT 18-0003-GIL
PAGE 3
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 v 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.
In applying Section 304(a), Department Regulations Section 100.3380(c)(2) provides the following
special rule:
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 sales 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;

IT 18-0003-GIL
PAGE 4
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.

Your petition for alternative apportionment is based on the assertion that the gain from the sale of
substantially all of COMPANY’s assets is allocated to Illinois pursuant to Department Regulations §§
100.3220(b)(2) and (b)(3), and that such allocation does not fairly reflect where the taxpayer earned its
taxable income.
As indicated above, for taxable years ending or after December 31, 2008, alternative apportionment
under IITA Section 304(f) is appropriate in cases where the allocation and apportionment provisions
under IITA Sections 304(a) through (e) do not fairly represent the market for the taxpayer’s goods,
services, or other sources of business income. Your petition contains no information relative to the
market for the taxpayer’s goods, nor does it contain information by which a determination can be made
as to whether the apportionment resulting under IITA Section 304 fails to fairly reflect that market.
In addition, note that Department Regulations § 100.3220 provides rules for the allocation of items of
nonbusiness income. In this case, the gain on the sale of taxpayer’s assets likely constitutes business
income and, as such, is not allocated according to the rules under Regulations § 100.3220. Note also
that IITA Section 1501(a)(1) allows taxpayers, for each taxable year beginning on or after January 1,
2003, to make an election to treat all income as business income. Finally, as indicated above, business
income is apportioned using the sales factor. In computing the sales factor, Department Regulations §
100.3380(c)(2) requires that gross receipts from an incidental or occasional sale of assets used in the
regular course of business shall be excluded from the sales factor. Based on the information contained
in your letter, § 100.3380(c)(2) likely applies to exclude from COMPANY’s sales factor the gross
receipts derived from the sale of substantially all of its assets (including its goodwill).
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)