What does Illinois Private Letter Ruling IT 19-0004-PLR conclude about (Alternative Apportionment) Alternative Method of Apportionment?

Plain-English summary

The taxpayer ("COMPANY1"), an LLC taxed as a partnership for Illinois income tax purposes, had previously sold a pharmaceutical product line (PRODUCT3) and associated assets to an unrelated buyer. That earlier sale was structured as an installment sale, with an upfront cash payment plus contingent "Earn-Out" payments based on the buyer's future net sales, and a possible one-time milestone payment. In the tax year at issue, COMPANY1 received two Earn-Out payments and also sold most of its remaining contractual rights to future Earn-Out payments to a third party. Its only other income that year was interest, including imputed interest on the deferred payments.

Under Illinois's normal rules, the gross receipts from the original occasional sale of PRODUCT3 -- and, by extension, the Earn-Out payments and the sale of Earn-Out rights tied to that same sale -- are excluded from the Illinois sales factor entirely under the "incidental or occasional sale" rule in 86 Ill. Adm. Code 100.3380(c)(2) (and separately under the intangible-sourcing rule in IITA Section 304(a)(3)(B-2)). Because interest income is sourced 100% to Illinois as the taxpayer's commercial domicile, stripping out the Earn-Out and installment-sale receipts would have left interest as effectively the only item in the sales factor -- which would have sourced 100% of COMPANY1's income, including the Earn-Out and installment-sale gains, to Illinois even though those gains had little connection to Illinois business activity in that year.

IDOR agreed this was a distorted result and that the standard statutory formula did not fairly represent the market for COMPANY1's goods, services, or other business income, as required to trigger relief under IITA Section 304(f). The Department granted an alternative apportionment method: rather than defaulting to the distorted 100%-Illinois sourcing, the taxpayer may compute its apportionment factor for the Earn-Out and installment-sale gain by using the Illinois apportionment percentage from the year the original PRODUCT3 sale occurred and the gain was economically realized -- applied to the net gain (not the interest portion, which stays sourced 100% to Illinois as before). The ruling also allows the same methodology to be used for future years' Earn-Out or milestone payments tied to that same original sale.

This is a narrow, facts-specific relief ruling. It does not change the general rule that occasional-sale gross receipts are excluded from the sales factor, or that interest is sourced to the taxpayer's commercial domicile; it simply lets this taxpayer avoid a distortive apportionment outcome that arose from the interaction of those two otherwise-correct rules.

What this means for you

Businesses winding down or selling substantially all assets

If your company sold its operating assets in an installment sale and is now receiving deferred contingent payments (earn-outs, milestones) in later years when the business has little or no other Illinois-sourced sales activity, you may face the same distortion: occasional-sale exclusion rules can leave interest income as the only item driving your sales factor, sourcing far more income to Illinois than your business activity would justify. This ruling shows IDOR is willing to grant alternative apportionment in that scenario, but only case-by-case and only on petition.

Accountants and tax professionals

The ruling walks through the interaction of three rules: the occasional-sale exclusion (86 Ill. Adm. Code 100.3380(c)(2)), the intangible/patent sourcing rule requiring intangible sales to exceed 50% of gross receipts to be includable (IITA Section 304(a)(3)(B-2)), and the interest-sourcing rule (IITA Section 304(a)(3)(C-5)(iii)(b)). Note the procedural point: a petition for alternative apportionment must be timely filed under 86 Ill. Adm. Code 100.3390(e)(1), generally 120 days before the return's due date (including extensions).

Partnerships and LLCs holding installment obligations

The ruling also addresses the mechanics of installment sales under Treas. Reg. § 15a.453-1(c) and the sale of an installment obligation under IRC Section 453B -- confirming that gross receipts from selling the installment obligation itself are likewise excluded from the sales factor under the occasional-sale rule, consistent with the treatment of the underlying deferred payments.

Common questions

Q: What alternative apportionment method did IDOR approve?
A: The taxpayer may source its Earn-Out and installment-sale-obligation gain (not including the interest income, which remains 100% Illinois-sourced) using the Illinois apportionment percentage from the year the original PRODUCT3 asset sale occurred, rather than being forced into the standard current-year formula that would source 100% of the income to Illinois.

Q: Why couldn't the taxpayer just use its current-year apportionment factor?
A: Because the occasional-sale exclusion rule and the intangible-sourcing rule together removed the Earn-Out and installment-sale receipts from both the numerator and denominator of the current year's sales factor, leaving only 100%-Illinois-sourced interest income in the factor -- which would have sourced all of the taxpayer's income to Illinois regardless of where the underlying business was actually conducted.

Q: Does this ruling let any Illinois taxpayer use a prior year's apportionment percentage for deferred payments?
A: No. Alternative apportionment under IITA Section 304(f) is only available where the standard formula does not fairly represent the market for the taxpayer's goods, services, or business income, and it requires a timely petition under 86 Ill. Adm. Code 100.3390(e)(1). IDOR evaluates each request on its own facts.

Q: Can another taxpayer rely on this ruling?
A: No. This is a Private Letter Ruling issued under 2 Ill. Adm. Code 1200.110. It binds the Department only as to the specific taxpayer who requested it, and only to the extent the facts that taxpayer presented were complete and accurate. It also expires 10 years from issuance (earlier if the law or facts change). Other taxpayers can look to it only as an illustration of IDOR's reasoning, not as binding authority for their own situation.

Citations and references

Statutes:

• 35 ILCS 5/304(a)(3)(A) -- sales factor definition
• 35 ILCS 5/304(a)(3)(B-1), (B-2) -- sourcing of intangible/patent sale receipts (50% test)
• 35 ILCS 5/304(a)(3)(C-5)(iii)(a)-(b) -- sourcing of interest income
• 35 ILCS 5/304(f) -- alternative allocation/apportionment
• 35 ILCS 5/304(h) -- apportionment factor equals sales factor
• 35 ILCS 5/1501(a)(21) -- definition of "sales"

Regulations:

• 86 Ill. Adm. Code 100.3380(c)(2) -- incidental or occasional sale exclusion from sales factor
• 86 Ill. Adm. Code 100.3390(e)(1) -- timely petition requirement for alternative apportionment
• 2 Ill. Adm. Code 1200.110 -- Private Letter Ruling procedure and binding effect

Federal authorities referenced:

• 26 U.S.C. § 483 -- imputed interest on certain deferred payments
• 26 U.S.C. § 453B; Treas. Reg. § 1.453-9(a) -- recognition of gain on sale of an installment obligation
• Treas. Reg. § 15a.453-1(c) -- contingent payment sales reported under the installment method

Prior IDOR ruling discussed: IT 13-0003-PLR (9/18/2013) -- alternative apportionment granted where an occasional sale of Illinois real property left the taxpayer with a zero Illinois sales factor.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2019.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2019/it19-0004-PLR.pdf

Original ruling text

IT 19-0004-PLR
(Alternative Apportionment) Alternative Method of Apportionment
Taxpayer is granted permission to apportion interest income and income
received from the sale of the right to receive future contingent payments
by using the same apportionment factor for the year in which Taxpayer
sold rights and property to a third party. (This is a PLR.)

December 17, 2019

Dear XXX:
This is in response to your letter dated May 3, 2019 in which you request a
Private Letter Ruling on behalf of COMPANY1. Your request for a Private Letter
Ruling includes the information required under paragraphs 1 through 8 of
subsection (b) of 2 Ill. Adm. Code 1200.110. The Private Letter Ruling will bind
the Department only with respect to COMPANY1 for the issues presented in this
ruling, and is subject to the provisions of subsection (e) of Section 1200.110
governing the expiration of Private Letter Rulings. Issuance of this ruling is
conditioned upon the understanding that COMPANY1 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 them are as follows:
The ruling is requested for tax year ended on December 31, 20##.
COMPANY1 is a limited liability company and is treated as a partnership
for federal income and Illinois personal property replacement income tax
(“Income Tax”) purposes. COMPANY1 has a calendar year ending
December 31st.
Statement of facts
COMPANY1 is a privately held biopharmaceutical company
headquartered in CITY1, STATE1. COMPANY1 is a regarded entity
treated as a partnership for federal and state Income Tax purposes.
COMPANY1 has a wholly owned subsidiary, COMPANY1 HOLDINGS.
COMPANY1 HOLDINGS is a disregarded LLC for federal and state
Income Tax purposes.
COMPANY2 was founded in 20## and headquartered in CITY1, STATE1
with additional locations in CITY2, CITY3, STATE2, and STATE3. From
inception through February 20##, COMPANY2’s core business was the
manufacturing, distribution and retail sale of approved pharmaceutical
products to pharmaceutical wholesalers. In February 20##, COMPANY2
divested the intellectual property associated with the majority of its
approved pharmaceutical products and devoted its efforts on advancing its
1

COMPANY/NAME
Page 2
December 17, 2019
drug development program. In particular, COMPANY2 focused all of its
resources on the development of PRODUCT1 and PRODUCT2 with the
goal of US regulatory approval and commercial launch of the associated
pharmaceutical products to wholesalers.
Following several years of clinical development activity, the Company
accumulated sufficient clinical, manufacturing and technical data to submit
a drug application to the US Food and Drug Administration (“FDA”) in
June 20## seeking US regulatory approval for PRODUCT1. Concurrently
to the submission, the Company began its launch readiness efforts,
including hiring ## employees, including field-based sales representatives,
sales and marketing executives, managed care and supply chain
management specialists and back office infrastructure support teams. In
advance of the launch, the Company entered into contracts for
warehousing and logistics management, order to cash management and
other on-going requirements for US drug sellers such as Affordable Care
Act reporting.
In February 20##, COMPANY2’s new drug application for PRODUCT1
was approved by the FDA under the trade name PRODUCT3. At the time
of approval, COMPANY2 announced that the product would be launched
by the Company. Shortly thereafter, as a result of market and industry
factors, COMPANY2 concluded that an outright sale of the rights to
PRODUCT3 would result in more value than a commercial launch of the
drug.
On March ##, 20##, COMPANY2 sold the rights to PRODUCT3 to
COMPANY3, an unrelated pharmaceutical company, for $$$. As part of
the sale of PRODUCT3, COMPANY2 sold all associated inventory, all
intellectual property, all world-wide regulatory filings, all product books and
records, all product materials and data, all bottling machinery and
equipment and all goodwill associated with PRODUCT3. At that time,
COMPANY2 initiated a workforce reduction and terminated all but ## of its
employees over the period from April 20## to June 20## (a total of ##
employees). The ## remaining employees were terminated on September

, 20##.

In addition to the $$$ received in 20##, the sales contract called for
contingent payments (“Earn-Outs”) based on the buyer’s net sales
beginning in 20##. There was a $$$ cap placed on the Earn-Outs. Also
included as part of the consideration was a one-time milestone payment of
$$$ if the “Milestone Event” as defined in the asset purchase agreement
was achieved.

COMPANY/NAME
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December 17, 2019
COMPANY1 excluded the gain from sale of the intangible and personal
property on its 20## Illinois partnership return as an occasional sale. The
sale of the intangibles could also be viewed as a sale of an intangible
covered under Illinois Income Tax Act (“IITA”) Section 304(a)(3)(B-1 and
B-2) and the proceeds from the sale of the intangibles would also be
excluded from the Illinois sales factor numerator and denominator.
COMPANY1’s Illinois apportionment factor for the 20## tax year was
%%%.
In 20##, COMPANY2 changed its name to COMPANY1 HOLDINGS and
COMPANY2 HOLDINGS changed its name to COMPANY1. COMPANY1
HOLDINGS is a SMLLC and is owned %%% by COMPANY1, a
partnership for federal and Illinois income tax purposes. During 20##,
COMPANY1 HOLDINGS received two Earn-Out payments totaling some
$$$ relating to the 20## sale of PRODUCT3. In December 20##,
COMPANY1 HOLDINGS entered into a Contingent Payment Agreement
(“Agreement”) with COMPANY4, an unrelated third party. Under the terms
of the Agreement, COMPANY1 HOLDINGS sold the rights to certain
future Earn-Out payments. COMPANY1 HOLDINGS sold the contractual
rights to the Earn-Out payments for $$$ million. COMPANY1 HOLDINGS
retained the rights to the milestone payment and to certain future Earn-Out
payments if certain sales of the drug were achieved.
In 20##, other than the Earn-Out payments and the proceeds from the
Agreement, COMPANY1’s only income was from portfolio interest income
and imputed interest income on the Earn-Out payments. Although
COMPANY1 is still in existence as a legal entity, it is no longer an active
company, has no employees and no physical locations.
Rulings Requested
COMPANY1 requests the use of an alternative method relating to the two
Earn-Out payments that were received in 20##. COMPANY1 also
requests the use of an alternative apportionment method regarding the
payment that they received from the sale of the intangible rights to future
Earn-Out payments. The contractual rights to the Earn-Out payments
relate to the same pharmaceutical sale that occurred in 20##.
In the event that COMPANY1 receives future payments relating to the
milestone payment or Earn-Out payments from rights they had retained,
COMPANY1 requests the use of the same alternative apportionment to be
applied to these payments.
Discussion
As previously stated, there are four types of receipts that COMPANY1
earned during 20##. They earn interest from cash on deposit maintained

COMPANY/NAME
Page 4
December 17, 2019
to service tax obligations and imputed interest on Earn-Out payments
received during the year. They earned and received two Earn-Out
payments during the year. The final receipt is the income that was earned
when they sold the rights to the future Earn-Out payments.
Interest income sourcing
The sourcing of interest is governed by IITA Section 304(a)(3)(C-5)(iii)(a)
and (b). Subsection (a) addresses the sourcing of interest if the taxpayer
is a dealer. For purposes of this ruling request, it is presumed that
COMPANY1 is not a dealer in the item of interest so the sourcing of the
interest would be governed by subsection (b). This subsection provides
that interest is sourced to Illinois, “if the income-producing activity of the
taxpayer is performed in this State or, if the income-producing activity of
the taxpayer is performed both within and without this State, if a greater
proportion of the income-producing activity of the taxpayer is performed
within this State than in any other state, based on performance costs.”
Based on this sourcing provision, 100% of the interest from various bank
accounts would be sourced to Illinois, the commercial domicile of
COMPANY1.
COMPANY1 received two Earn-Out payments during 20##. Pursuant to
Internal Revenue Code Section 483, a portion of the Earn-Out payments
will be deemed interest on certain deferred payments. Again it is
presumed that COMPANY1 is not a dealer in the item of interest and the
sourcing of the interest would be governed by IITA Section 304(a)(3)(C5)(iii)(b). Based on this sourcing provision, 100% of the interest income on
deferred payments would be sourced to Illinois, the commercial domicile
of COMPANY1.
Earn-Out Payment Income Sourcing
COMPANY1 distributes PRODUCT3 through a specialty pharmacy model
under which COMPANY1 sells PRODUCT3 to two specialty pharmacies,
at which point its earnings process is complete. COMPANY1 is an SECregistrant and its external reported product sales are based on its sales to
these specialty pharmacies. COMPANY1’s Earn-Out payments are based
on COMPANY1’s sale of product to the specialty pharmacies. From a
physical flow of goods perspective, COMPANY1 houses its inventory at a
third-party logistics provider (“COMPANY5”) located in STATE4.
COMPANY1 then sells inventory primarily to one specialty pharmacy
located in STATE5, with a small amount sold to a different specialty
pharmacy located in STATE6.
In COMPANY1’s original sale of the drug PRODUCT3 to COMPANY1, the
sale included the trademarks, tradenames, patents and other similar
intangible rights. The Earn-Out payments relate to these same rights and

COMPANY/NAME
Page 5
December 17, 2019
the sourcing of these payments would be governed by IITA Section
304(a)(3)(B-1 and B-2).
IITA Section 304(a)(3)(B-2):
Gross receipts from the license, sale, or other disposition of
patents, copyrights, trademarks, and similar items of intangible
personal property, other than gross receipts governed by paragraph
(B-7) of this item (3), may be included in the numerator or
denominator of the sales factor only if gross receipts from licenses,
sales, or other disposition of such items comprise more than 50%
of the taxpayer’s total gross receipts included in gross income
during the tax year and during each of the 2 immediately preceding
tax years; provided that, when a taxpayer is a member of a unitary
business group, such determination shall be made on the basis of
the gross receipts of the entire unitary business group.
The income from the Earn-Out payments will not meet the “more than
50% of the taxpayer’s total gross receipts included in gross income during
the tax year and during each of the two immediately preceding tax years.”
As such the proceeds from the receipt of the Earn-Out payments will be
excluded from COMPANY1’s Illinois sales factor apportionment, both
numerator and denominator.
Income from the sale of the intangible right to receive future Earn-Out
payments
Finally, the last receipt that COMPANY1 received during 20## is the
proceeds from the outright sale of the Earn-Out rights to future payments.
In this sale, COMPANY1 sold most of its rights to the future Earn-Out
payments. COMPANY1 also retained the rights to the milestone payment.
The sale of Earn-Out rights was a sale of an intangible. In general, net
gains from the sale of an intangible are governed by IITA Section
304(a)(3)(C-5)(iii)(a) and (b). However, Illinois has an “incidental or
occasional sale” provision which would eliminate these net proceeds from
COMPANY1’s Illinois sales factor.
On August 27, 2017 the Department revised 86 Ill. Admin. Code Section
100.3380(c)(2) to provide the following:
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

COMPANY/NAME
Page 6
December 17, 2019
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;
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.
The purpose of 86 Ill. Admin. Code Section 100.3380(c)(2) is to exclude
from both the numerator and denominator of the sales factor gross
receipts from a transaction that, while generating business income, does
not arise from transactions and activity that may be regarded as the
taxpayer’s regular or ordinary course of business. The sale of the EarnOut rights is an isolated transaction not made in COMPANY1’s market for
its goods, services, or other ordinary sources of COMPANY1’s business
income. As an isolated or occasional sale, the net gain from the sale of the
Earn-Out rights would be excluded from the numerator and denominator
of the Illinois sales factor.
Assuming that the net gain from the sale of the Earn-Out rights and the
Earn-Out payments are both excluded from the Illinois sales factor
numerator and denominator, Illinois would apportion all income earned in

COMPANY/NAME
Page 7
December 17, 2019
20## based on COMPANY1’s interest received. In essence, without the
use of an alternative apportionment method, Illinois would source 100% of
all of COMPANY1’s income to Illinois.
COMPANY1 maintains that the use of %%% apportionment does not fairly
reflect the sale of the Earn-Out rights and Earn-Out payments activities in
Illinois and is requesting the use of an alternative apportionment method.
IITA Section 304(f) Alternative allocation 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 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.
On August 3, 2017, the Department modified its regulations for petitioning
for alternative apportionment 86 Ill. Admin. Code 100.3390. Under 86 Ill.
Admin. Code 100.3390(e) Timely Filed Petitions.
A taxpayer petition for use of a separate accounting method or any
other alternative apportionment method will not be considered by
the Director unless such petition has been timely filed. A taxpayer
who petitions the Director for an alternative apportionment formula
does so subject to the Department’s right to verify, by audit of the
taxpayer’s return and supporting books and records within the
applicable statute of limitations, the facts submitted as the basis of
the petition. A petition for alternative allocation or apportionment is
timely filed if the petition is filed:
(e)(1) 120 days prior to the date of the tax return (including
extensions) for which permission to use such alternative method is
sought. A taxpayer who does not petition more than 120 days prior
to the due date of the original return must file their return and pay
tax according to the statutorily approved apportionment method.

COMPANY/NAME
Page 8
December 17, 2019
In IT 13-0003-PLR, 9/18/2013, the taxpayer requested the use of an
alternative apportionment where the only activity in the tax year was the
sale of the taxpayer’s real property located in Illinois that was formerly
used in the taxpayer’s trade or business. As a result of the application of
the incidental or occasional sale provision, the sale of the real property
could not be included in the taxpayer’s Illinois sales factor. The taxpayer
was left with no sales factor in Illinois to apportion the gain from the sale of
the real property. In this matter, the taxpayer was able to show that the
standard apportionment formula, would have apportioned zero income to
Illinois, did not fairly represent the market for the taxpayer’s goods,
services, or other sources of business income in Illinois and was permitted
the use of an alternative apportionment. The taxpayer was permitted in
using an average Illinois apportionment percentage over the last nine
taxable years as the alternative method to determine how much of the
gain on the sale of real property should be apportioned to Illinois.
In our facts, the exclusion of the Earn-Out payments and the proceeds
from the sale of the rights to the future Earn-Out payments would result in
the sourcing of this income to Illinois based on COMPANY1’s interest
income sourced 100% to Illinois. Similar to sourcing none of the proceeds
from the sale of real property, the sourcing 100% of the Earn-Out
payments and proceeds from the sale of the rights to future Earn-Out
payments do not fairly represent the market for the taxpayer’s goods,
services, or other sources of business income, that the use of an
alternative apportionment method is warranted. The sourcing of interest
income to Illinois should not be used to determine the sourcing of the
Earn-Out payments and the proceeds from the sale of the rights to the
future Earn-Out payments.
We are requesting under IITA Section 304(f) and 86 Ill. Admin. Code
Section 100.3390(e)(1) the use of an alternative apportionment method
because we believe that the application of the required statutory formula
for apportionment will lead to a grossly distorted result. We would like to
propose three apportionment options for the tax year ending December
31, 20## to source the proceeds for the Earn-Out payments received as
well as the proceeds for the rights to the future Earn-Out payments:
1) We will use the Illinois apportionment percentage that COMPANY1 had
in Illinois for 20##. This percentage was %%%. This is the year the
COMPANY1 sold the drug PRODUCT3 to a third party pharmaceutical.
The Earn-Out payments ultimately relate to this initial sale.
2) We will use the average Illinois apportionment percentage that
COMPANY1 had in Illinois over the last ## years while it developed the
drug PRODUCT3. This percentage was %%%,

COMPANY/NAME
Page 9
December 17, 2019
3) We will use the average Illinois apportionment percentage that
COMPANY1 had in Illinois since it first transacted business in Illinois back
in 20##. This percentage was %%%.
We believe that the first proposed option of apportionment would be most
appropriate because the 20## Earn-Out payments and the proceeds for
the future Earn-Out payments all relate to the original sale of PRODUCT3
back to 20##. However, we would accept either the second or third
options if the Department believes that these apportionment methods are
more representative of COMPANY1’s activities in Illinois.
Should the Department grant the Company’s request for the use of an
alternative apportionment for 20##, the Company would be interested in
applying the same alternative apportionment methodology for future
receipts attributable to the Milestone Event or Earn-Outs that the
Company retained.
In correspondence provided subsequent to your filing, you represented that in
20##, the amount of $$$ of interest income was included in Taxpayer’s base
income, none of which was attributable to imputed interest.
RULING
Under Section 304(h) of the Illinois Income Tax Act (“IITA” 35 ILCS 5/304(h)), for
taxable years ending on and after December 31, 2000, the apportionment factor
for taxpayers apportioning business income under Section 304(a) is equal to the
sales factor. The sales factor is defined under Section 304(a)(3)(A) as follows:
The sales factor is 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.
The term “sales” is defined under IITA Section 1501(a)(21) to mean all gross
receipts of the taxpayer not allocated under Sections 301, 302 and 303.
IITA Section 304(f) 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

COMPANY/NAME
Page 10
December 17, 2019
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.
Pursuant to this section, the Department promulgated Regulations Section
100.3380, which states in relevant part:
The Director has determined that, in the instances described in this
Section, the apportionment provisions provided in subsections (a) through
(e) and (h) of IITA Section 304 do not fairly represent the extent of a
person’s business activity within Illinois.
…
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;
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

COMPANY/NAME
Page 11
December 17, 2019
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 letter represents that on March ##, 20## COMPANY1 HOLDINGS
(hereinafter “Taxpayer”)1 sold substantially all of the assets used in its trade or
business, including the rights to PRODUCT3 and all associated assets, to a thirdparty purchaser for an immediate cash payment plus the third-party purchaser’s
obligation to make certain contingent payments in future taxable years. Based on
the facts as described in your letter, the March ##, 20## asset sale constitutes an
incidental or occasional sale of assets used in the regular course of business
pursuant to Regulations Section 100.3380. As such, the gross receipts from such
sale must be excluded from the Taxpayer’s sales factor.2
Your letter indicates that Taxpayer’s sale of PRODUCT3 and associated assets
qualifies as a contingent payment sale under Treasury Regulations Section
15a.453-1(c), which requires that such sales be reported under the installment
method. Under the installment method, gain from the asset sale is taken into
account proportionately as payments are received based on the ratio of the gross
profit realized or to be realized over the total contract price. Under Treasury
Regulations Section 15a.453-1(c)(2)(i), the stated maximum selling price is
treated as the selling price (and thus included in the contract price) for purposes
of applying the installment method. The contract price does not include interest,
whether stated or unstated, or original issue discount.
Where an occasional sale of assets is reported under the installment method, the
portion of the contract price received during the taxable year must be excluded
from the sales factor under Regulations Section 100.3380. In addition, under
Internal Revenue Code Section 453B and Treasury Regulations Section 1.4539(a), the entire amount of gain or loss on the sale of an installment obligation is
recognized in the taxable year of sale and is considered as resulting from the
sale or exchange of the property in respect of which the installment obligation
We assume for purposes of this ruling that Taxpayer’s name change qualified as a reorganization under
IRC Section 368(a)(1)(F).
2
Your letter indicates that the gross receipts from the March ##, 20## sale, to the extent allocable to
PRODUCT3 and associated intellectual property rights, are excluded from the sales factor under IITA
Section 304(a)(3)(B-2). Even assuming that such receipts would not be excluded from the sale factor under
IITA Section 304(a)(3)((B-2), such receipts are excluded from the sales factor under Regulations Section
100.3380. In addition, Regulations Section 100.3380 applies to exclude from the sales factor gross receipts
from the sale allocable to the bottling machinery and equipment and business goodwill. The analysis set
forth herein is the same whether the gross receipts are excluded from the sales factor under either IITA
304(a)(3)(B-2) or Department Regulations Section 100.3380.
1

COMPANY/NAME
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December 17, 2019
was received. Accordingly, where the taxpayer sells an installment obligation
received by the taxpayer in connection with an occasional or occasional sale of
assets, gross receipts from the sale of the installment obligation must likewise be
excluded from the sales factor pursuant to Department Regulations Section
100.3380.
Applying the provisions of Department Regulations Section 100.3380 to the facts
set forth in your letter, Taxpayer must exclude from its sales factor the $$$ of
Earn-Out payments received in 20##, as well as the $$$ received in 20## from
its sale of the Earn-Out rights. Similarly, any Earn-Out payments received in
future taxable years (including the milestone payment) must be excluded from
Taxpayer’s sales factor.
As indicated above, under Treasury Regulations Section 15a.453-1, the contract
price does not include interest, whether stated or unstated. You have
represented that Taxpayer did not recognize interest on the installment obligation
in 20##, but that imputed interest may be taken into account in subsequent
taxable years as amounts are paid under the contingent payment obligation.
Your letter indicates that, other than gross receipts received on the installment
obligation, the Taxpayer’s only source of gross receipts consists of interest
income from cash deposits maintained in order to service tax obligations. As
mentioned above, you indicate that the Taxpayer sold substantially all of its
assets on March ##, 20##, and thereafter began to wind down its business,
including eliminating all but ## employees as of June 20##, and all employees as
of September ##, 20##. As a result, most of the interest income taken into
account in 20## accrued after the Taxpayer had ceased its regular business
activities. In this case, the vast majority of the Taxpayer’s base income for 20##
derives from its March ##, 20## asset sale. However, under IITA Section 304(a),
all of that income is apportioned based on a relatively small amount of gross
receipts from interest income earned on deposits and accruing after the taxpayer
had ceased to conduct its regular business activities. Based on the facts
represented, the allocation and apportionment provisions of subsections (a)
through (e) and of subsection (h) of Section 304 do not fairly represent the
market for Taxpayer’s goods, services, or other sources of business income.
Therefore, an alternative apportionment method is appropriate.
Your letter proposes an alternative apportionment method for the 20## taxable
year in which Taxpayer would use its Illinois apportionment percentage for the
20## taxable year to source the proceeds from the Earn-Out payments as well as
the proceeds from the sale of the rights to future Earn-Out payments. The
apportionment percentage for the 20## taxable year represents the
apportionment that would have applied to the entire gain from the sale of
PRODUCT3 and associated assets if that gain was recognized in the year
realized. You may compute Taxpayer’s apportionment factor for its 20## taxable

COMPANY/NAME
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December 17, 2019
year by including in the numerator of the sales factor the percentage of the net
gain taken into account on payments received in 20## under the installment
obligation, plus the net gain taken into account from the sale of the installment
obligation, equal to Taxpayer’s 20## Illinois apportionment factor (which you
represent to be %%%). The entire net gain should be included in the
denominator. You should include 100% of the interest income taken into account
in 20## (including imputed interest taken into account, if any) in the numerator of
the sales factor (with the same amount included in the denominator). You may
use the same methodology for future taxable years with respect to any Earn-Out
payments (including the Milestone payment) received, and including 100% of the
interest income taken into account in future taxable years (including imputed
interest) in the numerator of the sales factor.
The factual representations 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 factual representations recited in
this ruling are correct and complete. This Private Letter Ruling is revoked and will
cease to bind the Department 10 years after the date of this letter under the
provisions of 2 Ill. Adm. Code 1200.110(e) or earlier if there is a pertinent change
in statutory law, case law, rules or in the factual representations recited in this
ruling.
Sincerely,

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