Can a taxpayer use alternative apportionment to include gain from selling media outlets (mostly attributable to goodwill) in its Illinois sales factor, when that gain would otherwise be excluded under the Occasional Sale Rule?

Subject

Alternative Apportionment

Plain-English summary

A media company (referred to as COMPANY1) sold its media outlets in a particular state (STATE3) and reported a large federal gain on the sale. On its originally filed Illinois return, the company left the gross receipts from that sale out of its Illinois sales factor, relying on the "Occasional Sale Rule" at 86 Ill. Adm. Code 100.3380(c)(2), which excludes gross receipts from an incidental or occasional sale of business assets from the sales factor.

The company then amended its return to claim a refund, arguing the opposite: that the Occasional Sale Rule should not apply here, because the sale gain was the company's only item of taxable income for the year, and excluding it from the sales factor while still taxing the income would be distortive. In the alternative, the company petitioned under 35 ILCS 5/304(f) for a method of alternative apportionment — asking the Department to include the sale proceeds in the sales factor denominator (and, for part of its argument, to weight the circulation of the sold outlets more heavily) so the sales factor would better reflect the market for its business income.

The Department denied the petition. It concluded that 86 Ill. Adm. Code 100.3380(c)(2) properly applies to exclude the gross receipts from this transaction from the sales factor, for two independent reasons drawn straight from the ruling:

1. The taxable gain was largely attributable to a lack of federal tax basis stemming from the company's prior bankruptcy, where debt was discharged under IRC Section 108 and asset basis was reduced accordingly. The Department treated this as recapture of previously excluded discharge-of-indebtedness income that "is properly apportioned according to the respective markets of the unitary business as a whole" — not specific to the state where the sold assets were located — so including it in the sales factor would be distortive.
2. To the extent the gain was attributable to goodwill built up over many years of operating the unitary business, "including all of the gross receipts attributable to the sale of goodwill in the sales factor denominator does not reflect the market for the taxpayer's goods, services or other ordinary sources of business income because such sourcing differs from the sales factor computed without regard to that sale."

The Department also addressed, and rejected the premise of, each of the four specific rationales in the regulation (subsections (A) through (D)) that the taxpayer had argued did not fit its facts, concluding instead that each rationale supported exclusion.

As the ruling itself notes, "(This is a GIL.)" — a General Information Letter, not a Private Letter Ruling, and therefore not binding on the Department.

What this means for you

Businesses selling major assets or business units

If your company has a large, one-time asset sale (especially one tied to a bankruptcy history or heavy goodwill), this ruling shows the Department will scrutinize why a sale isn't "incidental or occasional" before agreeing to include its receipts in the sales factor. The fact that a sale represents most or all of a company's taxable income for the year did not, by itself, persuade the Department to depart from the Occasional Sale Rule in this case.

Accountants and tax professionals evaluating alternative apportionment petitions

The Department's reasoning here tracked the regulation's own listed rationales at 86 Ill. Adm. Code 100.3380(c)(2)(A)-(D) rather than the general "grossly distorted result" case-law standard (which the taxpayer had invoked, citing Miami Corp. v. Dept. of Revenue and out-of-state cases like Appeal of Emmis Communications). The ruling illustrates that the Department will apply the specific regulatory Occasional Sale Rule test first, and treats discharge-of-indebtedness recapture and self-created goodwill as fitting squarely within that rule's exclusion rationale.

Anyone relying on this letter

This is a General Information Letter (GIL) issued under 86 Ill. Adm. Code 1200.120(b) and (c). It is not a statement of Department policy, does not bind the Department, and applies only to the facts described. A taxpayer wanting a binding answer on their own specific facts would need to request a Private Letter Ruling instead.

Common questions

Q: Did the Department grant the taxpayer's petition for alternative apportionment?
A: No. The ruling states plainly, "your petition for alternative apportionment cannot be granted," and that "Department Regulations §100.3380(c)(2) properly applies in this case to exclude from the sales factor the gross receipts from the June YYYY Transaction."

Q: Why did the Department say the gain shouldn't be included in the sales factor even though it was the company's main source of income that year?
A: The Department found two grounds. First, the gain largely reflected recapture of previously excluded discharge-of-indebtedness income from a prior bankruptcy under IRC Section 108, which "is properly apportioned according to the respective markets of the unitary business as a whole," not the state where the sold assets sat. Second, to the extent the gain was attributable to goodwill, the ruling concluded that "including all of the gross receipts attributable to the sale of goodwill in the sales factor denominator does not reflect the market for the taxpayer's goods, services or other ordinary sources of business income."

Q: Did the Department address the taxpayer's argument that the sale was part of a history of acquisitions and dispositions (like the Emmis Communications case)?
A: The ruling text recounts the taxpayer's argument citing Appeal of Emmis Communications and Miami Corp. v. Dept. of Revenue, but the Department's RULING section does not adopt that reasoning — it instead works through each subsection of 86 Ill. Adm. Code 100.3380(c)(2) and concludes the Occasional Sale Rule properly excludes the receipts, without granting relief based on the company's acquisition/disposition history.

Q: Does the ruling explain how the sales factor for publishing income (like subscriptions and advertising) is normally sourced?
A: Yes. It describes that under 86 Ill. Adm. Code 100.3373(c)(1), gross receipts from tangible published materials are sourced to where delivered, while receipts from other published materials, advertising, and customer lists are sourced using the taxpayer's circulation factor for the relevant publication.

Q: Is this ruling binding on the Illinois Department of Revenue or on other taxpayers?
A: No. The letter states it is a General Information Letter, and that "GILs do not constitute statements of Department policy that apply, interpret or prescribe the tax laws and are not binding against the Department," citing 2 Ill. Adm. Code 100.1200(b) and (c) (referenced in the ruling text; the current recodified citation is 86 Ill. Adm. Code 1200.120(b) and (c)).

Q: What alternative did the taxpayer propose instead of separate accounting?
A: The ruling text describes that although separate accounting (which would have resulted in no Illinois tax on the transaction gain) was available under the statute, "COMPANY1 is not proposing such a calculation." Instead, the taxpayer proposed including specific dollar amounts of gross proceeds and net gain in the sales factor denominator alongside its regular course-of-business sales — a proposal the Department ultimately rejected by upholding the Occasional Sale Rule.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2021.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2021/it21-0002-gil.pdf

Original ruling text

IT 21-0002 05/11/2021 ALTERNATIVE APPORTIONMENT
Alternative apportionment not appropriate where including all of the gross receipts attributable
to the sale of goodwill in the sales factor denominator does not reflect the market for the
taxpayer's goods, services or other ordinary sources of business income because such
sourcing differs from the sales factor computed without regard to that sale. (This is a GIL.)
May 11, 2021
Re:

Petition for Alternative Apportionment
COMPANY1
Tax Year Ended: 12/31/YYYY

Dear NAME:
This is in response to your petition 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 based on the information provided.
Your petition states as follows:
We are writing regarding COMPANY1 (FEIN: XX-XXXXXXX, “Taxpayer”) to claim a refund of
$$$$$$ for taxable year ended 12/31/YYYY of Illinois Income and Replacement Tax. Enclosed
is Taxpayer’s Amended Corporation Income and Replacement Tax Return (Form IL-1120-X).
Taxpayer is a media company providing award-winning CONTENT. Headquartered in CITY,
STATE1, Taxpayer owns local media businesses in eight markets with NAMES include the
OUTLETA, OUTLETB, OUTLETC, OUTLETD, OUTLETE, STATE2’s OUTLETF and OUTLETG,
OUTLETH and OUTLETI. In June 18, YYYY, Taxpayer completed the sale of the OUTLETJ,
OUTLETK, and various other NAMES of the Taxpayer’s COMPANY3 (“Transaction”) resulting
in a federal net gain of $$$$$$.
Taxpayer is amending its return to adjust its sales factor for purposes of computing Illinois
business income. On the originally filed return, Taxpayer did not include receipts related to the
Transaction in the Illinois sales factor.
Taxpayer asserts that Ill. Adm. Code Sec. 100.3380(c)(2), which excludes gross receipts that
arise from an incidental or occasional sale of assets used in the regular course of business,
should not be applicable where those gross receipts give rise to the Taxpayer’s only item of
taxable income. In the alternative, and pursuant to 35 ILCS 5/304(f), COMPANY1 respectfully
petitions for a method to effectuate an equitable allocation and apportionment of business
income because the allocation and apportionment provisions of subsections (a) through (e) and
of subsection (h) of 35 ILCS 5/304 do not fairly represent the market for COMPANY1’S sources
of business income.

The amended return also includes a petition for alternative apportionment that should be referred
to the Legal Services Bureau/Income Tax Division. Our position to claim alternative
apportionment is supported by Ill. Admin. Code tit. 86, §100.3390 which states:
If the allocation and apportionment provisions of IITA Section 304(a) through (e) do not,
for taxable years ending before December 31, 2008, fairly represent the extent of the
person’s business activity in this State, or do not, 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 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 of the factors
3) the inclusion of one or more additional factors which will fairly represent the person’s
business activity in this State; or
4) the employment of any other method to effectuate an equitable allocation and
apportionment of the person’s income.
Included with the amended return is a petition for alternative apportionment which includes
further explanation. As a result of this amended return, Taxpayer respectfully requests a refund
in the amount of $$$$$$$ for taxable year ended 12/31/YYYY, plus applicable interest.
Your submission includes the following additional information pertinent to your petition for alternative
apportionment:
II. Facts
COMPANY1 is a media company rooted in award-winning CONTENT. COMPANY1 operates
newsrooms in ten of the nation’s largest markets with OUTLET NAMES including the OUTLETA,
OUTLETB, OUTLETC, OUTLETD, OUTLETE, STATE2’s OUTLETF and OUTLETG, OUTLETH
and OUTLETI.
COMPANY1 operates each OUTLET as a separate business unit with stand-alone financial
statements. A substantial majority of subscribers for each OUTLET are located within the state
in which the OUTLET operates. Based on this consumer demographic and COMPANY1’S
general operating structure, each OUTLET operates independently from each other. Integral
functions of each OUTLET are operated autonomously such as the creation and selection of
editorial content, subscriber marketing, acquisition and maintenance of advertiser relationships,
and circulation services such as printing and distribution.
COMPANY1’S OUTLETS, and the MEDIA industry as a whole, are experiencing reduced
consumer demand for print circulation and decreased circulation revenue. These declines are
the result of several factors including: increased competition from other media, particularly the
Internet; changing MEDIA readership demographics; and shifting preferences among some
consumers toward receiving all, or a portion of, their news from sources other than MEDIA.
COMPANY1 Acquisitions and Dispositions
In YYYY, the COMPANY1 came out of bankruptcy. In YYYY, COMPANY1 announced that it
would split into two companies, spinning off its publishing division into the COMPANY1 with its
remaining media assets remaining in the former parent company renamed COMPANY2. The
spin off was executed in YYYY. Following the spin off, COMPANY1 acquired six suburban daily
and 32 weekly MEDIA in the CITY1 Metropolitan Area in October YYYY. In YYYY, COMPANY1
announced that it had reached a deal to acquire the OUTLETK and its associated properties for
$$$ million. Following the completion of the acquisition, the OUTLETK and OUTLETJ became

part of a new operating entity known as the COMPANY3. In YYYY, COMPANY1 announced that
it had acquired the OUTLETB.
On June 18, YYYY, COMPANY1 completed the sale of the OUTLETJ, the OUTLETK, and
various other of the COMPANY3 for approximately $$$$ million in gross proceeds (the
“Transaction”). The transaction was structured as a sale of assets. Due to the nature of
COMPANY1’S industry, the assets sold to COMPANY4 are specific to the STATE3 media
market. Approximately 99% of subscribers to the OUTLETJ and OUTLETK reside in, or in a
state adjacent to, STATE3. Included in the Transaction were various types of tangible and
intangible assets as detailed in the table below [Tabular material omitted].
As a result of the bankruptcy proceedings in YYYY, the federal tax basis of COMPANY1
properties was reduced to zero. Due to COMPANY1’S business trends and the overall trends in
the OUTLET industry, it follows that the taxable gain related to the Transaction was largely due
to a lack of federal tax basis and not to the appreciation in value of COMPANY1’S STATE3
OUTLET NAMES.
COMPANY1’S Originally Filed Return
For the tax year ended December 31, YYYY, COMPANY1 reported federal taxable income of
$$$$$$$. Included in COMPANY1’S computation of federal taxable income was a federal gain
of $$$$$$$ which included capital losses of $$$$$$$ related to other transactions. The gain
related to the transaction was $$$$$$$. On its originally filed Illinois return, COMPANY1 elected
to treat all income as business income pursuant to the election provided in 35 ILCS 5/1501(a)(1)
and 86 Ill. Admin. Code Sec. 100.3015. In the computation of its Illinois sales factor, COMPANY1
did not include gross proceeds or net gains related to the sale of assets included in the
Transaction.
Illinois imposes a tax on the “net income” of corporations for the privilege of earning or receiving
income in the State. To determine net income, a corporate taxpayer begins with its “taxable
income properly reportable for federal income tax purposes for the taxable year under the
provisions of the Internal Revenue Code,” applies certain specifically enumerated adjustments,
and then allocates or apportions such income to the state. Business income is defined to mean
“all income that may be treated as apportionable business income under the Constitution of the
United States.” For tax years ending on or after December 31, 2000, corporations that derive
business income in Illinois and one or more other states shall apportion business income to
Illinois by use of a single sales factor. The sales factor is a fraction, the numerator of which is
the total sales of the corporation in Illinois during the taxable year, and the denominator of which
is the total sales of the corporation everywhere during the taxable year. The term “sales” is
defined to mean “all gross receipts not allocated” under the provisions of the Illinois Income Tax
Act.
A taxpayer may treat all income, other than compensation, as business income, by making an
irrevocable election pursuant to 35 ILCS 5/1501(a)(1). For the tax year ended December 31,
YYYY, COMPANY1 elected to treat all its income as business income. Therefore, COMPANY1’S
income, including the federal gain of $$$$$$$ million from the Transaction, is apportioned to
Illinois by use of a single sales factor.
For purposes of determining the numerator of the sales factor, the Illinois Department of
Revenue has adopted specific rules prescribing where the sales from publishing activities are
received. Gross receipts derived from the sale of published materials in the form of tangible
personal property are sourced based on the location where the property is delivered or shipped
to a purchaser. The portion of gross receipts derived from sales of published materials in a form
other than tangible personal property, from advertising and from the sale, rental or other use of

the taxpayer’s customer lists for a particular publication or any portion thereof is attributed to the
State using the taxpayer’s circulation factor for that publication. Therefore, COMPANY1’S
primary sources of income from the normal operation of each MEDIA – subscription revenue
and advertising revenue – are sourced based on the circulation of that MEDIA. As previously
noted, the substantial majority of the subscribers for each of COMPANY1’S MEDIA reside in the
same state as that MEDIA base of operations.
Under both the Due Process and the Commerce Clauses of the U.S. Constitution, a State may
not, when imposing an income-based tax, “tax value earned outside its borders.” In the case of
an integrated business enterprise operating in more than one state, arriving at a territorial
allocation of “value” through formulary apportionment has generated constitutional litigation.
While a state may apply an apportionment formula to tax an appropriate share of the interstate
income of a unitary business operating in more than one state, both the Due Process and
Commerce Clauses of the U.S. Constitution also prevent a State from taxing income arising out
of extraterritorial activities, “even on a proportional basis,” unless there is a “minimum
connection” or “nexus” between the interstate activities and the taxing State, and a “rational
relationship between the income attributed to the State and the intrastate values of the
enterprise.
It is furthermore a “limiting principle” that no State may tax the interstate income of a multistate
corporation’s unitary business by means of a formula apportionment “which cannot in fairness
be attributed to the taxpayer’s activities within the State.” Thus, a formula-based tax on income
may be struck down if “the income attributed to the State is in fact “out of all appropriate
proportions to the business transacted [by the taxpayer] in that State,” or if application of the
apportionment formula has “lead to a grossly distorted result.” As discussed below, it is inherently
inequitable, and grossly distortive, for Illinois to apportion income from the sale of the STATE3
OUTLETS using an apportionment factor which overattributes income to Illinois.
Illinois’ apportionment statute, 35 Ill. Comp. Laws § 5/304(a)(3) defines the sales factor as “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.” Those sales are defined as “all gross receipts derived by the taxpayer from transactions
and activity in the regular course of such trade or business.” Nothing in the statute limits the
inclusion of receipts from the sale of assets.
35 Ill. Comp. Laws § 5/304(f) states that “if the allocation and apportionment provisions of [35 Ill.
Comp. Laws §5/304(a)] do not … fairly represent the extent of a person’s business activity in
this State, or … 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.
Pursuant to the statute, the Director promulgated a regulation, Illinois Administrative Code
§100.3380, which provides a number of instances where the Department of Revenue has
determined “Section 304(a) through (e) and (h) do not fairly represent the extent of a person’s
business activity or market within Illinois.” One of those instances is Ill. Admin. Code Sec.

100.3380(c)(2), which excludes gross receipts that arise from an incidental or occasional sale of
assets used in the regular course of business (“Occasional Sale Rule”).
Specifically, the Occasional Sale Rule provides that:
[w]hen 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 shall be excluded.
The sale of assets at issue is neither the sale of a factory or plant, nor the stock of a subsidiary.
The regulation explains that “[e]xclusion 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…” and goes on to articulate several specific scenarios where this rule would be
appropriate. However, none of the reasonings included in the regulation are applicable to
COMPANY1’S Transaction nor do they appropriately illustrate why the rule’s application would
result in an accurate measurement of the market for COMPANY1’S business income.
The first reason given by the regulation in subsection (c)(2)(A) is that “incidental or occasional
sales are not made in the market for the person’s goods, services or ordinary sources of
business income.” This reasoning makes sense in the context of a business with operating profits
that makes a one-time sale of a business asset. However, it us utterly distortive in the case of a
taxpayer like COMPANY1 where that one-time sale makes up all of its taxable income for the
year. For the tax year ended December 31, YYYY, COMPANY1’S sources of business income
were those derived from its regular course of business (e.g. subscription and advertisement
revenue), and those derived from the gain on the Transaction (i.e. the sale of the STATE1
OUTLETS). COMPANY1 reported federal taxable income of $$$$$ million, which included the
$$$$$$ million net gain from the Transaction. Without the federal taxable gain from the
Transaction, COMPANY1 would have reported a federal taxable loss. The only business income
being effectively apportioned to Illinois is from the sale of the STATE3 MEDIA.
Second, the reasoning articulated by subsection (c)(2)(B) states:
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 there 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.
However, in the case of the COMPANY1 Transaction the gain on the sale was not due to the
recapture of depreciation deductions. The vast majority of the gain was related to the sale of
goodwill which is not subject to depreciation.
Third, subsection (c) states:
To the extent the gain on a 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 shall 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.
The rationale behind (c)(2)(C) is generally the same as the rationale behind (c)(2)(A), i.e. that it
would be distortive to apportion taxable income related to regular business operations using a
factor that includes the sale of other assets. However, as discussed above, in this case all of the
net apportionable income, after netting against operational losses, is due to the sale of goodwill.
Accordingly, the concern outlined by (c)(2)(C) is effectively flipped on its head. Instead of
ordinary income being apportioned using extraordinary factors, the reverse is true.
Finally, under subsection (c)(2)(D) the regulatory reasoning provides, “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.
COMPANY1’S sale of the OUTLETJ and OUTLETK was a partial or complete withdrawal of
COMPANY1’S business from the state of STATE3. But although COMPANY1’S market in
STATE3 decreased, COMPANY1’S business income for the tax year ended December 31,
YYYY was specifically related to the sale of its STATE3 OUTLETS. The only source of business
income that requires a measurement of market value is the gain from the Transaction which can
properly be represented by inclusion of receipts from the Transaction.
Therefore, COMPANY1 asserts that the occasional sale rule under Ill. Admin. Code Sec.
100.3380(c)(2), which excludes gross receipts that arise from an incidental or occasional sale of
assets used in the regular course of business, is both arbitrary and overbroad as applied to these
facts. The stated purpose of the allocation and apportionment provisions of 35 Ill. Comp Laws
§5/304 are to “fairly represent the extent of a person’s business activity or market within Illinois.”
However, the application of such a rule in the case of COMPANY1, where a one-time sale makes
up all of the taxpayer’s taxable income for the year, is itself utterly distortive of the taxpayer’s
activity or market within Illinois. At the very least, COMPANY1 asserts that the occasional sale
rule is not applicable because the regulation specifically provides that “[e]xclusion 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…” and goes on to articulate several specific reasons why
this rule be applied. However, none of the reasonings included in the regulation are applicable
to COMPANY1’S Transaction nor do they appropriately illustrate why the rule’s application would
result in an accurate measurement of the market for COMPANY’S business income.
Original Statutory Apportionment Formula Should be Applied to Include Gains Where
Occasional Sale Rule is Distortive
Illinois regulations interpret the language in 35 Ill. Comp. Laws § 5/304(f) to mean, “[a]n
alternative apportionment method may not be invoked, either by the Director or by a taxpayer,
merely because it reaches a different apportionment percentage than the required statutory
formula. It is only where “the application of the statutory formula will lead to a grossly distorted
result in a particular case, [that] a fair and accurate alternative method is appropriate.” In this
case, it is the application of the Director’s alternative to the statutory formula that leads to the
grossly distorted result.
In order to vary from the prescribed apportionment formula, the party seeking alternative
apportionment “bears the burden of showing by clear and cogent evidence that the income
attributed to Illinois is out of all proportion to the business transacted in Illinois. For example, in
Miami Corp. v. Dept. of Revenue, the Illinois Appeals Court found that that imposition of the

state’s statutory apportionment formula did lead to a gross distortion of the taxpayer’s incomeproducing activities in Illinois because the formula failed to take into account the intangible value
of oil and gas leases derived from its Louisiana land and, consequently, did not reflect that 80%
of the taxpayer’s income was generated by those intangible assets.
In that case, the taxpayer, the Miami Corporation (“Miami”), headquartered in Chicago, derived
income through investments in real estate, stocks, and other securities. Years prior, Miami had
separated its oil and gas and real estate investments from its securities portfolio. Miami owned
real estate in Louisiana where oil was discovered. It did not engage in developing these oil and
gas reserves but, rather, contracted with independent oil and gas companies which explored,
drilled and produced oil and gas from the reserves. The corporation only retained a passive
royalty interest in the reserves.
Miami’s oil and gas reserves in Louisiana generated in excess of 80% of Miami’s income but
due to factual circumstances, these reserves were not fully reflected in the state’s apportionment
formula. Miami argued that the application of the standard three factor apportionment formula
used during the tax years at issue was grossly distortive. The Appellate Court examined each of
the three standard apportionment factors used during the tax year at issue, as they applied to
Miami. Due to the relative low original cost of the oil reserve versus the Chicago headquarters
lease, the Court found that “[t]he singular structure and operation of the taxpayer negatives the
application of the property factor,” as, “it produces a distortive effect because of the individual
characteristics of the taxpayer’s operations and its tangible property.” The Appellate Court
further affirmed the trial court’s finding that “the application of the payroll factor was inappropriate
due to [Miami’s] unusual corporate structure” where the costs related to the oil and gas reserves
were borne by independent contractors. As a result, the Appellate Court found that Miami had
met its burden by producing clear and cogent evidence that the income attributed to Illinois was
out of appropriate proportion to the business transacted in the state, that therefore an alternative
method of apportionment was appropriate. In Miami’s case, that meant using separate
accounting to determine the portion of its business conducted in Illinois, versus formulary
apportionment.
COMPANY1’S factorial circumstances are analogous to those of the Miami Corp decision.
Similarly, for the tax year ended December 31, YYYY COMPANY1’S federal taxable income is
effectively represented by the net gain from the sale of COMPANY1’S STATE3 MEDIA.
COMPANY1’S MEDIA operate autonomously, and they are specific to large local markets like
CITY1, CITY2, or CITY3. COMPANY1’s primary sources of income from each MEDIA are
subscription revenue and advertising revenue which are measured by the circulation factor of its
MEDIA, as required by Ill. Admin. Code Sec. 100.3373(c)(2). Therefore, the value of the sale of
the OUTLETJ and OUTLETK COMPANY1 is also related to COMPANY1’S OUTLET circulation
which is inside, not outside, of STATE3. Under Illinois’ standard apportionment provisions, the
net gain from the transaction would be entirely apportioned using COMPANY1’S receipts from
its primary sources of income from each MEDIA, i.e. receipts from outside STATE3. As in Miami,
this results in inequitable apportionment, as the business income from the sale of the OUTLETJ
and OUTLETK would be apportioned by the circulation of other OUTLETS (e.g. OUTLETA,
OUTLETD, etc.). The market for the business income from the sale of the OUTLETJ and
OUTLETK is the state of STATE3. The circulation of the OUTLETJ and the OUTLETK is
therefore appropriate to measure the market for the business income generated by the
Transaction. Thus, the provisions of 35 ILCS 5/304 do not represent the market for
COMPANY1’S business income.
Based on the Miami decision, it would be appropriate under COMPANY1’S facts to use the
separate accounting method to determine their proper income tax liability. Section 304 continues

to specifically include separate accounting as an appropriate alternative to the standard
apportionment formula. This would result in no tax on the gain from the Transaction being
allocated to Illinois. However, COMPANY1 is not proposing such a calculation. An equitable
measurement of the market for COMPANY1’S sources of business income would be to include
gross proceeds from the sale of fixed assets of $$$$$$, gross receipts from the sale of other
assets of $$$$$$$, and net gain from the sale of intangible assets of $$$$$$$ in the denominator
of the sales factor along with the sales from COMPANY1’S regular course of business. In that
way receipts from the Transaction are represented in the sales factor, and the circulation of
OUTLETS outside of STATE3 is still utilized to apportion COMPANY1’S business income, as
provided in the operation of 35 Ill. Comp. Laws §5/304.
Illinois’ Occasional Sale Rule is similar to the one used in California pursuant to Cal. Code Regs., tit 18,
§25137(c) (“California Occasional Sale Rule) which excludes capital gains from the sales factor where
inclusion in the sale would cause the factor to change by more than 5%. As outlined in Appeal of Fluor
Corporation, California follows the same analysis as followed by the Court in Miami Corp, requiring
that any party seeking to deviate from the California occasional sale rule must first establish by clear and
convincing evidence that the regulation does not fairly represent the extent of the taxpayer’s activities in
this state.
In Appeal of Emmis Communications, the taxpayer, Emmis Communications, was a diversified
media company based in Indiana. The company decided to begin divesting of its television
business and during the tax year at issue, it sold 13 of its 16 television stations, resulting in a
large gain. Similar to COMPANY1, the gross receipts from the sale of the stations were a majority
of Emmis’ gross receipts for the tax year in issue and constituted 100 percent of its income.
Emmis Communications also had a history of selling business assets, having completed 41
acquisitions and 28 dispositions in the ten years leading up to the tax year at issue. Pursuant to
an audit, the California Franchise Tax Board excluded the receipts from the sale of the television
stations from the sale factor.
The taxpayer argued that its receipts from the sale of the television stations should be included
for two major reasons. First, the taxpayer contended that due to the fact that the sales were part
of a history of acquisitions and dispositions and therefore should not be considered to be
“occasional.” Second, the taxpayer argued that because the gains constituted all of the
company’s taxable income, it would be grossly distortive for California to tax the gain without
any reflection of that income in the apportionment factor. California argued that the sales should
be considered to be occasional because they were outside of the taxpayer’s normal course of
business of running a media company. The state further argued that regardless of the fact that
all of the income was related to the sale, it should be apportioned using the regular
apportionment formula based on the company’s activity in California. The Board of Equalization
sided with Emmis Communications, holding in a 4-1 decision that the receipts from the sale
should be included in the sales factor.
COMPANY1, like Emmis Communications, had a history of mergers and acquisitions when they
sold a large part of their core business. Since its spin-off was executed in YYYY, COMPANY1
had engaged in a series of strategic business purchases. In October YYYY, COMPANY1
acquired six suburban daily and 32 weekly OUTLETS in the CITY Metropolitan Area. In YYYY,
COMPANY1 announced that it acquired the OUTLETK and its associated properties. In YYYY,
COMPANY1 announced that it had acquired the OUTLETB. This sale, like Emmis
Communications, resulted in a gain that constituted all of the taxable income the company had
for the year. Accordingly, as the Board of Equalization found, these facts constitute clear and
cogent evidence that excluding the gains at issue would be grossly distortive.

In the alternative, COMPANY1 argues that if the occasional sale rule is applicable under the
circumstances, for the tax year ended December 31, YYYY, the standard allocation and
apportionment provisions 35 ILCS 5/304 do not fairly represent the market for COMPANY1’S
business income for the following reasons:
The circulation factor for all of COMPANY1’S MEDIA is being used to apportion business income
from the sale of COMPANY1’S STATE3 MEDIA; and
A complete year of COMPANY1’S STATE3 circulation is not being utilized to apportion business
income from the sale of COMPANY1’S STATE3 MEDIA.
As explained below, COMPANY1’S business income is generally apportioned by a measure of
its MEDIA circulation. However, for the tax year ended December 31, YYYY, COMPANY1’S
business income was generated by the net gain from the sale of OUTLETJ and OUTLETK. The
assets sold in the Transaction included fixed assets located in STATE3, deferred revenue from
the STATE3 MEDIA and intangible assets of the STATE3 MEDIA such as goodwill, trademarks
and the masthead.
The sale of the OUTLETJ and OUTLETK was completed on June 18, YYYY. As a result,
COMPANY1’S sales factor includes regular sales (subscriptions and advertising) from its
STATE3 MEDIA from January 1, YYYY to June 18, YYYY. However, regular sales from
COMPANY1’S MEDIA outside of STATE3 are included in COMPANY1’S Illinois sales factor for
the entire tax year (January 1, YYYY to December 31, YYYY). COMPANY1’S MEDIA operate
autonomously, and the MEDIA are specific to large local markets like CITY1, CITY2, or CITY3.
The value of the OUTLETJ and OUTLETK is not related to COMPANY1’S MEDIA circulation
outside of STATE3. The circulation of the OUTLETJ and OUTLETK is therefore appropriate to
measure the market for the business income generated by the Transaction. However, the
application of 35 ILCS 5/304 and Ill. Admin. Code Sec. 100.3373(c)(2) functions to apportion the
net gain from the sale of the OUTLETJ and OUTLETK based on the circulation of all of
COMPANY1’S MEDIA (e.g. OUTLETA, OUTLETD, etc.). This includes using only a partial year
of sales from the market for the OUTLETJ and OUTLETK, which places greater weighting on
the circulation of COMPANY1’S MEDIA outside of STATE3 in the apportionment of net gain
from the Transaction.
To further illustrate the existence of distortion when applying 35 ILCS 5/304 and Ill. Admin. Code
Sec. 100.3370(c)(2), one can apply an alternative closing date of the Transaction. Absent
alternative apportionment, if the sale of OUTLETJ and OUTLETK was completed on January 1,
YYYY, this would have effectively apportioned the entire net gain from the Transaction solely
based on the circulation of COMPANY1’S MEDIA outside of STATE3. Although STATE3 is
clearly the market for COMPANY1’S sale of the OUTLETJ and OUTLETK, there would be no
representation of the STATE3 market. It follows that the closing date of the Transaction is
arbitrary when determining the apportionment of COMPANY1’S business income.
A cure for the apportionment distortion of the partial-year STATE3 circulation is to include the
annualized gross receipts derived from January 1, YYYY to June 18, YYYY of the OUTLETJ
and OUTLETK in the Illinois sales factor. The STATE3 gross receipts reported during the preTransaction period is $$$$$$ which annualized equals $$$$$$. Therefore, COMPANY1
proposes to include an additional $$$$$$ in its Illinois sales factor in order to equally weight the
revenue and circulation of both STATE3 MEDIA and those located outside of STATE3.
Illinois law provides for alternative apportionment relief when subsections (a) through (e) and of
subsection (h) of 35 ILCS 5/304 do not fairly represent the market for COMPANY1’S source of

business income. Based on COMPANY1’S petition for alternative apportionment pursuant to 35
ILCS 5/304(f), an adjustment of $$$$$$ is reported to total sales of COMPANY1’S Illinois sales
factor. This amended return adjustment better represents the market for COMPANY1’S source
of business income.
As a result of the amended apportionment computation and application of 35 ILCS 5/304(f),
COMPANY1 is apportioning % of its business income to Illinois. This computation provides that
the circulation of COMPANY1’S Illinois MEDIA (OUTLETA) is still used to apportion the net gain
derived from the sale of the OUTLETJ and OUTLETK. As discussed throughout, the adjustment
results in a more equitable and fair apportionment to represent the market for COMPANY1’S
business income.
RULING
Section 304(a) of the Illinois Income Tax Act (“IITA” 35 ILCS 5/304) 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. Section 304(a)(3)(C-5)(iv) provides that the Department
shall adopt rules prescribing where specific types of services are received, including, but not limited to,
publishing, and utility service.
Department Regulations Section 100.3373(c)(1) provides:
c) Sales within this State from publishing include:
1) Gross receipts derived from the sale of published materials in the form of tangible
personal property, as provided in Sections 100.3370(c) and 100.3380(c).
2) The portion of gross receipts derived from sales of published materials in a form other
than tangible personal property, from advertising and from the sale, rental or other use of
the taxpayer's customer lists for a particular publication or any portion thereof attributed
to this State using the taxpayer's circulation factor for that publication during the
applicable tax period.
Section 304(f) of the IITA states:
If the allocation and apportionment provisions of subsections (a) through (e) and of subsection
(h) do not, for taxable years ending before December 31, 2008,
fairly represent the extent of a
person’s business activity in this State, or, for taxable years ending on or after December 31, 2008,
fairly represent the market for the person’s goods, services, or other sources of business income, the
person
may petition for, or the Director may, without a petition, permit or require, in
respect of all or any part of the person’s business activity, if reasonable:
(1) Separate Accounting;
(2) The exclusion of any one or more factors;
(3) The inclusion of one or more additional factors which will fairly represent the person’s
business activities or market in this State; or

(4) The employment of any other method to effectuate an equitable allocation and
apportionment of the person’s business income.
Department Regulations Section 100.3380(a)(2) states:
The Director has determined that, in the instances described in this Section, the apportionment
provisions provided in IITA Section 304(a) through (e) and (h) do not fairly represent the extent
of a person's business activity or market within Illinois. For tax years beginning on or after the
effective date of a rulemaking amending this Section to prescribe a specific method of
apportioning business income, all nonresident taxpayers shall apportion their business income
employing that method in order to properly apportion their business income to Illinois. Taxpayers
whose business activity or market within Illinois is not fairly represented by a method prescribed
in this Section and who want to use another method for a tax year beginning after the effective
date of the rulemaking adopting that method may obtain permission to use that other method by
filing a petition under Section 100.3390. For tax years beginning prior to the effective date of the
rulemaking adopting a method of apportioning business income, the Department will not require
a taxpayer to adopt that method; provided, however, if any taxpayer has used that method for
any of those tax years, the taxpayer must continue to use that method for that tax year.
Moreover, a taxpayer may file a petition under Section 100.3390 to use a method of
apportionment prescribed in this Section for any open tax year beginning prior to the effective
date of the rulemaking adopting that method, and that petition shall be granted in the absence
of facts showing that that method will not fairly represent the extent of a person's business activity
or market in Illinois.
Department Regulations Section 100.3380(c)(2) states:
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 shall be excluded. Gross
receipts from an incidental or occasional sale of stock in a subsidiary shall 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
shall 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 indicates that in June of YYYY Taxpayer completed the sale of its STATE3 properties,
which included certain fixed assets, intangible assets such as goodwill, trade names, subscribers,
mastheads, and advertiser relationships, and other assets. You indicate that the gain from such sale
“was largely due to a lack of federal tax basis” as required under section 108 of the Internal Revenue
Code (IRC) “and not to the appreciation in value of [Taxpayer’s] STATE3 OUTLET NAMES.” You
indicate that gross receipts from the sale of these assets is excluded from the sales factor under
Department Regulations §100.3380(c)(2) as an incidental or occasional sale of assets used in the
regular course of Taxpayer’s trade or business. Your petition asserts that the failure to include such
receipts in the denominator of the Taxpayer’s sales factor results in an amount of income apportioned
to Illinois that does not fairly represent the market for Taxpayer’s goods, services, or other sources of
business income. The primary basis for this assertion is that none of the rationales provided in Section
100.3380(c)(2) applies to the YYYY sale transaction, so that failure to include receipts from such sale
is distortive of the market for the Taxpayer’s sources of business income.
Department Regulations §100.3380(c)(2) properly applies in this case. Including gross receipts from
the June YYYY Transaction in the Taxpayer’s sales factor does not “fairly represent the extent of a
person's business activity or market within Illinois.” Including such gross receipts in the sales factor
results in distortion for the very reasons set forth in §100.3380(c)(2).
Your petition indicates that as a result of bankruptcy proceedings in YYYY, the basis of Taxpayer’s
assets was reduced to zero. You next indicate that the taxable gain related to the June YYYY
Transaction was “largely due to a lack of federal tax basis and not to the appreciation in value of
COMPANY1’S STATE3 OUTLET NAMES.” Under IRC section 108, income from discharge of
indebtedness is excluded from gross income where the discharge occurs in a title 11 case. However,
under IRC section 108(b) certain tax attributes, including the basis of the property of the taxpayer, must
be reduced by the amount of the excluded income. The effect of IRC section 108, then, is generally to
defer taxation of debt discharge income rather than to forgive tax on such income entirely. In this case,
Taxpayer’s gain derived from the June YYYY Transaction constitutes recapture of previously excluded
discharge of indebtedness income. As a result, including the gross receipts from the June YYYY
Transaction in the sales factor is plainly distortive of an apportionment reflecting the relative market for
the Taxpayer’s sources of business income. Presumably, the debt which Taxpayer incurred, and which
was subsequently discharged, benefited the Taxpayer’s unitary business and markets as a whole, not
merely its STATE3 business and STATE3 market. Moreover, if the discharge of indebtedness income
had been included in gross income when realized in YYYY, the income would have been properly
apportioned based on the taxpayer’s Illinois apportionment in that year. In any case, the proper
apportionment of the Taxpayer’s income for the year in which the discharge occurred would have been
determined without inclusion of the discharge income in the sales factor. Gross receipts from discharge
of indebtedness income is not provided for in IITA Section 304, and is not reflective of the market for
the Taxpayer’s ordinary sources of business income. Therefore, including the gross receipts from the
occasional sale of Taxpayer’s STATE3 assets would distort the apportionment formula, as that gain
reflects discharge of debt income that is properly apportioned according to the respective markets of
the unitary business as a whole. As discharge of indebtedness income is properly apportioned
according to the respective markets of the unitary business as a whole, including the gross receipts
from the June YYYY Transaction in the sales factor does not fairly represent the extent of the
Taxpayer’s market within Illinois.

Department Regulations §100.3380(c)(2)(A) provides that gross receipts from an incidental or
occasional sale are excluded from the sales factor because such sales are not made in the market for
the taxpayer's goods, services or other ordinary sources of business income. Exclusion of such receipts
from the sales factor thereby prevents distortion of the sales factor that would otherwise occur where
assets which are generally used to conduct a unitary business are removed from the business by sale
to a third-party purchaser. The gross receipts from such a sale do not reflect the market for the
taxpayer’s ordinary sources of business income, which is the income generated by the use of those
assets in generating sales to customers, as opposed to a sale of those assets to a non-customer. In
this case, the June YYYY Transaction is an occasional sale of assets used in the Taxpayer’s trade or
business, and therefore is not made in the market for the Taxpayer’s goods, services, or other ordinary
sources of business income.
Department Regulations §100.3380(c)(2)(B) states that to the extent that gains realized on the
incidental or occasional 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. In addition, Department Regulations §100.3380(c)(2)(C) states that to the extent gain from
an incidental or occasional 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 shall 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. Your petition indicates that the “vast majority of the gain was related to the sale of goodwill which
is not subject to depreciation.” Your petition does not specifically indicate whether any portion of the
Taxpayer’s goodwill was subject to basis reduction under IRC section 108, whether any portion of
Taxpayer’s goodwill was an amortizable intangible under IRC section 197, or whether any portion of
the Taxpayer’s goodwill is self-created. In any case, however, subparagraphs (B) and (C) support
exclusion of the gross receipts from the June YYYY Transaction from the sales factor. To the extent
that the Taxpayer’s basis in goodwill was reduced either under IRC section 108, or as amortization
deductions were claimed under IRC section 197, the rationale of subparagraph (B) applies to exclude
receipts attributable to goodwill from the sales factor. To the extent that gain from the YYYY Transaction
is attributed to self-created goodwill, the rationale of subparagraph (C) applies. In particular, goodwill
is an asset that appreciates in value over many taxable years. Presumably, any goodwill inherent in
the Taxpayer’s STATE3 business was generated over multiple years as the Taxpayer operated its
unitary business. The increase in value of the Taxpayer’s goodwill was not realized for tax purposes
until the goodwill was sold, but the value was generated in the conduct of the unitary business over the
years in which the unitary business was conducted. Furthermore, the costs incurred in generating the
asset goodwill, including advertising expenses and other ordinary business expenses, were likewise
deducted over the years the unitary business was conducted. As such, the tax deductions attributable
to the costs of generating the goodwill were apportioned to Illinois using the apportionment factor for
Taxpayer’s unitary business in the years the costs were incurred. Therefore, including all of the gross
receipts attributable to the sale of goodwill in the sales factor denominator does not reflect the market
for the taxpayer's goods, services or other ordinary sources of business income because such sourcing
differs from the sales factor computed without regard to that sale..
Finally, Department Regulations §100.3380(c)(2)(D) provides that where sales of assets are made in
connection with a 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. In this case, Taxpayer
is liquidating its STATE3 assets and thereby withdrawing from the STATE3 market. Including the gross
receipts from the June YYYY Transaction in the sales factor increases the amount of income
apportioned to a market the Taxpayer is exiting.

For the reasons stated above, Department Regulations §100.3380(c)(2) properly applies in this case
to exclude from the sales factor the gross receipts from the June YYYY Transaction. Accordingly, your
petition for alternative apportionment cannot be granted.
Sincerely,
Brian Stocker
Associate Counsel (Income Tax)