Can a company use alternative apportionment to include a huge one-time asset-sale gain in its Illinois sales factor after that gain was excluded under the incidental-or-occasional-sale rule?

Plain-English summary

This is a General Information Letter (GIL) — not binding on the Illinois Department of Revenue and not a statement of Department policy — responding to a large multinational cyber-security company's petition to use an alternative method of apportioning its income to Illinois.

The company had sold substantially all the assets of its global enterprise security business (products, patents, trademarks, customer contracts, and goodwill) for several billion dollars, plus it recognized additional federal taxable income under I.R.C. §367(d) from previously transferred foreign intangible property. Under Illinois's standard "incidental or occasional sale" rule (86 Ill. Adm. Code 100.3380(c)(2)), gross receipts from that one-time asset sale — and, separately under 35 ILCS 5/304(a)(3)(B-2), the §367(d) income and tangible-property sale receipts — are excluded from both the numerator and denominator of the sales factor used to apportion income to Illinois. Because that exclusion meant the sales factor (built almost entirely from the company's ordinary, much smaller, day-to-day sales) was being used to apportion income that was overwhelmingly generated by the asset sale, the company argued this produced a "grossly distorted" over-apportionment of income to Illinois, attributing to the state a percentage of income "out of all proportion" to its actual Illinois business activity.

The Department disagreed and denied the petition. It held that excluding occasional-sale receipts from the sales factor is not "inherently distortive or unfair" — that is exactly what the incidental-or-occasional-sale regulation is designed to do. A taxpayer cannot get alternative apportionment merely by pointing out that the standard formula reaches a different (here, much lower) apportionment percentage than an alternative method would; it must prove by clear and convincing evidence, under 86 Ill. Adm. Code 100.3390(c), that the standard formula produces a grossly distorted result. The Department found the company's petition did not meet that burden on the facts presented, though it left the door open: the company could supplement its petition with additional facts for reconsideration.

What this means for you

Companies with large one-time asset sales

If your company sells a division, subsidiary, or major block of assets in a single unusual transaction, expect Illinois's incidental-or-occasional-sale rule (86 Ill. Adm. Code 100.3380(c)(2)) to exclude the gross receipts from that sale from your sales factor — even if the resulting taxable income is enormous relative to your ordinary operations. This GIL shows the Department will not automatically grant alternative apportionment (35 ILCS 5/304(f)) just because that exclusion causes a much higher percentage of the sale-related income to be attributed to Illinois than would result from a sales-factor calculation that included the sale.

Anyone considering an alternative apportionment petition

The Department's position here is that alternative apportionment is not warranted merely because your proposed method produces a different (lower) apportionment percentage than the statutory formula. You must affirmatively prove, with clear and convincing evidence per 86 Ill. Adm. Code 100.3390(c), that the standard formula leads to a "grossly distorted result" — attributing income to Illinois "out of all proportion" to actual business activity or market in the state. Simply showing a large gap in factor representation was not, by itself, enough on these facts.

Tax professionals evaluating occasional-sale transactions

Note the procedural details: a petition for alternative apportionment must be filed at least 120 days before the original return's due date, as an attachment to a timely amended return, or as part of a timely protest/petition to the Illinois Independent Tax Tribunal (86 Ill. Adm. Code 100.3390(e)). Also note that §367(d) deemed-royalty income and gains on sale of tangible personal property tied to the transaction are separately excluded from the sales factor under 35 ILCS 5/304(a)(3)(B-2), apart from the occasional-sale exclusion for the intangible/goodwill receipts under 100.3380(c)(2).

Common questions

Q: Did the Department grant the company's request to include the asset-sale gain in its sales factor?
A: No. The Department denied the petition, concluding the company had not proven the standard apportionment formula produced a grossly distorted result, as required by 86 Ill. Adm. Code 100.3390(c).

Q: Why was the asset-sale income excluded from the sales factor in the first place?
A: Under 86 Ill. Adm. Code 100.3380(c)(2), gross receipts from an "incidental or occasional sale" of assets used in a taxpayer's regular trade or business are excluded from both the numerator and denominator of the sales factor. The company itself acknowledged this rule applied to its enterprise-security-business sale. Separately, IRC §367(d) income and tangible-property sale receipts tied to the transaction are excluded from the sales factor by 35 ILCS 5/304(a)(3)(B-2).

Q: What did the company argue, and why wasn't it enough?
A: The company argued that because roughly the same enormous share of its taxable income for the year lacked any "factor representation" in the sales factor, the standard formula massively overstated its Illinois business activity, citing case law like Miami Corp. v. Dep't of Revenue and Container Corp. of America v. Franchise Tax Bd. The Department found this insufficient: pointing to a different apportionment percentage under a proposed alternative method does not, by itself, satisfy the clear-and-convincing-evidence burden of showing a "grossly distorted result" under 100.3390(c). The Department stated there is "nothing inherently distortive or unfair" in excluding occasional-sale receipts from the sales factor, since that is the rule's intended purpose.

Q: Is this the end of the road for the company?
A: Not necessarily. The Department noted that if the company has additional information related to the request that was not previously submitted, it may supplement its petition and the Department will reconsider.

Q: Can other taxpayers rely on this letter for their own situations?
A: No. This is a GIL, not a Private Letter Ruling. A GIL does not constitute a statement of Department policy that applies, interprets, or prescribes the tax laws, and it is not binding on the Department even for the taxpayer who received it. It only points the taxpayer to relevant statutes and regulations.

Subject

Alternative Apportionment

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2022.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2022/it22-0002-gil.pdf

Original ruling text

IT-22-0002 01/11/2022 ALTERNATIVE APPORTIONMENT
Alternative apportionment not appropriate when gross receipts arising
from an incidental or occasional sale of assets used in the regular course
of trade or business are excluded from the sales factor pursuant to 86 Ill.
Adm. Code 100.3380(c)(2). (This is a GIL.)
January 11, 2022
Re:

Petition for Alternative Apportionment
COMPANY
Tax Year Ended: DATE

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 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:
COMPANY and its subsidiaries that are members of its Illinois Unitary
Business Group (“Taxpayer” or “COMPANY”) respectfully submit this
Petition pursuant to 35 Ill. Comp. Stat. §5/304(f) and Ill. Admin. Code tit.
86, §§100.3380(a)(2), 100.3390 for use of an alternative method of
apportionment from the apportionment provisions in Ill. Admin. Code tit.
86, §100.3380(c)(2). When applied to COMPANY for the tax period ended
DATE, these apportionment provisions do not fairly represent
COMPANY’S in-state business activity in light of COMPANY’S sale of the
assets of its enterprise security division during this tax period. COMPANY
submits this Petition to provide clear and convincing evidence of, and
explanation for, why the Illinois apportionment provisions lead to a grossly
distorted result with the COMPANY income attributed to Illinois out of all
appropriate proportion to COMPANY’S business transacted in Illinois for
this period. This Petition also includes a proposed alternative method of
apportionment that would be used only for the tax period ended DATE and
would clearly reflect COMPANY’S business activity in Illinois during this
period. This Petition also explains why this alternative methodology is
reasonable.

Your submission includes the following additional information pertinent to your
petition for alternative apportionment:
I. FACTUAL BACKGROUND
COMPANY is the parent company of a multinational corporate group that
is a trusted brand and leading provider of cyber safety solutions for
consumers worldwide. COMPANY is a fiscal year taxpayer. The
company’s YEAR/YEAR fiscal year ended on DATE.
COMPANY’S business is built around the prevention, detection, and
restoration of potential damages caused by cyber criminals. The need for
COMPANY’S products is more critical than ever in today’s increasingly
digital world, as people transition to remote work environments, conduct
virtual meetings, and engage in online gaming, streaming, shopping,
telemedicine, and numerous other online transactions and activities on a
daily basis. With each new digital interaction comes increased risk for
consumers as cyber criminals look to take advantage of this accelerating
trend.
COMPANY stands between today’s cyber criminals and consumers,
helping secure the devices, identities, online privacy, and home and family
needs of nearly ## million consumers globally.
COMPANY was originally incorporated in YEAR as CORPORATION.
From incorporation through the present day, COMPANY has been
headquartered in STATE.
Prior to DATE, in addition to its consumer division, COMPANY (then
CORPORATION) also conducted an enterprise security business,
providing cyber security products, services, and solutions to more than

organizations in the private and public sectors. By DATE,

COMPANY had operations in ## countries. Its annual federal taxable
income attributable to company operations was typically between $$$
million and $$$$ million.
On DATE, COMPANY and its subsidiaries sold substantially all of the
assets of their global enterprise security business to BUSINESS for $$$.$
billion. At the same time, the company changed its name from
CORPORATION to COMPANY. The assets sold on DATE included all
enterprise security business products and related intellectual property,
such as patents, trademarks, domain names, IP addresses, technology,
code, database, algorithms, customer lists, trade secrets, all
customer/partner/reseller/distributor agreements, all license agreements
for technology, leases, options, permits, licenses, and registrations. The
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assets also included fixed assets related to the enterprise security
business. These assets, including the developed technologies, were
developed outside of Illinois and were marketed and sold to a business
(BUSINESS) incorporated and headquartered outside of Illinois. No
aspect of the sale was negotiated within Illinois.
The allocation of the $$$.$ billion purchase price to the assets sold by
COMPANY subject to U.S. tax was as follows:
Gross Receipts
Intangible Assets & Goodwill

$$$$$$$$$$$

Tangible Assets (PPE, Prepaid
Expenses, Other Current Assets & Inventories)

$$$$$$$$$$
Total:

$$$$$$$$$$$

Approximately ##% of the gross receipts allocated to intangible assets and
goodwill are attributable to COMPANY’S developed technologies and
related assets including patents, processes, and knowhow. The residual approximately ##% of the gross receipts allocated to intellectual property
and goodwill - are attributable to goodwill. Additionally, $$$$$$$$ of the
gross receipts allocated to intellectual property and goodwill were
attributable to customer contracts.
The federal taxable income attributable to the U.S. assets sold was
$$$$$$$$$$$, calculated as follows:
Gross Receipts

Basis

Intangible Assets
& Goodwill

Federal Taxable
Income

$$$$$$$$$$$

$$$$$$$$$$

$$$$$$$$$$$

Tangible Assets

$$$$$$$$$$

$$$$$$$$$

$$$$$$$$$

Total:

$$$$$$$$$$$

Only $$$$$$$$$$ of this taxable income is attributable to depreciation
recapture.
In addition to this $$$$$ billion taxable income, COMPANY will also report
federal taxable income from an accelerated royalty required to be
recognized pursuant to I.R.C. §367(d) as a result of the sale of the
enterprise security business. In YEAR, COMPANY transferred various
foreign patents and other items of foreign intangible property (collectively
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“Transferred Foreign IP”) to two foreign subsidiaries. For six years
following the YEAR transaction - which was the useful life of the
Transferred Foreign IP - I.R.C. §367(d) required COMPANY to recognize
as ordinary income a deemed payment equal to an arm’s length royalty
charge for use of the Transferred Foreign IP. Because COMPANY
disposed of the Transferred Foreign IP during this six year period as part
of the sale of its enterprise security business, I.R.C. §367(d) and Treas.
Reg. §1.367(d)-1 T(f)(l) require COMPANY to recognize in the year of the
sale of its enterprise security business sale (i.e. the tax period ended
DATE) gain equal to the sum of: (1) the difference between the fair market
value of the Transferred Foreign IP and its former basis on the property
($$$$$$$$$$) and (2) a deemed payment equal to an arm’s length royalty
charge for use of the Transferred Foreign IP for the part of the taxable
year that the Transferred Foreign IP was held by COMPANY’S
subsidiaries prior to sale ($$$$$$$$$$). Both components of this gain
exclusively relate to foreign intangible assets. For the tax year ended
DATE, the amount of gain that COMPANY must recognize pursuant to
I.R.C. §367(d) is $$$$$$$$$$ which is reported as an accelerated royalty
for federal tax purposes.
II. COMPANY’S ILLINOIS CORPORATION INCOME TAX RETURN FOR
THE TAX PERIOD ENDED DATE
On DATE, prior to the submission of this Petition, COMPANY filed its
Form IL-1120, Corporation Income and Replacement Tax Return for the
tax period ended DATE (“Illinois Original Return”).
The starting point for the calculation of COMPANY’S taxable income in
Illinois is its federal taxable income reported on its federal Form 1120, Line

30. For the taxable period at issue, COMPANY reported $$$$$$$$$$$ of
    federal taxable income on Form 1120, Line 30.
    After accounting for the specific addition and subtraction modifications in
    Illinois law, COMPANY is reporting Unitary Business Group’s
    Apportionable Income of $$$$$$$$$$$, subject to Illinois’ income tax.
    COMPANY is not reporting any non-apportionable income.
    The supermajority of this Unitary Business Group Income -- $$$$$$$$$$$
    or ##% -- is exclusively attributable to the gain from the sale of the
    enterprise security business’ intangible assets and goodwill and the I.R.C.
    §367(d) income inclusion.
    The apportionment ratio COMPANY used for its Illinois Original Return
    reflects Illinois’ single sales factor formula.

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COMPANY’S apportionment factor (for the Unitary Business Group) for
the tax period ended DATE is #.####% calculated as:
[$$$$$$$$$ (Illinois Receipts of COMPANY)
divided by
$$$$$$$$$$$
(Total Receipts of all members of the
COMPANY Unitary Business Group)]
$$$$$$$$$ divided by $$$$$$$$$$$ equals #.####%.
Notably, the sales factor denominator does not include any of the gross
receipts (or gain) attributable to the sale of the enterprise security
intangible assets and goodwill. Ill. Admin. Code tit. 86, §l00.3380(c)(2).
The sales factor denominator also does not include any of the gross
receipts (or gain) attributable to the I.R.C. §367(d) income inclusion or the
sale of the tangible personal property that was part of the enterprise
security business. 35 Ill. Comp. Stat. §5/304(a)(3)(B-2).
Application of this regulatory apportionment ratio (#.####%) to
COMPANY’S $$$$$$$$$$$ of Unitary Business Group’s Apportionable
Income results in a calculation of Illinois’ Taxable Share of Unitary
Business Group’s Apportionable Income of $$$$$$$$$$ (Line 34).
III. ALTERNATIVE APPORTIONMENT PETITION FRAMEWORK
Illinois law provides a mechanism for taxpayers to request the use of an
alternative method of apportionment when its regulatory apportionment
rules are not reasonably adapted to approximate the net income derived
from business carried on within Illinois and do not fairly represent the
extent of the taxpayer’s business activity in state.
With respect to the corporation income tax, 35 Ill. Comp. Stat. §5/304(f)
provides:
If the normal allocation and apportionment provisions do not fairly
represent the extent of a person’s business activity in Illinois, 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 can petition for or the Director may, without a petition,
permit or require:
(1)
(2)
(3)

separate accounting;
the exclusion of one or more factors from the formula;
the inclusion of one or more additional factors that will fairly
represent the person’s business activities or market in Illinois;
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(4)

the use of any other method to create an equitable allocation and
apportionment of the taxpayer’s business income.

35 Ill. Comp. Stat. §5/304(f).
The use of Illinois’ alternative apportionment statute and regulation is
authorized when the application of any of the Special Rules in Ill. Admin.
Code tit. 86, §100.3380 - including the incidental or occasional sale rule in
Ill. Admin. Code tit. 86, §100.3380(c)(2) - do not fairly represent a
taxpayer’s business activity or market within Illinois.
Requests for alternative apportionment under this provision are subject to
the rules in Ill. Admin. Code tit. 86, §100.3390. There are several
procedural rules for alternative apportionment relief in this regulation.
First, the party petitioning for an alternative apportionment must prove 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 Illinois
using clear and convincing evidence. Ill. Admin. Code tit. 86,
§100.3390(c).
Second, the petitioner must prove that the proposed alternative
apportionment method fairly and accurately apportions income to Illinois.
Id. The regulation does not explain how a petitioner may do so, perhaps
because “[a]llocating income among various taxing jurisdictions bears
some resemblance ... to slicing a shadow.” Container Corp. of Am. v.
Franchise Tax Bd., 463 U.S. 159, 192 (1983).
Third, the petition must be timely filed. A petition is timely if it is filed at
least 120 days prior to the original tax returns due date, if it is filed as an
attachment to a timely amended return, or if it is filed as part of a timely
protest or petition to the Illinois Independent Tax Tribunal. Ill. Admin. Code
tit. 86, §100.3390(e).
A taxpayer’s request for alternative apportionment will not be granted
solely because it arrives at a different apportionment percentage than the
statutory or special rule formula. Ill. Admin. Code tit. 86, §100.3380(c).
IV. THE REGULATORY APPORTIONMENT PROVISIONS DO NOT
FAIRLY REPRESENT COMPANY’S ILLINOIS BUSINESS ACTIVITY
For the tax period ended DATE, Illinois’ regulatory apportionment
provisions do not fairly represent the extent of COMPANY’S in-state
business activity. As explained below, the regulatory provisions do not
provide factor representation for any receipts attributable to over ##% of
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COMPANY’S apportionable income for this period. Because nearly all of
the receipts attributable to this taxable income are not sales within Illinois,
the lack of factor representation results in the apportionment of income to
Illinois that far exceeds COMPANY’S business activity in Illinois for the
period.
A tax based on an inherently arbitrary method of apportionment cannot
stand. Underwood Typewriter Co. v. Chamberlain, 254 U.S. 113, 121
(1920); Bass, Ratcliff & Gretton, Ltd. v. State Tax Commission, 266 U.S.
271, 283 (1924). An apportionment method is inherently arbitrary if there
is a lack of correspondence between the income included in a taxpayer’s
apportionable income and the factors that are used to apportion such
income. See Container Corp. of America v. Franchise Tax Bd., 463 U.S.
159, 169 (1983) (stating that “the factor or factors used in the
apportionment formula must actually reflect a reasonable sense of how
income is generated.”) This lack of correspondence between a taxpayer’s
apportionable income and the factors used to apportion such income is
commonly referred to as a lack of “factor representation.” Hellerstein,
Hellerstein & Swain, State Taxation ¶ 9.15[1] (Thomson Reuters/Tax &
Accounting, 3rd ed. 2001, with updates through May 2020) (online version
accessed on Checkpoint (www.checkpoint.riag.com) on June 26, 2020)
(emphasis added).
Illinois case law reflects this rule. In Miami Corp. v. Dep’t of Revenue, 571
N.E.2d 800, 805 (Ill. App. 1991), a taxpayer’s most profitable operation
was its oil and gas reserves located in Louisiana, generating more than
80% of its total income. Illinois’ then three-factor formula did not reflect the
oil and gas reserves, as they were intangible property rights. The court
held that the formula did not fairly represent the taxpayer’s business
activity and allowed the taxpayer to utilize a separate accounting
apportionment method.
For the tax period ended DATE, COMPANY reports $$$$$$$$$$$ of
apportionable income subject to Illinois’ income tax. The supermajority
(indeed nearly all) of this apportionable income -- $$$$$$$$$$$ or ##% -results from the sale of the enterprise security intangible assets and
goodwill and an I.R.C. §367(d) income inclusion. Pursuant to Illinois’
Special Rule for incidental or occasional sales in Ill. Admin. Code tit. 86,
§100.3380(c)(2) none of that $$$$$$$$$$$ is included in COMPANY’S
regulatory sales factor. Its exclusion means that the sales factor used to
apportion $$ billion of income for the tax period is based on the receipts
corresponding to less than $$$ million of that taxable income.
The lack of factor representation caused by the occasional sales rule far
exceeds the absence of factor representation at issue in Miami Corp.,
which required the use of an alternative method of apportionment. In
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Miami Corp. 80% of the taxpayer’s income lacked factor representation
thus requiring use of Illinois’ alternative apportionment statute. Here, there
is no factor representation for ##% of COMPANY’S income.
For the following reasons, COMPANY’S sale of its enterprise security
business created a specific and unusual situation for which Illinois’
regulatory apportionment methods do not fairly represent the extent of
COMPANY’S in-state business activity.
First, the magnitude of the disposition transaction by itself is unusual,
unique, and nonrecurring. A $$$ billion asset sale transaction is not only
very unique among the universe of commercial disposition transactions,
but the deal was the first of its kind for COMPANY and cannot be
replicated by COMPANY given the nature of the company’s remaining
business operations.
Second, the amount of taxable income attributable to the transaction ($$
billion) relative to COMPANY’S taxable income from its ordinary business
operations (typically between $$$$ million and $$$$ million, and only $$$
million during this tax period) also makes the transaction unusual, unique,
and non-recurring, especially for an on-going enterprise such as
COMPANY. COMPANY is not aware of any other corporate asset
transaction by any taxpayer that resulted in such a lopsided income
presentation on any state’s tax return.
Third, because the taxable income that is attributable to the sale of
enterprise security assets dwarfs COMPANY’S other taxable income for
the period, the lack of factor representation for the receipts from the sale
of the enterprise security assets gives rise to incongruous results under
Illinois law. It makes no sense for Illinois (or any other state) to seek to
apportion $$.$$ billion of apportionable group income using the gross
receipts attributable to only $$$ million of that taxable income. As noted by
the Supreme court in Container Corp. of America v. Franchise Tax Bd.,
463 U.S. 159, 169 (1983), “the factor or factors used in the apportionment
formula must actually reflect a reasonable sense of how income is
generated.” With respect to COMPANY for the tax period ended DATE,
Illinois’ regulatory apportionment formula does not actually reflect a
reasonable sense of how COMPANY generated income during this period
and does not fairly represent the extent of COMPANY’S business activity
in Illinois for this one tax period.
In summary, this is a limited and specific case. It is an unusual fact
situation that is unique and nonrecurring and results in the drastic
overstatement of COMPANY’S business activity in Illinois for the tax
period ended DATE because the regulatory allocation and apportionment

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provisions are not reasonably adapted to approximate the COMPANY’S
net income from business carried on within Illinois during this tax period.
As demonstrated below, the absence of factor representation for ##% of
COMPANY’S apportionable income causes the Illinois’ regulatory
apportionment rules to not fairly represent COMPANY’S business activity
within Illinois by a factor of ###%.
V. SALES FACTOR REPRESENTATION ANALYSIS WOULD FAIRLY
AND ACCURATELY APPORTION INCOME TO ILLINOIS
The table below identifies the differences between application of the
regulatory apportionment rules and an apportionment ratio that includes
factor representation for the $$$$$$$$$$$ of COMPANY’S taxable
income from the sale of the intangible assets, goodwill, and I.R.C. §367(d)
income that were recognized on the sale of the enterprise security assets.

In reviewing the table, it is important to note that (1) all of the I.R.C.
§367(d) income was attributable to foreign intangible assets that had no
nexus to Illinois whatsoever and (2) all of the developed technologies
comprising the $$$$$$$$$$$ of receipts were developed outside of
Illinois, were marketed and sold to a business incorporated and
headquartered outside of Illinois, and no aspect of the sale was negotiated
within Illinois. As a result, with the exception of the two items noted below,
most of the intangible asset and goodwill gross receipts and all of the
I.R.C. §367(d) income to be included in COMPANY’S sales factor are
properly included solely in COMPANY’S sales factor denominator for the
tax period ended DATE.
The first item includable in COMPANY’S sales factor numerator (with
factor representation) is the portion of the depreciation recapture
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recognized on the sale of the intangible assets that approximates the
amount of depreciation benefit that COMPANY received in Illinois in prior
years. This amount is calculated by multiplying the total accumulated
depreciation recapture from the sale of these assets ($$$$$$$$$$) by a
factor equal to COMPANY’S Illinois regulatory sales factor for the period
ended DATE (#.###%).
The second item includable in COMPANY’S sales factor numerator (with
factor representation) is the approximate value of COMPANY’S Illinois
customer contracts transferred with the sale of the enterprise business
assets. This amount is calculated by multiplying the total valuation of the
customer contracts ($$$$$$$$) by a factor equal to COMPANY’S Illinois
regulatory sales factor for the period ended DATE (#.###%).
The table above compares application of the regulatory apportionment
rules with factor representation for the developed intangible assets and
the goodwill sold with COMPANY’S enterprise security assets and the
related I.R.C. §367(d) income inclusion.
COMPANY recognizes, however, that because the value of transferred
goodwill cannot always be readily assigned to a specific state, Illinois may
take the position that COMPANY’S receipts from the sale of goodwill
attributable to the sale of its enterprise security assets (which was
determined to reflect ##% of the $$$$$$$$$$$ value assigned to the
intangible assets and goodwill) should never be afforded factor
representation.
However, even if goodwill is properly excluded from COMPANY’S sales
factor the failure of the regulatory apportionment rules to provide factor
representation for the receipts attributable to the developed intangible
assets (i.e., patents, knowhow, etc.) results in the clear distortion of
COMPANY’S business activity in Illinois during the tax period ended
DATE. Specifically, as reflected in the table below, failure to provide factor
representation for the receipts attributable to the developed intangible
assets (but not goodwill) and the I.R.C. §367(d) income inclusion still
results in the overstatement of COMPANY’S income attributable to Illinois
by ###%:

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VI. COMPANY’S PROPOSED ALTERNATIVE METHOD OF
APPORTIONMENT
COMPANY respectfully petitions that for the tax period ended DATE - and
for this period only - the company be permitted to deviate from the
regulatory apportionment rules consistent with the second table above. As
compared to regulatory apportionment, this method reflects four changes
to the calculation of COMPANY’S sales factor:

1. COMPANY will include in its sales factor denominator the I.R.C.
   §367(d) income inclusion ($$$$$$$$$$). All of this income relates
   to foreign intangible property that has no nexus whatsoever to
   COMPANY’S business activity in Illinois. If this income is to be
   included in the COMPANY group’s apportionable income, it must
   be afforded factor representation.
2. COMPANY will include in its sales factor denominator ##% of the
   gross receipts attributable to the sale of the intangible assets and
   goodwill received from sale of its enterprise security business
   ($$$$$$$$$$$ * ##% = $$$$$$$$$$$). This ##% amount reflects
   the amount allocated to the developed intangible assets (and not
   goodwill) that were sold with enterprise security assets.
3. COMPANY will include in the numerator of its sales factor the
   portion of the depreciation recapture recognized on the sale of the
   intangible assets that approximates the amount of depreciation
   benefit that COMPANY received in Illinois in prior years. This
   amount will be calculated by multiplying the total accumulated
   depreciation recapture from the sale of these assets ($$$$$$$$$$)
   by a factor equal to COMPANY’S Illinois regulatory sales factor for

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the period ended DATE (#.####%). The amount of this numerator
inclusion is $$$$$$$$.

4. COMPANY will include in the numerator of its sales factor is the
   value of the customer contracts transferred with the sale of the
   enterprise business assets that approximates the value of the
   customer contracts in Illinois. This amount will be calculated by
   multiplying the total valuation of the customer contracts ($$$$$$$$)
   by a factor equal to COMPANY’S Illinois regulatory sales factor for
   the period ended DATE (#.####%). The amount of this numerator
   inclusion is $$$$$$.
   This alternative method proposed by COMPANY is authorized by 35 Ill.
   Comp. Stat. §5/304(f).
   Consistent with this alternative method, the components of COMPANY’S
   apportionment ratio and Illinois corporation income would be as follows:

There are multiple reasons why the proposed alternative apportionment
method fairly and accurately apportions income to Illinois.
First, this proposal provides factor representation for nearly all of
COMPANY’S taxable income for the period. The only income that does
not have factor representation is the income from the sale of goodwill
attributable to the enterprise security assets. Providing factor
representation to the goodwill would only decrease COMPANY’S Illinois
apportionment percentage for the year.
Second, the proposal is consistent with the considerations listed in Ill.
Admin. Code tit. 86, §100.3380(c)(2) to justify the incidental or occasional
sale rule. According to the regulation, the “exclusion of gross receipts from
the sales factor is appropriate for several reasons, more than one of which
may apply to a particular sale, including:

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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.”
Ill. Admin. Code tit. 86, §100.3380(c)(2). The proposal reflects each of
these four considerations.
With respect to the first consideration, the proposed alternative
methodology reflects the reality that COMPANY’S primary source of
taxable income for the year was from the sale of its enterprise security
business and not its ordinary operations. In other words, the company’s
business operations were inverted for the period with occasional sales
compromising ##% of the taxable income for the period. The concern with
dilution presented in this first consideration is simply not present in this
inverted scenario. With respect to the second consideration, the proposed
alternative methodology sources to Illinois a percentage of the
depreciation recapture and the value assigned to the customer contracts
consistent with COMPANY’S sales factor for the period without regard to
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the sale of the enterprise security business. With respect to the third
consideration, the proposed alternative methodology does not include the
receipts attributable to goodwill in either the numerator or the denominator
of COMPANY’S Illinois apportionment factor. And with respect to the
fourth consideration, the sale of the enterprise security assets will not
have a material impact on COMPANY’S apportionment factor in the future
years from its remaining consumer security business. COMPANY’S
market in Illinois and in all the other states for its consumer security
business is roughly the same as its market from the disposed of enterprise
security business.
Third, factor representation fairly and accurately apportions COMPANY’S
income consistent with common sense, found in Miami Corp. The
intangible assets and I.R.C. §367(d) gain generated ##% of COMPANY’S
income. Including them in the sales factor would “reflect a reasonable
sense of how income is generated.” Container Corp. of America v.
Franchise Tax Bd., 463 U.S. 159, 169 (1983). This proposal provides
factor representation for nearly all of COMPANY’S taxable income for the
period, consistent with Miami Corp.
Fourth, factor representation would align the treatment of the sale of the
enterprise security assets in Illinois with the 29 other jurisdictions. 27 other
jurisdictions provide factor representation by statute or regulation. Two
additional jurisdictions (STATE and STATE) have granted relief pursuant
to their respective alternative apportionment statutes to provide factor
representation to COMPANY identical to the proposal set forth in this
petition. Related correspondence attached. As of this date, no state has
denied a petition similar to this one.
VII. CONCLUSION
For all of the foregoing reasons, the Illinois Department of Revenue should
grant this petition for alternative apportionment. Illinois’ occasional sale
rule does not fairly and accurately apportion COMPANY’S income,
whereas the alternative methodology outlined above clearly would.

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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. Section 304(a)(3) of the IITA
defines the sales 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(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
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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
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).

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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.
The purpose of this provision is to exclude from both the numerator and
denominator of the sales factor gross receipts from transactions that, while
generating business income, do not arise from transactions and activity that may
be regarded as the taxpayer’s regular or ordinary course of business. Exclusion

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of such receipts from the sales factor thereby prevents distortion of the sales
factor that would otherwise occur.
Your petition indicates that on DATE COMPANY sold substantially all of the
assets of their global enterprise security business, which included all enterprise
security business products and related intellectual property, intangible assets
such as goodwill, and other fixed assets related to the enterprise security
business. You indicate that gross receipts from the sale of these assets is
excluded from the sales factor under 86 Ill. Adm. Code Section 100.3380(c)(2) as
an incidental or occasional sale of assets used in the regular course of
COMPANY’S trade or business. In addition, you indicate COMPANY reported
federal taxable income from an accelerated royalty required to be recognized
pursuant to IRC Section 367(d) as a result of the sale of the enterprise security
business. Your petition asserts that the failure to include such receipts in the
denominator of the sales factor results in an amount of income apportioned to
Illinois that does not fairly represent the market for COMPANY’S goods, services,
or other sources of business income. The primary basis for this assertion is that
the sale of the enterprise security business created a specific and unusual
situation which Illinois’ regulatory apportionment provisions do not provide factor
representation for any receipts attributable to over ##% of COMPANY’S
apportionable income for the period and this lack of factor representation results
in the apportionment of income to Illinois which exceeds COMPANY’S business
activity in Illinois because nearly all of the receipts attributable to this taxable
income are not sales within Illinois, leading to a grossly distorted result.
As you have represented that the sale of the enterprise security business is an
incidental or occasional sale of assets of COMPANY, and that no similar sale can
be replicated by COMPANY given the nature of the company’s remaining
business operations, Department Regulations Section 100.3380(c)(2) properly
applies in this case. Therefore, the gross receipts from such sale must be
excluded from both the numerator and denominator of COMPANY’S sales factor.
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 regulatory
exclusion of the receipts from the sale of the enterprise security business from
COMPANY’S sales factor for tax year ended DATE, pursuant to 86 Ill. Adm.
Code 100.3380(c)(2), an alternative apportionment formula would more
accurately represent COMPANY’S market in Illinois. Your proposed alternative
method of apportionment, which would reduce the sales factor by only #.####%
(#.####% - #.####%), fails to demonstrate how the application of the statutory
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method leads to a grossly distorted result. An alternative apportionment method
may not be invoked, either by the Department or by a taxpayer, merely because
it reaches a different apportionment percentage than the required statutory
formula.
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 receipts which arise from an incidental or
occasional sale of assets used in the regular course of trade or business.
Accordingly, your petition for alternative apportionment for tax year ended DATE
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.
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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