Can a corporation use alternative apportionment just because its foreign royalty income is excluded from the Illinois sales factor under the 50% test?

Plain-English summary

The Illinois Department of Revenue denied a corporation's request to use an alternative apportionment method for royalty income earned from licensing intangible property. This is a General Information Letter (GIL), which means it is not a statement of Department policy and is not binding on the Department -- it simply explains how the Department viewed this particular petition based on the facts submitted.

The taxpayer was part of an Illinois combined filing group whose ultimate parent is a large, multi-segment consumer-goods company operating almost entirely outside Illinois. The parent and certain U.S. subsidiaries owned valuable intangibles (trademarks, patents, and similar property) and earned royalties from foreign affiliates that licensed those intangibles. Because the royalty income did not exceed 50% of the taxpayer's total gross receipts included in gross income -- the threshold set by 35 ILCS 5/304(a)(3)(B-2) -- those royalties were excluded from the sales factor used in Illinois's single-sales-factor apportionment formula. The taxpayer argued that leaving the royalties out of the sales factor was "distortive" and asked to use an alternative method (such as including the royalties in the sales-factor denominator, using separate accounting, or including certain "80/20" foreign affiliates in the combined group) so its apportioned Illinois income would better reflect its actual market.

The Department disagreed. It explained that a taxpayer seeking alternative apportionment under 35 ILCS 5/304(f) and 86 Ill. Adm. Code 100.3390(c) must prove by clear and convincing evidence that the standard statutory formula produces a "grossly distorted" result -- not merely that a different method would produce a different percentage. The Department found that excluding royalties that fall under the 50% threshold is exactly what the statute intends, so the mere fact of exclusion is not, by itself, evidence of unfairness or distortion. The Department also distinguished the taxpayer's reliance on Miami Corp. v. Dep't of Rev. (where alternative apportionment was allowed for Louisiana oil and gas reserves) and discussed Colgate-Palmolive Co. v. Bower (where a similar request to add an intangible-property factor was rejected), concluding the taxpayer's facts were more like Colgate-Palmolive's. Because the petition failed to show more than the different-percentage effect of the 50% exclusion rule, the Department could not grant it based on the information provided -- though it left the door open for the taxpayer to supplement the petition with additional evidence.

Subject

Alternative Apportionment

What this means for you

Multistate corporations with foreign royalty income

If your company (or your Illinois combined filing group) earns royalties from licensing patents, trademarks, copyrights, or similar intangible property, remember that 35 ILCS 5/304(a)(3)(B-2) only lets those receipts into the sales factor if they exceed 50% of your total gross receipts included in gross income for the current year and each of the two preceding years -- measured at the entire unitary group level if you file combined. If your royalties fall under that threshold and get excluded from the sales factor, this GIL is a warning that the exclusion alone is not grounds for alternative apportionment. You need affirmative evidence that the statutory formula produces a "grossly distorted" result, not just a showing that a different method yields a different number.

Anyone considering an alternative apportionment petition under Section 304(f)

The Department reiterated the high bar: under 86 Ill. Adm. Code 100.3390(c), the party seeking alternative apportionment (whether the Director or the taxpayer) must prove "by clear and convincing evidence" that the standard formula operates unreasonably and arbitrarily, or fails to fairly represent the market for the taxpayer's goods, services, or business income in Illinois. It's not enough to propose separate accounting, an additional factor, or inclusion of "80/20" foreign affiliates in the combined group -- the petition must explain why that alternative method is more accurate than the statutory formula. The Department also noted this taxpayer's proposed inclusion of 80/20 companies (normally excluded from the combined group under 35 ILCS 5/1501(a)(27)(A)) needed more support to show it would fairly represent the taxpayer's Illinois activity.

Tax professionals researching Illinois apportionment case law

This GIL walks through how the Department distinguishes the leading Illinois alternative-apportionment cases. It reads Miami Corp. v. Dep't of Rev. narrowly -- that case turned on unique facts about Louisiana oil and gas reserves whose value (guided by the Alaska Supreme Court's reasoning in Atlantic Richfield Co. v. Alaska) wasn't captured by the traditional three-factor formula. By contrast, the Department found this taxpayer's royalty facts closer to Colgate-Palmolive Co. v. Bower, where a similar request to add an intangible-property factor was rejected because the standard formula already accounted for the income-producing activities behind the royalties (through the costs-of-performance sourcing rule in 86 Ill. Adm. Code 100.3370). The Department also cited Lakehead Pipe Line Co. v. Dep't of Rev. and AT&T Teleholdings, Inc. v. Dep't of Rev. as further examples of the same "grossly distorted" / "out of all proportion" standard.

Common questions

Q: Does excluding royalties from the sales factor under the 50% test automatically justify alternative apportionment?
A: No. The Department held that exclusion under 35 ILCS 5/304(a)(3)(B-2) is simply how the statute is designed to work. On its own, being excluded from the sales factor doesn't prove the standard formula is unfair or "grossly distorted" -- the taxpayer still has to prove that with clear and convincing evidence.

Q: What alternative methods did the taxpayer propose, and were any of them accepted?
A: The taxpayer proposed three options: (1) including the royalty income directly in the sales factor's "net sales everywhere" line, (2) using separate accounting to apportion the royalties apart from other activity, and (3) including certain foreign "80/20" affiliates (that pay the royalties) in the Illinois combined group. The Department rejected the petition as submitted because none of the proposals were shown, with adequate explanation, to be more accurate than the standard formula.

Q: Is this ruling binding on the Department or on other taxpayers?
A: No. This is a General Information Letter (GIL), not a Private Letter Ruling. Under 2 Ill. Adm. Code 1200.120(b) and (c), a GIL does not constitute a statement of Department policy, does not interpret or prescribe the tax laws, and is not binding on the Department -- not even as to the taxpayer who received it.

Q: Is the door completely closed for this taxpayer?
A: No. The Department said that if the taxpayer has additional information not previously submitted, it may supplement the petition and the Department will reconsider. The letter also notes the ruling only addresses the alternative apportionment petition -- it does not decide the separate refund claim relating to including another company's federal taxable income in the return.

Q: Why couldn't the taxpayer just rely on the Miami Corp. case it cited?
A: The Department distinguished Miami Corp. v. Dep't of Rev. on its facts. That case involved a taxpayer's ownership of out-of-state (Louisiana) real estate and intangible oil-and-gas reserve rights that "ran with the land" and weren't reflected in the property or payroll factors at all under the old three-factor formula. The Department found the intangibles at issue in this petition were not analogous, and Illinois's apportionment formula has since moved from a three-factor formula to a single sales factor.

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/it21-0013-gil.pdf

Original ruling text

IT 21-0013 12/8/21 ALTERNATIVE APPORTIONMENT
Alternative apportionment not appropriate where royalties earned from
licensing the use of intangible personal property did not compromise more
than 50% of taxpayer’s total gross receipts included in gross income and
are excluded from sales factor pursuant to IITA Section 304(a)(3)(B-2).
(This is a GIL.)
December 8, 2021
Re: Petition for Alternative Apportionment
Dear XXXXX:
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 1200.120(b)
and (c). For the reasons discussed below, your petition cannot be granted based
on the information provided.
Your petition states as follows:
Enclosed please find the amended Illinois Form 1120-X, Amended
Corporation Income and Replacement Tax Return, prepared on behalf of
TAXPAYER (“Taxpayer”) for the tax years ended June 30, 20XX and June
30, 20XX.
Taxpayer is amending its return to request that the Illinois Department of
Revenue approve the utilization of alternative apportionment and accept
the Amended Return as filed and prospectively for tax years ending on or
after June 30, 20XX. Please refer to Statement 1 in the amended returns
for additional details. In addition, the refund claims correct an error to
include COMPANY 1’S (FEIN: XXXXX) federal taxable income into the
returns. As a result, Taxpayer is requesting a tax refund in the amount of
$$$$ for the tax year ended June 30, 20XX; and a tax refund in the
amount of $$$$ for the tax year ended June 30, 20XX.

Please direct all correspondence regarding this matter to my attention. If
you need further information or have questions regarding this matter,
please contact me at (XXX) XXX-XXXX.
Your submission includes the following additional information pertinent to your
petition for alternative apportionment:
TAXPAYER (“COMPANY” or “Taxpayer”) timely filed an original 20XX
Illinois Corporate Income and Replacement Tax Return (“Return”). The
Taxpayer is now amending its 20XX Return to revise the Taxpayer’s
apportionment. Taxpayer respectfully requests that the Illinois Department
of Revenue (“Department”) approve the utilization of alternative
apportionment and accept the Amended Return as filed and for
prospective tax years ending on or after June 30, 20XX.
Background Information
TAXPAYER is a wholly owned subsidiary of COMPANY 2 (“COMPANY
2”). COMPANY 2 was formed in YEAR, when the firm made its initial
public offering, and was later incorporated in STATE in YEAR. COMPANY
2 operates solely outside of Illinois in southwest STATE. COMPANY 2,
along with its subsidiaries, is a global leader in the consumer goods
industry providing branded products of superior quality and value.
The COMPANY 2 business revolves around five major segments: Beauty;
Grooming; Health Care; Fabric and Home Care; and Baby, Feminine, and
Family Care.1 COMPANY 2’s products are instantly recognizable when
browsing the aisles of most stores. Brands available around the globe
include: NAME among many others. These products are sold in more than
180 countries and territories, primarily through mass merchandisers, ecommerce, grocery stores, membership club stores, drug stores,
department stores, distributors and pharmacies.2 The United States
(“U.S.”) accounts for roughly %%% of the company's worldwide net
sales.3 Europe is responsible for %%% of sales, Asia contributes %%%
and Latin America %%%.4 To facilitate such activities, the company has
on-the-ground manufacturing and commercial operations in approximately

countries.5

COMPANY 2, along with other U.S. subsidiaries that are included in the
Illinois combined filing group, own many valuable intangibles used in the
U.S. and globally. COMPANY 2 and its U.S. subsidiaries are responsible
for all corporate governance and administrative duties, advertising, and
COMPANY 2, Annual Report (Form 10-K) (June 30, 20XX).
Id.
3
Id.
4
Id.
5
Id.
1
2

2

research and development for its global brands. As a result, in addition to
sales of consumer goods, COMPANY 2 and certain U.S. subsidiaries
receive royalties from foreign affiliates through licensing arrangements for
the intangibles owned by COMPANY 2 and its U.S. subsidiaries. These
foreign royalties are earned as a percentage of sales from foreign affiliates
and represent the primary source of royalties reported on the Federal
1120. The income producing activities related to the royalty income,
including research and development, monitoring, and supervision of the
intangible personal property, take place entirely outside of Illinois.
Pursuant to 35 ILCS 5/304(h) of the Illinois Income Tax Act (“IITA”, “35
ILCS 5/”, “the Act”, “ILCS Chapter 35 Section 5/”), Taxpayer filed its
original return following the standard apportionment method using a single
sale factor formula. Taxpayer’s sales factor consisted primarily of sales of
tangible personal property representing consumer goods sold by members
of the Illinois combined group. However, COMPANY 2 and certain U.S.
subsidiaries were unable to include in the Taxpayer’s sales factor the
royalties earned from licensing the use of intangible personal property
because such income did not comprise more than 50% of Taxpayer’s total
gross receipts included in gross income as required under IITA 35 ILCS
5/304(a)(3)(B-2).
Alternative Apportionment
Law
ILCS Chapter 35 Section 5/304(f) provides that if the normal allocation
and apportionment methods do not fairly represent the market for the
person’s goods, services, or other sources of business income in Illinois,
the person can petition the Director of Revenue to permit separate
accounting or the use of any other method to create an equitable
allocation and apportionment of the taxpayer’s business income.
Ill. Admin. Code §100.3390(a)(c) (IITA Section 304(f)) reads as follows:
A departure from the required apportionment method is allowed only
when those methods do not accurately and fairly reflect business
activity in Illinois (for taxable years ending before December 31, 2008)
or market in Illinois (for taxable years ending on or after December 31,
2008). An 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. However, if the application of the statutory formula will lead to
a grossly distorted result in a particular case, a fair and accurate
alternative method is appropriate. The party (the Director or the
taxpayer) seeking to utilize an alternative apportionment method has
the burden or going forward with the evidence and proving by clear
3

and convincing evidence that the statutory formula results in the
taxation of extraterritorial values or operates unreasonably and
arbitrarily in attributing to Illinois a percentage of income that is out of
all proportion to the business transacted in this State (for taxable
years ending before December 31, 2008) or the market for the
taxpayer’s goods, services or other sources of business income in this
State (for taxable years ending on or after December 31, 2008). In
addition, the party seeking to use an alternative apportionment
formula must go forward with the evidence and prove that the
proposed alternative apportionment method fairly and accurately
apportions income to Illinois based upon business activity in this State
(for taxable years ending before December 31, 2008) or the market for
the taxpayer’s goods, services or other sources of business income in
this State (for taxable years ending on or after December 31, 2008).
The Appellate Court of Illinois held in Miami Corp v. Dept. Rev., 571
N.E.2nd 800 that use of the statutory method was inappropriate. It was
determined that the taxpayer was entitled to utilize separate accounting.
The statutory apportionment formula (the three-factor method) did not
fairly represent activities in Illinois with respect to Louisiana oil and gas
reserves which generated in excess of 80% of the taxpayer’s total income.
The court found that the distortion created by the use of the statutory
formula amounted to an unfair representation of the taxpayer’s activities
within Illinois. Part of the court’s reasoning was based on the fact that
intangibles (sourced to Louisiana) were not included in the property factor
and substantial out-of-state independent contractors were not considered
in the payroll factor.
The Department has granted alternative apportionment requests when the
statutory apportioned income attributable to business activity in Illinois
does not fairly reflect the activities of the taxpayer in Illinois. In Private
Letter Ruling IT 05-0002-PLR (3/29/2005), the Department granted the
use of separate accounting when the taxpayer demonstrated that the
statutory apportionment method attributed more income to Illinois than
was earned by the individual unitary group members who were conducting
business in Illinois. The Department further approved a separate
accounting method for the same taxpayer in Private Letter ruling IT 050007-PLR (10/17/2005).
The Illinois Administrative Code sets forth the rules and requirements for
alternative apportionment petitions.6 Subsection (e) of the Regulation
prescribes three options for requesting alternative apportionment. In
relevant part, the Regulation provides that a petition for alternative
apportionment may be filed as an attachment to a return amending an
6

See 86 Ill. Admin. Code §100.3390 (the "Regulation").
4

original return which was filed using the statutory allocation and
apportionment rules.7
Subsection (a) of the Regulation identifies the types of alternative
apportionment that may be requested. If reasonable, a taxpayer may
petition for the following: (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 the
state; or (4) the employment of any other method to effectuate an
equitable allocation and apportionment of the person’s income.8
Discussion
In Taxpayer’s case, the standard apportionment formula does not fairly
represent the market for its business income, which includes royalties
earned from the licensing of intangible personal property. Taxpayer is
petitioning for an equitable allocation and apportionment of its income
under 86 Ill. Admin. Code §100.3390(a)(4).
As stated above, Taxpayer was unable to include in its sales factor
royalties earned from licensing the use of intangible personal property
primarily consisting of royalties paid by foreign affiliates through licensing
arrangements for the intangibles owned by COMPANY 2 and its U.S.
subsidiaries included in the Illinois combined group. Taxpayer asserts that
the application of the standard single sales factor which excludes the
royalties from the sales factor is distortive and does not fairly represent the
market for the taxpayer’s business income.
For the fiscal years ending June 30, 20XX - June 30, 20XX, the royalties
earned by COMPANY 2 and its subsidiaries included in the Illinois
combined filing group represents %%% of total gross income, while the
royalty income represents %%% of Illinois combined unitary income. The
royalties earned by the Taxpayer are included in business income subject
to formula apportionment in Illinois. However, there is no representation of
the royalties in the sales factor because the royalties are excluded
pursuant to IITA 35 ILCS 5/304(a)(3)(B-2).
IITA 35 ILCS 5/304(a)(3)(B-2) provides as follows:
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
7
8

86 Ill. Admin. Code §100.3390(e)(2).
86 Ill. Admin. Code §100.3390(a)(1)-(4).
5

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 standard apportionment formula allows gross receipts from the
licensing of intangible property (e.g., royalties) to be included in the sales
factor only if gross receipts from licensing 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. Because Taxpayer’s royalty income consists of only %%% of total
gross income, the royalty income is excluded from the sales factor. Note, if
Taxpayer’s royalty income was included in the sales factor, the gross
receipts would be sourced to Illinois if the income producing activity of
such income is performed in the state based on costs of performance.
Effective for tax years ending on or after December 31, 2008, gross
receipts from transactions involving intangible personal property when the
taxpayer is not a dealer with respect to the intangible personal property,
are attributed to Illinois if the income producing activity is performed in the
state, based on costs of performance.9 Such gross receipts are sourced in
Illinois when the income producing activities are performed both in and
outside the state and, based on costs of performance, a greater proportion
of the income producing activity is performed in Illinois than in any other
state.10
However, the standard apportionment formula was not created with
Taxpayer’s facts in mind. It does not consider the significant impact the
earned royalties represent of total business income. The royalty income
represents %%% of the total combined business income for the tax years
ended June 30, 20XX - June 30, 20XX. Yet there is no connection
between Illinois and the foreign royalties, including from where they were
paid and received, as well as the income producing activity which takes
place outside of Illinois.
In Colgate-Palmolive Company, Inc. (“Colgate-Palmolive”) v. Bower, No.
01 L 50195 (10/15/2002) (“Colgate”), the Cook County Judicial Circuit
Court held that a Delaware corporation that had business operations in
Illinois was not allowed to modify the standard apportionment formula (the
three-factor formula method). Colgate-Palmolive filed for alternative
apportionment to add a fourth intangible property factor to the Illinois
three-factor formula to fairly represent foreign royalties and dividends from
9

86 Ill. Admin. Code §100.3370(c)(6).
86 Ill. Admin. Code §100.3370(c)(6)(C)(ii).

10

6

foreign subsidiaries. The Administrative Law Judge ruled that ColgatePalmolive failed to meet its burden of establishing that the standard
formula failed to “fairly represent the extent” of Colgate-Palmolive’s
business in Illinois.11 The court found that “ ... each part of Illinois' statutory
three factor formula takes into account the ordinary income producing
activities and expenses related to Colgate-Palmolive's production of the
income at issue, as well as the fact the income producing activities related
to the particular income at issue were not performed within Illinois.”12
In reaching the decision that Colgate-Palmolive failed to meet its burden,
the court reasoned that all three factors had representation of the activities
associated with the foreign royalties and dividends from foreign
subsidiaries. Specifically, the sales factor included the dividends from
foreign corporations and royalty income earned from licensing intangible
personal property to foreign subsidiaries. Regarding the royalty income in
particular, the sales factor was specifically designed to take into account
where the costs of performance related to a taxpayer’s licensing or other
disposition of business intangibles occurred, in order to apportion the
receipts realized by such activities in the ordinary course of the taxpayer
business. 35 ILCS 5/304(a)(3), 5/1501(21); 86 Ill. Admin. Code
§100.3370(a), (b).13
It should be noted that the foreign royalties and dividends from foreign
subsidiaries earned by Colgate-Palmolive were included in the sales factor
despite the fact that they did not comprise more than 50% of the total
gross receipts of the taxpayer.14
The court's reasoning in Colgate can be applied in the Taxpayer’s case. In
contrast to Colgate, the standard apportionment formula today fails to
represent the market for the royalty income in the Taxpayer’s case
because the royalties earned from licensing of intangible property are
excluded from the sales factor (i.e., the royalties do not comprise more
than 50% of Taxpayer’s gross income). The lack of inclusion in the factor
fails to take into account the ordinary income producing activities and
expenses related to Taxpayer’s royalty income, as well as the fact the
income producing activities related to the particular income at issue were
not performed in Illinois. Further, Illinois administrative code specifies that
income shall be included in the denominator (and numerator) of the sales
factor when the income producing activity relative to the sourcing of
11

Colgate.
Id.
13
Id.
14
The facts of the Colgate decision detail that Colgate-Palmolive reported net sales of $2,085,271,427 on
Line 1 of its 1990 Federal return, while Colgate-Palmolive received $247,818,837 in royalty and dividend
income. Accordingly, the royalty and dividend income represented approximately 10.62% of the
summation of Line 1 of its 1990 Federal return and the royalty and dividend income earned in 1990.
12

7

business income from intangible personal property can be readily
identified, such as in the Taxpayer’s case.15
Conclusion
Based on the above, Taxpayer requests a deviation from the Illinois’
statutory apportionment method as it relates to the royalty earned from
licensing of intangible personal property because the application of
Illinois’s tax apportionment formula produces a tax that fails to represent
the activities or market in Illinois. As a result of this distortion, Taxpayer
requests the use of an alternative method to fairly represent the market for
Taxpayer’s business income by including its royalty income on Schedule
UB Step 4, Line 2 “net sales everywhere” in the amount of $$$.
Alternative Position
In the event that the Department challenges or denies the Taxpayer’s
alternative apportionment position and refund request, the Taxpayer also
requests the Department consider and apply another method to effectuate
an equitable allocation and apportionment of Taxpayer’s royalties.
Another method is the use of separate accounting to apportion the
Taxpayer’s royalties separate and apart from all other activity. Using
separate accounting, Taxpayer's apportionment will fairly represent
Taxpayer’s activity in Illinois, as it will no longer be skewed by the
inclusion of the royalties which are not fairly reflected in the apportionment
formula.
Finally, yet another method to use is to include as members of the Illinois
combined group all of the 80/20 companies that are excluded from the
combined group under IITA 35 ILCS 5/1501(a)(27)(A) that are paying the
royalties to the Taxpayer. The inclusion of the 80/20 companies would
serve to include the business income of the foreign corporations, as well
as include the sales of such corporations into the apportionment formula.
This method will also fairly represent Taxpayer’s activity in Illinois as it
would have matching representation between business income and sales
in the sales factor.
Other Amended Return Items
Additionally, this IL-1120-X incorporates an error in the EDA-25 IL-1120
Auditor’s Report (Audit ID - XXX) for this tax period ending June 30, 20XX,
which improperly excluded the federal taxable income of COMPANY 1.
(FEIN: XXXXX). The return is being amended to include COMPANY 1’s
federal taxable income into Line 1, Step 3.

15

86 Ill. Admin. Code §100.3380(c)(3).
8

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.
For taxable years ending on or after December 31, 1999, IITA Section
304(a)(3)(B-2) provides that gross receipts from the license, sale, or other
disposition of patents, copyrights, trademarks, and similar items of intangible
personal property may be included in the sales factor only if gross receipts from
the license, sale, 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 two immediately preceding tax years, and 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. If not excluded from the sales factor under the 50% B-2 test, these
receipts are sourced to Illinois according to IITA Section 304(a)(3)(B-1).
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
apetition, 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.

9

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.
Taxpayers who wish to use an alternative method of apportionment under these
provisions are required to file a petition complying with the requirements of 86 Ill.
Adm. Code Section 100.3390. Subsection (c) of that regulation provides:
A departure from the required apportionment method is allowed only when
those methods do not accurately and fairly reflect business activity in
Illinois (for taxable years ending before December 31, 2008) or market in
Illinois (for taxable years ending on or after December 31, 2008). An
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. However, if
the application of the statutory formula will lead to a grossly distorted
result in a particular case, a fair and accurate alternative method is
appropriate. The party (the Director or the taxpayer) seeking to utilize an
alternative apportionment method has the burden or going forward with
the evidence and proving by clear and convincing evidence that the
statutory formula results in the taxation of extraterritorial values or
operates unreasonably and arbitrarily in attributing to Illinois a percentage
of income that is out of all proportion to the business transacted in this
State (for taxable years ending before December 31, 2008) or the market
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for the taxpayer's goods, services or other sources of business income in
this State (for taxable years ending on or after December 31, 2008). In
addition, the party seeking to use an alternative apportionment formula
must go forward with the evidence and prove that the proposed alternative
apportionment method fairly and accurately apportions income to Illinois
based upon business activity in this State (for taxable years ending before
December 31, 2008) or the market for the taxpayer's goods, services or
other sources of business income in this State (for taxable years ending
on or after December 31, 2008).
Your petition for alterative apportionment indicates that gross receipts from the
foreign royalties are not more than 50% of Taxpayer’s total gross receipts for the
tax year ended June 30, 20XX and are therefore excluded from the sales factor
under IITA Section 304(a)(3)(B-2). Your petition asserts that the royalties earned
by Taxpayer are included in business income subject to formula apportionment in
Illinois but the failure to include such receipts in the sales factor results in an
Illinois tax liability that is distortive and does not fairly represent the market for
Taxpayer’s business income in the State. The primary basis for this assertion is
that for fiscal years ending June 30, 20XX – June 30, 20XX, the statutory
apportionment formula fails to take into account that the gross receipts from the
foreign royalties earned by Taxpayer represents %%% of total gross income,
while the royalty income represents %%% of Illinois combined unitary income.
The facts stated in your petition are not sufficient to satisfy the burden set forth in
Ill. Adm. Code Section 100.3390(c). As indicated above, for taxable years
ending on or after December 31, 2008, alternative apportionment under IITA
Section 304(f) is appropriate in cases where the allocation and apportionment
provisions under IITA Sections 304(a) through (e) do not fairly represent the
market for the taxpayer’s goods, services, or other sources of business income.
In this case, your petition does not meet the regulatory requirement and cannot
be granted at this time. Your request merely states that due to the statutory
exclusion of foreign royalty from the sales factor pursuant to IITA Section
304(a)(3)(B-2), an alternative apportionment formula would more accurately
represent Taxpayer’s market in Illinois. An alternative apportionment method
may not be invoked, either by the Department or a by a taxpayer, merely
because it reaches a different apportionment percentage than the required
statutory formula.
In this case, IITA Section 304(a)(3)(B-2) and 86 Ill. Adm. Code Section
100.3370(a)(2)(F) provide that for taxable years ending on or after December 31,
1999, gross receipts from the licensing, sale, or other disposition of a patent,
copyright, trademark, or similar item of intangible personal property may be
included in the sales factor only if gross receipts from licenses, sales, or other
dispositions of these 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 two

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immediately preceding tax years. Exclusion of such receipts from the sales factor
thereby prevents distortion of the sales factor that would otherwise occur.
Section 304(f) relief is proper where the income allocated to the State by the
otherwise applicable statutory formula is unfairly disproportionate to the business
activity conducted in the State. There is nothing inherently distortive or unfair in
excluding from the sales factor those royalties that do not comprise more than
50% of gross income gross receipts from royalties earned from the licensing of
intangible property based on the activities of the taxpayer.
In addition, your proposed alternative methods fail to demonstrate that the
statutory method would lead to a distorted result in attributing to Illinois a
percentage of income that is out of all proportion to the market for the taxpayer’s
goods, services, or other sources of business income in this State. See
Lakehead Pipe Line Co. v. Dep’t of Rev., 192 Ill. App. 3d 756 (1st Dist. 1989);
Miami Corp. v. Dep’t of Rev., 212 Ill. App. 3d 702 (1st Dist. 1991); AT&T
Teleholdings, Inc. v. Dep’t of Rev., 978 N.E.2d 371 (Ill. App. Ct. 2012). Merely
indicating separate accounting or inclusion of 80/20 companies in the combined
group would effectuate equitable allocation and apportionment of Taxpayer’s
royalties, without any explanation of why these methods are more accurate than
formulary apportionment, is insufficient to meet the burden of proof imposed by
86 Ill. Adm. Code Section 100.3390(c) on taxpayers requesting permission to use
an alternative method of apportionment. As a unitary business enterprise, there
are intercompany transactions that are not reflected in your calculations.
Separating companies from their unitary group often creates more distortions due
to intercompany pricing issues.
This conclusion is also warranted by a review of Illinois cases involving a
taxpayer’s request to invoke an alternative apportionment method pursuant to
IITA Section 304(f). For example, in Miami Corp. v. Dep’t of Rev., which you cite
as an authority in support of your petition to use an alternative formula, the Illinois
appellate court affirmed the circuit court’s decision that the Illinois three-factor
formula, as applied by the Department in that case, grossly distorted the amount
of income to be apportioned to Illinois. The facts of that case, however, are
distinguishable from the facts presented in your petition, and distinguishable in a
way that warrants a different result. The primary difference is the fact that the
intangible income at issue in Miami Corp. arose from the taxpayer’s ownership of
real estate situated in other states, and the fact that Miami Corp. had no such
intangible property rights regarding land owned in Illinois. Both the appellate and
the trial court in Miami Corp. relied to a great degree on the reasoning of the
Alaska supreme court in Atlantic Richfield Co. v. Alaska, 705 P.2d 418 (Alaska
1985) app. dism’d, 474 U.S. 1043, 106 S.Ct. 74, 88 L.ed.2d 754 (1985).
Specifically, the Alaska supreme court wrote that:

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A unique characteristic of unitary oil and gas businesses is that the major
income-producing element is the value of the oil and gas reserves in the
ground. While this element can be readily identified, it is not recognized
under traditional formula apportionment methods. *** [S]eparate
accounting, not formula apportionment, is the prevailing method
throughout the United States for reporting income for oil production.
Atlantic Richfield Co., 705 P.2d at 418, 426.
Furthermore, the statutory apportionment formula has since changed from threefactor apportionment formula (property, payroll, and sales) to a one factor
formula (sales). The intangibles at issue here are not like the intangible rights
that ran with the land in Miami Corp.
Accordingly, your petition for alternative apportionment for tax year ended June
30, 20XX and for prospective tax years ending on or after June 30, 20XX cannot
be granted. However, if you have additional information related to this request
that was not previously submitted, you may supplement your petition and we will
reconsider your request. Please note that 86 Ill. Adm. Code Section
100.3390(e)(1) requires a petition to be filed at least 120 days prior to the due
date (including extensions) for the first return for which permission is sought to
use the alternative apportionment method. In addition, this ruling only addresses
your alternative apportionment petition and makes no decision on the amended
return’s refund claim to correct an error to include COMPANY 1’s federal taxable
income into the returns.
As stated above, this is a GIL. A GIL does not constitute a statement of policy
that applies, interprets or prescribes the tax laws, and it is not binding on the
Department.
Sincerely,
Jennifer Uhles
Associate Counsel (Income Tax)

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