Is the gain from selling a non-unitary limited-partnership interest taxed by Illinois, or allocated to the seller's home state?

Plain-English summary

A corporation commercially domiciled outside Illinois, but with Illinois corporation income and replacement tax nexus (it files Form IL-1120), asked the Illinois Department of Revenue for a Private Letter Ruling about the tax treatment of selling a partnership interest. The Department instead answered with a General Information Letter (GIL) — its standard practice when the facts or request don't fit the criteria for a binding PLR, not an error or refusal.

The taxpayer's business centers on intellectual property: brand management, licensing, marketing, an animated TV series, home entertainment, and revenue-sharing for IP used in another product. Separately, it had acquired a small minority limited-partner interest in another partnership ("the Partnership"). As part of its request, the taxpayer represented that it was not unitary with the Partnership. While it held the interest, the Partnership generated losses, which the taxpayer treated as "business income or loss from non-unitary partnerships," removing them from its Illinois apportionable business income and instead allocating them to the two other states where it received state K-1s — based on the Partnership's own representation that it had no Illinois nexus during that period.

The taxpayer later sold its entire limited-partnership interest for a large gain, reported federally as a long-term capital gain. It asked IDOR to confirm that gain would be treated as nonbusiness income allocated to the taxpayer's own out-of-state commercial domicile, rather than apportioned to Illinois, assuming its non-unitary status and the Partnership's lack of Illinois nexus held true.

IDOR walked through the framework: under IITA Section 1501(a)(1), "business income" is apportionable business income; nonbusiness income (Section 1501(a)(13)) is allocated under Section 303 rather than apportioned under Section 304. A partnership interest is intangible personal property, so under Section 303(b)(3), capital gains from selling intangible personal property are allocated to the taxpayer's commercial domicile at the time of sale. IDOR's own regulation, 86 Ill. Adm. Code 100.3380(d)(1), distinguishes unitary from non-unitary partners: a partner that is not in a unitary business with the partnership includes its share of the partnership's business income under Section 305(a), rather than through combined apportionment.

Applying that framework, IDOR concluded that, "[b]ased on the representations that Taxpayer held a non-unitary partnership interest... and [the Partnership] did not have nexus in Illinois... the gain... should be treated as allocable income under IITA Section 303 and sourced to the Taxpayer's commercial domicile" outside Illinois — meaning Illinois would not tax the gain. But this conclusion is entirely conditional. IDOR did not independently verify that the taxpayer was actually non-unitary with the Partnership, or that the Partnership actually lacked Illinois nexus during the relevant period. It simply applied the law to the facts as the taxpayer represented them.

What this means for you

Multistate corporations holding partnership interests

If your business holds a minority limited-partner interest that you consider non-unitary, this GIL confirms the mechanics: nonbusiness capital gain from selling intangible personal property (including a partnership interest) is allocated to your commercial domicile, not apportioned to Illinois, under IITA Section 303(b)(3). But the entire benefit rests on your unitary-business determination and on the partnership's own nexus facts actually being correct. If either representation turns out to be wrong on audit, this reasoning would not protect you, since IDOR never independently confirmed either fact here.

Accountants and tax professionals

This is a useful roadmap of the IITA business/nonbusiness income framework (Sections 1501(a)(1), 1501(a)(13), 303, 304, 305) and of how 86 Ill. Adm. Code 100.3380(d)(1) treats unitary versus non-unitary partners differently for apportionment purposes. But treat the bottom-line conclusion as fact-dependent, not a general rule: IDOR expressly conditioned its answer on the taxpayer's own representations about non-unitary status and the partnership's lack of Illinois nexus, and a GIL is non-binding even on its own facts. Document the unitary-business analysis and the partnership's nexus posture carefully before relying on this reasoning for a similar sale.

Common questions

Q: Does Illinois tax the gain from selling a non-unitary partnership interest?
A: In this GIL, IDOR said no — the gain is nonbusiness income allocated to the taxpayer's commercial domicile outside Illinois under IITA Section 303(b)(3), not apportioned to Illinois. But that answer depended entirely on the taxpayer's representations that it was non-unitary with the partnership and that the partnership lacked Illinois nexus.

Q: Did IDOR verify that the taxpayer was really non-unitary with the partnership?
A: No. IDOR's ruling is explicitly conditioned on "the representations that Taxpayer held a non-unitary partnership interest" — it did not independently confirm the unitary-business status itself.

Q: What if the partnership actually did have Illinois nexus during that period?
A: The ruling doesn't address that scenario directly, but its conclusion is expressly tied to the representation that the partnership "did not have nexus in Illinois" during the relevant months. If that representation were inaccurate, the analysis IDOR walked through would not necessarily hold.

Q: Why did IDOR issue a GIL instead of the requested Private Letter Ruling?
A: The taxpayer asked for a PLR under 2 Ill. Adm. Code 1200.110, but IDOR determined the nature of the request and facts required a GIL response instead under 2 Ill. Adm. Code 1200.120(b) and (c). This is routine Department practice, not a sign that something was wrong with the request.

Q: Is this ruling binding on Illinois for other taxpayers?
A: No. A GIL is not a statement of Department policy and is not binding on the Department at all, for this taxpayer or anyone else. It only shows how IDOR reasons through this fact pattern.

Citations and references

Statutes and rules:

• 35 ILCS 5/1501(a)(1) (IITA definition of "business income")
• 35 ILCS 5/1501(a)(13) (IITA definition of "nonbusiness income")
• 35 ILCS 5/303(b)(3) (allocation of capital gains from intangible personal property to commercial domicile)
• 35 ILCS 5/305(a) (allocation of partnership business income to nonresident partners)
• 86 Ill. Adm. Code 100.3380(d)(1) (unitary vs. non-unitary partner treatment for 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/it22-0008-gil.pdf

Original ruling text

IT-22-0008 05/10/2022 PARTNERSHIPS
Nonresident partner that sells its share of non-unitary partnership allocates
nonbusiness capital gain from the sale under Section 303 of the Illinois Income
Tax Act. (This is a GIL.)
May 10, 2022
NAME
ADDRESS
Re:

Illinois income tax

Dear NAME:
This is in response to your letter dated January 21, 2021, in which you request
information regarding Illinois income tax. The nature of your request and the
information you have provided require that we respond with a General Information
Letter (“GIL”), which is designed to provide general information, is not a statement of
Department policy, and is not binding on the Department. See 2 Ill. Adm. Code
1200.120(b) and (c), which may be found on the Department's web site at
www.tax.illinois.gov.
Your letter states as follows:
On behalf of our client, COMPANY1 (FEIN: ##-#######), hereinafter referred to
as “Taxpayer,” we respectfully request the issuance of a private letter ruling
(“PLR”) by the Illinois Department of Revenue (“Department”) pursuant to 2 Ill
Adm. Code 1200.110.
General Information

1. This Private Letter Ruling (“PLR”) is not requested with regard to hypothetical
   or alternative proposed transactions.
2. The Taxpayer is not currently engaged in litigation with the Department in
   regard to this or any other tax matter.
3. The Taxpayer is not currently under audit by the Department in regard to this
   matter.
4. The Taxpayer requests that certain information be redacted from the PLR
   prior to dissemination to others.
5. The Taxpayer requests that its name, all contractual parties’ names, its
   exhibits, and the name of its representative be redacted.
6. The Taxpayer knows of no authority contrary to the authorities referred to and
   cited below.
7. To the best of the knowledge of both Taxpayer and Taxpayer’s
   representative, the Department has not previously ruled on the same or a
   similar issue for the Taxpayer or predecessor, nor has any representatives
   previously submitted the same or a similar issue to the Department but
   withdrew it before a letter ruling was issued.

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Tax Year
The ruling is requested for the tax year ending MONTH DAY, YEAR.
Statement of Facts
Taxpayer, commercially domiciled in CITY, STATE, is a subsidiary of
COMPANY1 in COUNTRY1. Based on its activities in Illinois, Taxpayer currently
has Illinois corporation income and replacement tax nexus. Taxpayer manages
intellectual property outside of COUNTRY2 and is responsible for brand
management, licensing, marketing, the PRODUCT1, the animated TV series,
home entertainment, and the official PRODUCT2 website. Its primary revenue
streams include marketing and sales of trading card games, brand management,
licensing, animated TV series, home entertainment, and income from a revenue
sharing arrangement for intellectual property used in the PRODUCT3. Taxpayer
files Form IL-1120 in Illinois for corporation income and replacement tax
purposes.
On MONTH DAY, YEAR, Taxpayer acquired a %% minority and limited partner
interest in a partnership, COMPANY2 (“COMPANY2”), headquartered in CITY,
STATE. (It should be noted, for purposes of this PLR request, Taxpayer
represents that it is not unitary with COMPANY2).
COMPANY2 generated operational losses during each tax period in which
Taxpayer owned its limited partner interest in COMPANY2. Taxpayer treated the
losses reported on the federal K-1 it received from COMPANY2 as “business
income or loss included from non-unitary partnerships” and removed these
losses from its Illinois business income before apportionment on its Form IL1120. Taxpayer allocated the losses from COMPANY2 to STATE and STATE,
the two states where it received state K-1s from COMPANY2. Based on
COMPANY2’s representations to Taxpayer that COMPANY2 did not have nexus
in Illinois from MONTH YEAR to MONTH YEAR. COMPANY2 did not provide an
Illinois K-1-P to Taxpayer.
In MONTH YEAR, Taxpayer sold its entire limited partnership interest in
COMPANY2 for a gain of approximately $$$ million. On its YEAR federal Form
1120, Taxpayer treated the sale of the partnership interest as a long-term capital
gain computed on Schedule D. For the short period prior to the sale, Taxpayer
received a federal K-1 from COMPANY2 and included this income as ordinary
income for federal income tax purposes.
Requested Rulings

1. For purposes of Taxpayer’s YEAR Illinois corporation income and
   replacement tax return, if Taxpayer does not have a unitary relationship with
   COMPANY2, and COMPANY2 did not have nexus in Illinois from MONTH
   YEAR to MONTH YEAR, would the gain on the sale of Taxpayer’s nonunitary partnership interest in COMPANY2 be treated as allocable income
   sourced to Taxpayer’s commercial domicile outside Illinois?
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Analysis
For purposes of the corporation income and replacement tax, Illinois classifies
income as business income or nonbusiness income. Business income, as
defined under 35 ILCS 5/1501(a)(1), is:
“…all income that may be treated as apportionable business income under
the Constitution of the United States. Business income is net of the
deductions allocable thereto. Such term does not include compensation or
the deductions allocable thereto. For each taxable year beginning on or
after January 1, 2003, a taxpayer may elect to treat all income other than
compensation as business income. This election shall be made in
accordance with rules adopted by the Department and, once made, shall
be irrevocable.”
Business income of persons other than residents is apportioned in accordance
with the rules in 35 ILCS 5/304.
Nonbusiness income, defined under 35 ILCS 5/1501(a)(13), means all income
other than business income or compensation. Nonbusiness income is allocated
in accordance with the allocation rules in 35 ILCS 5/303.
Based on the representations that Taxpayer held a non-unitary partnership
interest in COMPANY2, and COMPANY2 did not have nexus in Illinois from
MONTH YEAR to MONTH YEAR, the allocation rules in 35 ILCS 5/303 should
apply to allocate the capital gain on Taxpayer’s sale of its limited partnership
interest in COMPANY2.
Since the sale of the non-unitary partnership interest is treated as a capital gain
for federal income tax purposes, 35 ILCS 5/303(b), which governs the allocation
of capital gains and losses, is the appropriate provision to be used to allocate
Taxpayer’s capital gain. 35 ILCS 5/303(b) creates allocation rules for three
categories of nonbusiness capital gains, including: (1) gains from the sale or
exchange or real property; (2) gains from the sale or exchange of tangible
personal property; or (3) gains from the sale or exchange of intangible personal
property. As a partnership interest is intangible personal property, Taxpayer’s
sale of its interest in COMPANY2 qualifies as the sale of intangible personal
property.
With respect to allocating the capital gain, 35 ILCS 5/303(b)(3) requires that
capital gains and losses from sales or exchanges of intangible personal property
be allocated to the location of the taxpayer’s commercial domicile at the time of
such sale or exchange. 35 ILCS 5/1501(a)(2) defines the term “commercial
domicile” to mean the principal place from which the trade or business of the
taxpayer is directed or managed. Taxpayer’s commercial domicile is in CITY,

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STATE, and on this basis, the capital gain from the sale of Taxpayer’s limited
partnership interest should be allocated to STATE.
Conclusion
Based on the representations that Taxpayer held a non-unitary partnership
interest in COMPANY2, and COMPANY2 did not have nexus in Illinois from
MONTH YEAR to MONTH YEAR, the gain on the sale of Taxpayer’s non-unitary
partnership interest in COMPANY2 in MONTH YEAR should be treated as
allocable income under 35 ILCS 5/303 and sourced to Taxpayer’s commercial
domicile in STATE.
We respectfully request a private letter ruling from the Department regarding this
matter. Should you disagree with this opinion, please contact me to discuss this
opinion prior to issuing a ruling. If you have any further questions or require any
additional information, please contact me at (###) ###-####.
RULING
Section 1501(a)(1) of the Illinois Income Tax Act (“IITA”, 35 ILCS 5/1501) defines
“business income” as follows:
The term “business income” means all income that may be treated as
apportionable business income under the Constitution of the United States.
Business income is net of the deductions allocable thereto. Such term does not
include compensation or the deductions allocable thereto. For each taxable year
beginning on or after January 1, 2003, a taxpayer may elect to treat all income
other than compensation as business income. This election shall be made in
accordance with rules adopted by the Department and, once made, shall be
irrevocable.
Business income is explained in greater detail in the Illinois Administrative Code,
including how the definition has evolved over the years. A person’s income is business
income unless clearly classifiable as nonbusiness income. 86 Ill. Adm. Code
100.3010(a)(3)(C).
Section 1501(a)(13) of the IITA defines “nonbusiness income” as follows:
The term “nonbusiness income” means all income other than business income or
compensation.
Section 1501(a)(27) of the IITA defines “unitary business group” in pertinent part as
follows:
The term “unitary business group” means a group of persons related through
common ownership whose business activities are integrated with, dependent
upon and contribute to each other.
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Section 301(c)(1) of the IITA states that any item of income or deduction which was
taken into account in the computation of base income for the taxable year by any
person other than a resident and which is referred to in Section 302, 303 or 304
(relating to compensation, nonbusiness income and business income, respectively)
shall be allocated to this State only to the extent provided by such section.
Section 303 of the IITA governs the allocation of nonbusiness income. Section 303(a)
provides:
Any item of capital gain or loss, and any item of income from rents or royalties
from real or tangible personal property, interest, dividends, and patent or
copyright royalties, and prizes awarded under the Illinois Lottery Law, and, for
taxable years ending on or after December 31, 2019, wagering and gambling
winnings from Illinois sources as set forth in subsection (e-1) of this Section, and,
for taxable years ending on or after December 31, 2021, sports wagering and
winnings from Illinois sources as set forth in subsection (e-2) of this Section, to
the extent such item constitutes nonbusiness income, together with any item of
deduction directly allocable thereto, shall be allocated by any person other than a
resident as provided in this Section.
Section 303(b) of the IITA outlines when capital gains and losses are allocable to this
State. For real property, capital gains and losses are allocable to this State if the
property is located in this State (35 ILCS 5/303(b)(1)). Capital gains and losses from
sales or exchanges of tangible personal property are allocable to this State if, at the
time of the sale or exchange, the property had its situs in this State or the taxpayer had
its commercial domicile in this State and was not taxable in the state in which the
property had its situs (35 ILCS 5/303(b)(2)). Capital gains and losses from sales or
exchanges of intangible personal property are allocable to this State if the taxpayer had
its commercial domicile in this State at the time of the sale or exchange (35 ILCS
5/303(b)(3)).
Section 1501(a)(2) of the IITA defines “commercial domicile” as follows:
The term “commercial domicile” means the principal place from which the trade
or business of the taxpayer is directed or managed.
Section 304 of the IITA governs the allocation and apportionment of business income of
persons other than residents. In general, pursuant to Section 304(a), the business
income of a person other than a resident shall be allocated to this State if such a
person’s business income is derived solely from this State. For tax years ending on or
after December 31, 1998, Section 304(h) of the IITA provides if a person other than a
resident derives business income from this State and one or more other states, then the
apportionment factor shall be equal to the sales factor.

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When a partner and partnership meet the criteria of being engaged in a unitary
business, Section 304(e) requires that combined apportionment be utilized, as stated
below:
Where 2 or more persons are engaged in a unitary business as described in
subsection (a)(27) of Section 1501, a part of which is conducted in this State by
one or more members of the group, the business income attributable to this State
by any such member or members shall be apportioned by means of the
combined apportionment method.
Section 305 of the IITA governs the allocation of partnership income by partnerships
and partners other than residents. In general, the income generated by a partnership is
to be allocated to Illinois pursuant to Section 305(a):
The respective shares of partners other than residents in so much of the
business income of the partnership as is allocated or apportioned to this State in
the possession of the partnership shall be taken into account by such partners
pro rata in accordance with their respective distributive shares of such
partnership income for the partnership's taxable year and allocated to this State.
The allocation of partnership nonbusiness income by partners other than residents is
governed by Section 305(b):
The respective shares of partners other than residents in the items of partnership
income and deduction not taken into account in computing the business income
of a partnership shall be taken into account by such partners pro rata in
accordance with their respective distributive shares of such partnership income
for the partnership's taxable year, and allocated as if such items had been paid,
incurred or accrued directly to such partners in their separate capacities.
86 Ill. Adm. Code Section 100.3380(d)(1) distinguishes the treatment of a partner that is
unitary versus non-unitary with the partnership:
IITA Section 304(e) provides that whenever 2 or more persons are engaged in a
unitary business as described in IITA Section 1501(a)(27), a part of which is
conducted in this State by one or more members of the group, the business
income attributable to this State by any member or members shall be
apportioned by means of the combined apportionment method. Because
partnerships may be members of a unitary business group within the meaning of
IITA Section 1501(a)(27), this provision requires a partnership to use combined
apportionment when it is engaged in a unitary business with one or more of its
partners. However, partners who are not engaged in a unitary business with the
partnership are required to include their shares of the partnership's business
income apportioned to Illinois in their Illinois net incomes under IITA Section
305(a), and those partners’ business activities in Illinois would not be
represented fairly by their shares of partnership income computed by combining
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the business income and apportionment factors of the partnership with the
business income and apportionment factors of its unitary partners.
The gain on the sale of a partnership interest must be classified as either business
income or nonbusiness income. If the gain is business income, nonresidents must
include the gain in income apportioned under Section 304 of the IITA. Business income
of the partnership flows through to nonresident partners as business income in
accordance with Section 305(a) of the IITA. If the gain is nonbusiness income,
nonresidents must include the gain in income allocated under Section 303 of the IITA.
Capital gains on sales of intangible assets are allocated to the state of commercial
domicile under Section 303(b)(3) of the IITA. Nonbusiness income of a partnership is
taxed to the partner or shareholder as if that partner or shareholder had received the
income directly, rather than through the entity, as provided in Section 305(b) of the IITA.
You have represented that you are not in a unitary business group with COMPANY2
and COMPANY2 did not have nexus in Illinois from MONTH YEAR to MONTH YEAR.
You also represented taxpayer’s commercial domicile is in CITY, STATE. Further, you
represented the losses shown on the federal K-1 you received from COMPANY2 were
reported as “business income or loss included from non-unitary partnerships” and
removed those losses from your Illinois business income before apportionment on your
Form IL-1120.
If the gain on the sale of the partnership interest is not business income as defined in
IITA Section 1501(a)(1), then it is nonbusiness income pursuant to Section 1501(a)(13).
Assuming, arguendo, that the gain on the sale of the partnership interest is classified as
nonbusiness income, then the capital gain would not fall under the provisions of IITA
Section 304, but rather Section 303. The sale of ownership interest in a non-unitary
partnership is not pass-through income from said partnership and is not subject to the
provisions of pass-through income. Accordingly, the gain on the sale of the partnership
interest would be treated as allocable income under IITA Section 303(b) and sourced to
the Taxpayer’s commercial domicile.
As stated above, this is a GIL which 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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