When a company sells its entire business division, is the goodwill gain apportioned to Illinois, or can the company get alternative apportionment instead?

Plain-English summary

A large, multi-segment energy and fuel-distribution corporation ("COMPANY1") sold its entire company-owned and operated retail convenience-store and gas-station business segment (branded "COMPANY2" in the redacted letter), covering locations both in Illinois and nationwide, to a third-party buyer. A large share of the resulting gain was attributable to goodwill: the retail brand value and a highly successful customer-loyalty program, both built and managed almost entirely at the retail segment's headquarters outside Illinois.

COMPANY1 asked the Illinois Department of Revenue (IDOR) to confirm that, under the standard single-sales-factor apportionment formula, the goodwill gain would be sourced outside Illinois (either to the buyer's out-of-state commercial domicile, if COMPANY1 counted as a "dealer" in intangibles under IRC Section 475, or under the income-producing-activity test if it did not). If IDOR disagreed, COMPANY1 asked in the alternative for alternative apportionment under 35 ILCS 5/304(f) and 86 Ill. Adm. Code 100.3390 — specifically, separate accounting that would carve out the portion of the goodwill attributable to its out-of-state headquarters, arguing that otherwise the standard formula would "grossly distort" and overstate the share of the gain attributed to Illinois.

IDOR denied the request, but on a different basis than either side had briefed. The Department pointed to 86 Ill. Adm. Code 100.3380(c)(2), a special rule providing that gross receipts from an "incidental or occasional sale of assets used in the regular course of the person's trade or business" must be excluded entirely from the sales factor — from both the numerator and the denominator — rather than sourced to any state at all. Two of the regulation's listed rationales applied directly here: subsection (C), because goodwill/customer-relationship gains do not reflect the market for the taxpayer's ordinary business income, and subsection (D), because including proceeds from a sale tied to a withdrawal from a state's market would inflate apportionment to that state precisely as the taxpayer's presence there shrinks.

Because the sale was "the disposition of [COMPANY1's] entire company-owned and operated retail store business segment" — a complete exit from the retail market — IDOR found this squarely an "incidental or occasional sale." It explicitly rejected COMPANY1's argument that its own history of buying and selling businesses and licensing trademarks made this something other than "occasional." Since the exclusion rule controls, the entire gain (goodwill included) simply comes out of the sales factor — it isn't apportioned by any formula, standard or alternative — so there was nothing left for alternative apportionment to correct. IDOR cited its own prior guidance applying the same exclusion rule to comparable business-sale scenarios (IT 21-0002-GIL and IT 18-0003-GIL, both GILs, and IT 13-0001-PLR, a private letter ruling). The Department also expressly declined to decide the separate question of whether COMPANY1 qualified as a "dealer" in goodwill/intangibles under IRC Section 475 — a classification that would trigger a different, customer-location-based sourcing rule — leaving that issue open.

What this means for you

Companies selling a business division or segment

If you are selling an entire line of business, store chain, or segment — not just an isolated asset — expect the Department to look first at whether the "incidental or occasional sale" exclusion in 86 Ill. Adm. Code 100.3380(c)(2) applies before it even reaches questions of how goodwill should be sourced. If it applies, the entire gain (including goodwill) drops out of both the numerator and denominator of the sales factor rather than being apportioned to Illinois or anywhere else. Arguing that you regularly buy and sell businesses or license trademarks will not necessarily convert a sale of an entire segment into a non-"occasional" sale — IDOR rejected that argument here. If the exclusion applies, alternative apportionment isn't available (or needed), because there's no factor result left to fix.

Accountants and tax professionals handling apportionment on M&A gains

Before analyzing goodwill sourcing (commercial domicile, income-producing activity, or dealer status under IRC Section 475) or building a case for alternative apportionment under 35 ILCS 5/304(f) and 86 Ill. Adm. Code 100.3390, check whether the transaction is a divestiture of an entire business segment that could instead be excluded outright under the occasional-sale rule in 86 Ill. Adm. Code 100.3380(c)(2), particularly subsections (C) (goodwill/customer-relationship gains) and (D) (sales tied to a market withdrawal). IDOR treated this as a threshold question that mooted the taxpayer's alternative-apportionment petition entirely. Note also that IDOR left the "dealer" classification question open here — it did not rule on whether the taxpayer was a dealer in goodwill under IRC Section 475, since the exclusion rule made that question unnecessary to resolve in this letter.

Common questions

Q: Did Illinois rule on whether the goodwill gain should be sourced to Illinois or to the buyer's home state?
A: No. The Department never reached that question. It resolved the case entirely on the separate "incidental or occasional sale" exclusion rule in 86 Ill. Adm. Code 100.3380(c)(2), which removes the gain from the sales factor altogether rather than sourcing it anywhere.

Q: Why was the alternative-apportionment request denied?
A: Because there was nothing left to apportion. Once IDOR determined the entire gain (including goodwill) must be excluded from both the numerator and denominator of the sales factor as an occasional sale, there was no apportionment result — standard or alternative — left to correct.

Q: Did the company's history of buying and selling other businesses make this sale "regular" rather than "occasional"?
A: The taxpayer argued that, but IDOR rejected it. Because the transaction represented the sale of the taxpayer's entire company-owned and operated retail business segment — a complete withdrawal from that market — the Department found it was still an incidental or occasional sale, regardless of the taxpayer's other acquisition and disposition activity.

Q: Did IDOR decide whether the company was a "dealer" in goodwill under IRC Section 475?
A: No. The Department explicitly stated this GIL makes no determination on that question, since the occasional-sale exclusion rule made it unnecessary to resolve for purposes of this letter.

Q: Is this ruling binding on Illinois for other taxpayers?
A: No. It is a General Information Letter (GIL), issued under 2 Ill. Adm. Code 1200.100(b) and (c). A GIL is not a statement of Department policy, is not binding on the Department, and directs taxpayers to relevant regulations and prior guidance rather than resolving a specific dispute the way a binding Private Letter Ruling would.

Citations and references

Statutes and rules:

• 86 Ill. Adm. Code 100.3380(c)(2) (exclusion of incidental or occasional asset sales from the sales factor, including subparts (A)-(D) listing the rationales)
• 86 Ill. Adm. Code 100.3380(c)(2)(C) (goodwill/customer-relationship gains do not reflect the market for ordinary business income)
• 86 Ill. Adm. Code 100.3380(c)(2)(D) (sales tied to a market withdrawal would inflate apportionment to that state)
• 35 ILCS 5/304(f) (alternative apportionment petitions)
• 86 Ill. Adm. Code 100.3390 (alternative apportionment procedure; "grossly distorted result" standard)
• 2 Ill. Adm. Code 1200.100(b) and (c) (PLR vs. GIL distinction)

Prior Department guidance cited:

• IT 21-0002-GIL (applying the same occasional-sale exclusion to a similar business-sale scenario)
• IT 18-0003-GIL (applying the exclusion rule where a sale reflected withdrawal from a state's market)
• IT 13-0001-PLR (a private letter ruling applying the same principle)

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/it22-0011-gil.pdf

Original ruling text

IT-22-0011-GIL 09/13/2022 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 generate a gain in goodwill are excluded from the
sales factor pursuant to 86 Ill. Adm. Code Section 100.3380(c)(2). (This is
a GIL.)
September 13, 2022
NAME/TAXPAYER REPRESENTATIVE/
Re:

Petition for Alternative Apportionment
COMPANY 1
FEIN: ##-#######
Tax Year Ended: 12/31/20##

Dear XXX:
This is in response to your letter dated June 15, 2022, in which you request a
Private Letter Ruling on behalf of COMPANY1 to use an alternative method of
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 on 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 on the Department. See 2 Ill. Adm. Code Section
1200.100(b) and (c). For the reasons discussed below, your request to use an
alternative method of apportionment cannot be granted based on the information
provided.
Your letter states as follows:
On behalf of our client, COMPANY1 (“COMPANY1” and/or “Company”
and/or “Taxpayer”), we respectfully request a letter ruling pursuant to 2 Ill.
Admin. Code § 1200.110 confirming our understanding of how Illinois
standard statutory apportionment provisions apply to receipts from gain on
the sale of goodwill.
If the Illinois Department of Revenue (“Department”) does not agree with
our understanding, we request permission to use an alternative
apportionment formula pursuant to 35 Ill. Comp. Stat. § 5/304(f) and 86 Ill.
Admin. Code § 100.3390 in connection with its taxable year ended
December 31, 20##.

COMPANY/ NAME
Page 2
September 13, 2022
Based on the information below, and any and all evidence required by the
Department, the statutory formula under 35 Ill. Comp. Stat. § 5/304(a)
through (e) does not fairly represent the extent of Taxpayer’s market,
business activities, or income in Illinois and alternative apportionment, as
proposed by the Taxpayer, is justified under Illinois law and the U.S.
Constitution.
Your submission includes the following additional information pertinent to your
petition for alternative apportionment:
Table of Contents:
I.
Relevant Facts
A. Company History
B. Retail Operations and the COMPANY2 Brand
C. COMPANY2 Customer Loyalty Program
D. COMPANY2 Sale
E. COMPANY1’s Illinois Operations
II.
Law and Analysis
A. Application of Illinois Standard Apportionment Formula
B. Alternatively, Request for Alternative Apportionment

1. Illinois Statutory Criteria for Alternative Apportionment is Met
   a. Standard Formula Does Not Fairly Represent the Illinois
   Market
   b. Standard Formula Does Not Fairly Represent Illinois
   Business Activity
   c. Standard Formula Does Not Result in Equitable
   Apportionment
2. U.S. Constitutional Criteria for Alternative Apportionment is
   Met
3. Proposed Alternative Apportionment: Separate Accounting
   III.
   Conclusion
   I. Relevant Facts
   A. Company History
   COMPANY1 has over ### years of history in the PRODUCT1 and
   PRODUCT2 industry, and is the largest independent PRODUCT3
   INDUSTRY1, INDUSTRY2, and INDUSTRY3 in the United States.
   COMPANY1 operates the nation’s largest INDUSTRY1 system with
   approximately AMOUNT1 per day of PRODUCT1 INDUSTRY1 capacity.
   COMPANY1 is also positioned as one of the largest wholesale suppliers
   of PRODUCT2 and ITEM1 to resellers in the United States. COMPANY1
   distributes its INDUSTRY1 products through one of the largest terminal
   operations in the United States and one of the largest private domestic

COMPANY/ NAME
Page 3
September 13, 2022
fleets of inland PRODUCT3 barges. In addition, COMPANY1’s integrated
INDUSTRY3 energy asset network links producers of PRODUCT4 and
PRODUCT4 liquids from some of the largest supply basins in the United
States to domestic and international markets.
Historically, COMPANY1’s operations consisted of three operating
segments: (l) INDUSTRY1 & INDUSTRY2; (2) INDUSTRY3; and (3)
Retail. Each of these segments is organized and managed based upon
the nature of the products and services it offers.
▪

INDUSTRY1 & INDUSTRY2. This segment PRODUCES
PRODUCT1 and other PRODUCT5 at FACILITIES in the Gulf
Coast, Mid-Continent, and West Coast regions of the United States.
It also purchases INVENTORY and PRODUCT6 for resale and
distributes INVENTORY through transportation, storage,
distribution, and marketing services provided largely by the
INDUSTRY3 segment. This segment sells INVENTORY to
wholesale marketing customers domestically and internationally, to
buyers on the spot market, to independent entrepreneurs who
operate primarily COMPANY1’s branded outlets, through long-term
supply contracts with independently owned PRODUCT2 and
CUSTOMER1, including locations under the PRODUCT7 brand.

▪

INDUSTRY3. This segment transports, stores, distributes, and
markets PRODUCT1 and INVENTORY principally for the
INDUSTRY1 & INDUSTRY2 segment via INDUSTRY1 logistics
assets, pipelines, terminals, towboats, and barges; gathers,
processes, and transports PRODUCT4; and gathers, transports,
fractionates, stores, and markets PRODUCT4 liquids.

▪

Retail. This segment sells transportation PRODUCT8s and
convenience products in the retail market across the United States
through company-owned and operated CUSTOMERS1, primarily
under the COMPANY2 brand, and long-term PRODUCT8 supply
contracts with independently owned and operated PRODUCT8
locations mainly under the PRODUCT7 brand.

B. Retail Operations and the COMPANY2 Brand
Vital to this petition are COMPANY2’s company-owned and operated retail
PRODUCT2 and PRODUCT8 locations (collectively referred to herein as
“COMPANY2”). COMPANY2 commenced operations in 19## as
COMPANY2 ## and was acquired by COMPANY1 in 19##. COMPANY2
rebranded to what is the current COMPANY2 in 19##. From inception,
COMPANY1 quickly expanded the COMPANY2 retail store concept;

COMPANY/ NAME
Page 4
September 13, 2022
growth occurred through a series of acquisitions of smaller regional
PRODUCT2 FRANCHISES. Once acquired, these regional chains would
be converted and operated under the COMPANY2 brand under a unified
retail strategy.
At the time of its sale, COMPANY2 grew to become the second largest
chain of company-owned and operated retail PRODUCT2 and
PRODUCT8 in the United States, with approximately AMOUNT2
PRODUCT8. Taken as a whole, this growth and COMPANY2’s execution
of its strategy resulted in the value realized at the time of its sale.
COMPANY2’s strategic focus over the years included: (1) integrating
acquisitions, (2) building new store locations, (3) remodeling and
rebuilding existing locations in core markets, (4) building out its network of
commercial PRODUCT10 PRODUCT9ing lane locations, and (5)
significant marketing and customer loyalty programs, including major
marketing sponsorships such as COMPANY3, Official PRODUCT9
Supplier for COMPANY4, and COMPANY5. COMPANY2’s commercial
domicile is STATE1; its headquarters is located in CITY1, STATE1, and
limited organizational support is provided from COMPANY1 from its
commercial domicile in CITY2, STATE1. Additionally, all strategic
decisions, management, and value creation of the COMPANY2 brand,
specifically the goodwill of the company sold in the sale, was generated
and managed in STATE1.
C. COMPANY2 Customer Loyalty Program
In 20##, COMPANY2 founded PRODUCT11, a loyalty program that has
been highly successful. By 20##, PRODUCT11 averaged AMOUNT3
active members. This program is a key driver of the value of the
COMPANY2 brand. Historically, the rewards program provided
COMPANY1 with a unique competitive advantage and opportunity to
increase its customer base at existing and new COMPANY2 locations.
COMPANY2’s ability to capture and analyze member-specific
transactional data enables the Company to offer PRODUCT11 members
discounts and promotions specific to their buying behavior. COMPANY1
considers the PRODUCT11 program as a key reason why customers
choose COMPANY2 over competitors and is a significant driver of the
value of the COMPANY2 brand. PRODUCT11 membership growth is
illustrated in the following Table.
TABLE REDACTED
The PRODUCT11 Program was created, developed, and managed in
CITY1, STATE1.

COMPANY/ NAME
Page 5
September 13, 2022
D. COMPANY2 Sale
On DATE1, COMPANY1 entered into a definitive agreement to sell
COMPANY2 to COMPANY61 for approximately AMOUNT4. The sale
closed on DATE2. The assets sold represent all of COMPANY1’s retail
store operations which include COMPANY2. In total, COMPANY1
disposed of approximately AMOUNT2 retail locations in Illinois and
throughout the country. The sale to COMPANY6 reflects the disposition of
COMPANY1’s entire company-owned and operated retail store business
segment.
As currently estimated by the Taxpayer, the gain on the sale is projected
to be AMOUNT5; of this gain, approximately AMOUNT6 is associated with
the sale of goodwill.2
E. COMPANY1’s Illinois Operations
COMPANY1 has filed an Illinois Corporation Income and Replacement
Tax Return (an “IL Return”) for over ## years. Historically, COMPANY1’s
business activities in Illinois have included:
•
•

•
•
•

Operation of an PRODUCT1 FACILITY within Illinois;
Operation of INDUSTRY3 property located in Illinois by
COMPANY8, a publicly traded partnership of which COMPANY1
and its subsidiaries are material unitholders earning Illinois receipts
from operation of the INDUSTRY3 operations;
Operation of INDUSTRY1 and INDUSTRY2 segment in Illinois,
resulting in Illinois receipts;
Operation of retail property located in Illinois, owned and operated
by COMPANY2, resulting in Illinois receipts;
Receipts from its retail operations, through COMPANY2 stores.

Following the Sale, COMPANY1’s retail operations, including COMPANY2
and the other retail entities sold will no longer contribute to COMPANY1’s
Illinois apportionment factor. The sale completely divested COMPANY1 of
its retail operations.

1

COMPANY2 was sold to COMPANY7, which is a wholly owned subsidiary of COMPANY6,
Inc.
2
Information based on the purchase price allocation of the sale. Details available on request.

COMPANY/ NAME
Page 6
September 13, 2022
II. Law and Analysis
In Part A, below, we request a letter ruling confirming how Illinois standard
apportionment provisions apply to include receipts from the gain on the
sale of COMPANY2 goodwill in the Illinois sales factor and to source those
receipts largely outside of Illinois. If the Department does not agree, then
in Part B, below, we request alternative apportionment. As detailed in Part
B, failure to adopt the proposed reasonable alternative formula would
result in taxation of the gain in a manner that does not fairly reflect the
market for COMPANY1’s goods, services, or other sources of income in
Illinois under the Illinois statute and is inconsistent with the fair
apportionment requirement of the Commerce Clause.3 Additionally, in Part
B, we propose a reasonable alternative formula to rectify the statutory and
constitutional distortion.
A. Application of Illinois Standard Apportionment Formula
Illinois statutes state the business income of a non-resident taxpayer is
apportioned to Illinois, for a taxpayer that derives income from Illinois and
other states, using an apportionment formula.4 For tax years ending on or
after December 31, 2000, the apportionment formula is composed of a
single sales factor.5 Illinois defines the sales factor as follows: the
numerator is the total sales of the taxpayer in Illinois during the taxable
year and the denominator is the total sales of the taxpayer everywhere
during the taxable year.6 Illinois regulations define the term “sales” for
apportionment purposes as “all gross receipts derived by the person from
transactions and activity in the regular course of his or her trade or
business.”7
If a taxpayer’s sales are not specifically governed by paragraphs (B), (B1), (B-2), (B-5), or (B-7) of 35 Ill. Comp. Stat. § 5/304(a)(3), a taxpayer
sources income from intangible property based on 35 Ill. Comp. Stat. §
5/304(a)(3)(C-5)(iii). 35 Ill. Comp. Stat. § 5/304(a)(3)(C-5)(iii)(a) and (b)
source interest, net gains, and other items of income from intangible
personal property by customer location or income producing activity,
depending on whether the taxpayer is a dealer in the item of intangible
personal property.8 If the taxpayer is classified as a dealer under I.R.C. §
475, the income or gain received from a customer is sourced to Illinois if
3

Article I, Section 8, Clause 3 of the United States Constitution
35 Ill. Comp. Stat. § 5/304(a); 35 Ill. Comp. Stat. § 5/304(h)(3).
5
35 Ill. Comp. Stat. § 5/304(h)(3).
6
35 Ill. Comp. Stat. § 5/304(a)(3)(A).
7
86 Ill. Admin. Code § 100.3370(a)(l). Pursuant to 86 Ill. Admin. Code § 100.3380(c)(5), in
COMPANY1’s case, the receipts would be included at net rather than gross.
8
35 Ill. Comp. Stat. § 5/304(a)(3)(C-5)(iii).
4

COMPANY/ NAME
Page 7
September 13, 2022
the customer is commercially domiciled in the state.9 In all other cases,
other items of income from intangible personal property are sourced to
Illinois if “the income-producing activity of the taxpayer is performed in this
State or, if the income-producing activity of the taxpayer is performed both
within and without this State, if a greater proportion of the incomeproducing activity of the taxpayer is performed within this State than in any
other state, based on performance costs.”10
The Department provided additional guidance in General Information
Letter IT 08-0028-GIL which states, “The purpose of the Section is not to
create a customer-based sourcing rule only for dealers in securities ...
Taxpayers in the business of selling a certain intangible item assign gross
receipts based on the location of their customers, while taxpayer’s not in
the business of selling such item assign gross receipts based on the
income-producing activity.”11
COMPANY1’s sale of goodwill is considered an “other item of income from
intangible property.” COMPANY1 regularly buys or sells interests in a
business, which can include goodwill. Over the last # years, COMPANY1
has acquired or sold many businesses, including but not limited to:
COMPANY9 in 20## (AMOUNT7), COMPANY10 in 20## (AMOUNT8),
COMPANY11 in 20## (AMOUNT9), and COMPANY2 in 2021
(AMOUNT4). While COMPANY1 does not separately charge as part of its
franchising agreements, COMPANY1 also continuously licenses
trademarks and tradenames, which reflect goodwill. To the extent this
activity classifies COMPANY1 as a dealer, the sale of COMPANY2
goodwill is sourced to the commercial domicile of the customer for that
sale, COMPANY6. The customer’s, COMPANY6’s, commercial domicile is
outside of Illinois; specifically STATE2.12
If the state determines COMPANY1 is not a dealer, other items of income
from intangible personal property are sourced to the state based on the
income-producing activity.13 In this instance, the activity giving rise to the
intangible gain was the sale of an intangible asset--goodwill. The incomeproducing activity was performed outside of Illinois, where the sale took
place.14 When looking at the transaction at issue, the negotiations,
discussions, the signing of documents, the transfer of ownership, all that
could be considered the income-producing activity associated with the
sale of COMPANY2 goodwill occurred outside of Illinois. This income9

35 Ill. Comp. Stat. § 5/304(a)(3)(C-5)(iii)(a).
35 Ill. Comp. Stat. § 5/304(a)(3)(C-5)(iii)(b).
11
IL General Information Letter IT 08-0028-GIL.
12
COMPANY6 Corporate, About, available at ADDRESS (last accessed on June 14, 2022).
13
35 Ill. Comp. Stat. § 5/304(a)(3)(C-5)(iii)(b).
14
IL General Information Letter IT 08-0028-GIL.
10

COMPANY/ NAME
Page 8
September 13, 2022
producing activity is readily identifiable and should be included in the
factor.15 Furthermore, even if COMPANY1’s buying and selling activity is
not sufficient to make COMPANY1 a dealer, given the nature of the
transactions (the sale of an entire business or line of business)
COMPANY1’s activities are sufficient so that this should not be considered
an occasional sale.16 This is especially true if one were to take into
account that COMPANY1 regularly receives receipts from goodwill
through its trademarks and tradenames, making it an ordinary source of
business income. In accordance with Illinois statute, a greater portion of
the income-producing activity was performed outside of Illinois. Therefore,
the sale of goodwill is not sourced to the Illinois numerator.
COMPANY1 requests the Department confirm that the sale of
COMPANY2 goodwill should be sourced based on customer location or
income-producing activity, and under either of those sourcing rules, would
be sourced outside of Illinois for purposes of the Illinois numerator, but
included in the everywhere sales for purposes of the denominator. If the
Department disagrees with our conclusion, we request alternative
apportionment for the reasons laid out below.
B. Alternatively, Request for Alternative Apportionment
If the Department does not agree with COMPANY1’s conclusion regarding
application of the standard apportionment formula to COMPANY2 goodwill
and would instead exclude the receipts from the sale of the goodwill, then
COMPANY1 petitions for alternative apportionment.

1. Illinois Statutory Criteria for Alternative Apportionment is Met
   86 Ill. Admin. Code § 100.3380(c)(2) states that if the determination of
   sales does not “clearly reflect the market for the taxpayer’s goods,
   services, or other sources of income in Illinois (for taxable years ending on
   or after December 31, 2008), the taxpayer may request the use of an
   alternative method of apportionment.”17
   35 Ill. Comp. Stat. § 5/304(f) provides the alternative apportionment
   methodologies.
   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
   15

86 Ill. Admin. Code § 100.3380(c)(3).
86 Ill. Admin. Code § 100.3380(c)(2).
17
86 Ill. Admin. Code § 100.3380(a)(1).
16

COMPANY/ NAME
Page 9
September 13, 2022
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.
86 Ill. Admin. Code § 100.3390 provides, for tax years starting on January
1, 2009 and later:
A departure from the required apportionment method is allowed
only when those methods do not accurately and fairly reflect [the
taxpayer’s] market in Illinois. 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 of 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 market for
the taxpayer’s goods, services or other sources of business income
in this State. 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 the market
for the taxpayer’s goods, services or other sources of business
income in this State.18
a. The Standard Formula Does Not Fairly Represent the Market for
COMPANY1’s Sale of Goodwill
If the receipts from COMPANY1’s sale of COMPANY2 goodwill asset are
not included in the sales factor and sourced significantly outside of Illinois,
18

86 Ill. Admin. Code § 100.3390.

COMPANY/ NAME
Page 10
September 13, 2022
the state statutory apportionment formula will not “fairly represent the
market” for the goodwill asset.19 The market for the goodwill asset is
where the customer for that asset, COMPANY6, is located. COMPANY6
has retail locations within Illinois but is domiciled outside of Illinois;
specifically, in STATE2. The application of the standard formula does not
reflect that market if the goodwill receipts are excluded from the sales
factor. The exclusion of goodwill from the sales factor would lead to
distortion. In the sale of assets other than goodwill, the standard
apportionment formula sources the income from the sale of these assets
to the location of the market. For example, the sale of retail items in a
convenience store located in Illinois would be sourced to Illinois because
that is where the market is. In this instance, the sale of the goodwill asset
is unfairly entirely excluded from the sales factor resulting in
COMPANY1’s apportionment factor overstating its market in Illinois. The
exclusion of goodwill from the factor entirely does not fairly represent
COMPANY1’s market for that goodwill.
86 Ill. Admin. Code § 100.3380(c)(2)(C) states that “goodwill ...
represent[s] the value of customer relationships.”20 The “value of
customer relationships” exists at the location of the business activities that
developed and maintained those relationships. This location, for
COMPANY1’s sale of its goodwill asset, is in STATE1. Almost all business
activities associated with the development and maintenance of the
goodwill were conducted in STATE1. Below is an activity map created
based on the information gathered during the economic valuation. Based
on this information, the most significant portion of the high value activities
were performed in STATE1.
TABLE REDACTED
Thus, the location of the goodwill asset, like the location of the market for
the goodwill asset, is outside of Illinois. While the location of the asset is
not the same thing as the location of the market for the asset, in
COMPANY1’s case, these locations are both outside of Illinois. Therefore,
either excluding the goodwill entirely or sourcing a portion of the goodwill
to Illinois does not “fairly represent the market” for the sale and
COMPANY1 is entitled to alternative apportionment.
b. Standard Formula Does Not Fairly Represent Illinois Business Activity
The Illinois statute, in prong (3) of the alternative apportionment section,
also references the need to “fairly represent the person’s business
activities ... in this state” as a rationale for “inclusion of one or more
19
20

Pursuant to 86 Ill. Admin. Code § 100.3380(c)(5), includable receipts are at net.
86 Ill. Admin. Code § 100.3380(c)(2)(C).

COMPANY/ NAME
Page 11
September 13, 2022
additional factors.”21 In this case, the standard formula also overstates the
extent to which business activity that gave rise to the income being
apportioned took place in Illinois.
As a result of the sale, COMPANY1 has undertaken an economic
valuation analysis in order to identify the locations where goodwill should
be attributed. COMPANY1 engaged TAXPAYER REPRESENTATIVE to
perform this study. TAXPAYER REPRESENTATIVE prepared a state
activity map for the COMPANY2 business based on a review of supporting
documentation and background information including transfer pricing
studies, financial data, and notes from functional interviews with
COMPANY2. The analysis identifies the states in which business activity
occurred which created and maintained the value of the COMPANY2
goodwill, and thus gave rise to the income associated with the sale of the
goodwill. The preliminary results show that up to %%% of the value of
goodwill is attributable to a single state—STATE1, using the comparable
transaction analysis. This method analyzes the economic profits
attributable to STATE1 based on market royalties for entities performing
similar functions. Based on this analysis, a portion of the goodwill should
be separately accounted for and sourced to STATE1. The remaining value
of the goodwill may then be sourced to Illinois using standard
apportionment. Without removing the amounts that are attributable to
STATE1, the standard formula application would overstate the value of the
goodwill sourced to Illinois and would not fairly represent COMPANY1’s
business activities in Illinois. An Illinois apportionment formula that reflects
all other business activity, without including the activity that created and
maintained the goodwill, results in over attribution of the goodwill income
to Illinois business activity.22
As noted above, COMPANY1 currently expects the sale to result in
approximately AMOUNT6 in gain on the goodwill. COMPANY1’s expected
total gain is AMOUNT5.23 With the goodwill representing roughly %%% of
the taxpayer’s entire gain, and the sale of COMPANY2 representing the
cessation of the company’s complete retail operations, consideration of
how the sale should be apportioned, in relation to the Taxpayer’s overall
business activities is required. The Retail business is built upon creating
intangible value through key strategies and business decisions; all of
which were made outside of Illinois. Key corporate marketing and retail
strategies such as the PRODUCT11 drove a large amount of the
intangible value created. Therefore, alternative apportionment is the
acceptable remedy to address this distortion.
21

35 Ill. Comp. Stat. § 5/304(f)(3).
This concept was accepted by the California Supreme Court in Microsoft Corp. v. Franchise Tax Bd., 39
Cal. 4th 750, 139 P.3d 1169 (2006).
23
Information based on the purchase price allocation of the sale. Details available on request.
22

COMPANY/ NAME
Page 12
September 13, 2022
While the sale of tangible stores in Illinois and the value attributable to
those locations should be sourced to and included in the Illinois tax base
and apportionment factor, the bulk of the gain on goodwill and intangibles
is directly traceable to STATE1 and the efforts taken there to grow
COMPANY1’s Retail business segment. Given the significance of the
transaction and the gain, alternate apportionment is required.

COMPANY/ NAME
Page 13
September 13, 2022
c. Standard Formula Does Not Result in Equitable Apportionment
Illinois statute under prong (4) of the alternative apportionment section,
also references the need for “equitable allocation and apportionment of
the person’s business income” as a basis for applying “any other method”
of apportionment.24 As noted above, the standard formula overstates the
business income attributable to Illinois due to a failure to reflect either the
market or the other business activity that gave rise to the income.
COMPANY1 has undertaken an economic valuation analysis that shows
the portion of goodwill that can be attributable to the various states,
including Illinois. Based on this analysis, the standard formula application
would inequitably overstate this value and does not fairly represent
COMPANY1’s business activities in Illinois. Therefore, COMPANY1 is
entitled to alternative apportionment.

2. U.S. Constitutional Criteria for Alternative Apportionment is Met
   In addressing unconstitutional taxation necessitating alternate
   apportionment, the U.S. Supreme Court has stated that:
   The facts of life do not neatly lend themselves to the niceties of
   constitutionalism; but neither does the Constitution tolerate any
   result, however distorted, just because it is the product of a
   convenient mathematical formula which, in most situations, may
   produce a tolerable product.25
   The Constitution requires that an apportionment formula be “fair,” and the
   U.S. Supreme Court has said that for a formula to be “fair,” it must be
   internally and externally consistent.26 External consistency requires “that
   the factor or factors used in the apportionment formula must actually
   reflect a reasonable sense of how income is generated.”27 The external
   consistency test looks “to the economic justification for the State’s claim
   upon the value taxed, to discover whether a State’s tax reaches beyond
   that portion of value that is fairly attributable to economic activity within the
   taxing State.”28 The economic valuation analysis indicates that the value
   associated with the goodwill was predominately generated by business
   activities performed in STATE1. That business activity must be included to
   actually reflect a reasonable sense of how COMPANY1’s income
   associated with the goodwill was generated. By eliminating the gain from
   the sales factor and sourcing only based on COMPANY1’s other factors,
   24

35 Ill. Comp. Stat. 5/304(f)(4).
Norfolk & W. Ry. Co. v. Missouri State Tax Comm., 390 U.S. 317, 327 (1968).
26
Container Corp. of America v. Franchise Tax Bd., 463 U.S. 159, 169 (1983).
27
Id.
28
Oklahoma Tax Comm. v. Jefferson Lines. Inc., 514 U.S. 175, 175 (1995).
25

COMPANY/ NAME
Page 14
September 13, 2022
the Illinois statutory formula would not reflect a reasonable sense of how
the income associated with the goodwill gain is generated.29
If the statutory formula fails the external consistency test, the taxpayer is
entitled to challenge the application of the standard formula, as applied,
and seek application of an alternative apportionment that more fairly
reflects the extent of the taxpayer’s activities within the taxing state.
Evidence may always be received and reviewed to determine whether the
state has applied a method of apportionment which, albeit fair on its face,
operates so as to reach profits which are in no just sense attributable to
transactions within its jurisdiction.30
While the U.S. Supreme Court has held that an increase in the tax base of
250% or greater is sufficient to establish distortion of a constitutional
magnitude, it has not set a bright-line rule as to what threshold level of
distortion is unconstitutional and requires alternate apportionment.31
As noted above, the sale resulted in approximately AMOUNT5 in net gain,
AMOUNT6 of which is attributable to net gain on the goodwill.
COMPANY1’s economic valuation analysis indicates that up to
approximately AMOUNT10 of the net goodwill gain is attributable to
STATE1. For the apportionment to be fairly reflective of the amount that
should be apportioned to Illinois, Illinois would apportion its share of the
remaining AMOUNT11 net goodwill gain. Failing to subtract the value
resulting from activities in STATE1, would result in distortion due to an
increase to the apportionable goodwill gain of over %%%. Even if this may
not reach the level of distortion present in Hans Rees’ Sons, it
nonetheless is grossly distortive and would not be considered a “fair
reflection” of the income which is the standard adopted by Illinois.

3. Proposed Alternative Apportionment: Separate Accounting
   As the intangible value attributable to COMPANY2 was created, managed,
   maintained, and operated from COMPANY2 and COMPANY1’s
   headquarters in STATE1, a portion of the gain attributable to goodwill and
   intangibles should be allocated to STATE1 via separate accounting. From
   its STATE1 headquarters, COMPANY2 built its COMPANY2 brand, and
   the resulting market for its goods and services through: (1) integrating
   acquisitions under the COMPANY2 brand strategy on external signage
   and internal layout; (2) building new store locations with a regional focus;
   (3) remodeling and rebuilding existing locations in core markets; (4)
   29

See, e.g., Miller Brothers Co. v. State of Maryland, 347 U.S. 340, 344-345 (1954); see also Moorman
Mfg. Co. v. Bair, 437 U.S. 267, 273 (1978).
30
Hans Rees’ Sons Inc. v. North Carolina, 283 U.S. 123 (1931).
31
Id.

COMPANY/ NAME
Page 15
September 13, 2022
building out its network of commercial PRODUCT10 PRODUCT9ing lane
locations to take advantage of demand; and (5) significant marketing and
COMPANY2 customer loyalty programs (e.g., PRODUCT11).Specifically
with respect to (5) above, a key value driver in the value of COMPANY2,
and the related entities sold in the sale, was the PRODUCT11 program.
This program was created, developed, and managed completely outside
of the state of Illinois. The decisions and logic built into the rewards
program to incentivize further purchases at COMPANY2 was all done from
locations outside of Illinois. These activities were key in developing the
market for COMPANY2’s goods and services within Illinois. As a result,
the value created through the program, specifically the goodwill sold as
part of the sale, should be attributed to the location where the program
was created, developed, and managed.
COMPANY1 conducted an economic valuation analysis related to the
value of the goodwill created in STATE1. The economic valuation analysis
shows that as much as %%% of the goodwill value is attributable to
STATE1. The value of the goodwill that the study shows is attributed to
STATE1 should be carved out of the tax base. The remaining goodwill will
be included in the apportionable tax base and divided among the
remaining states based on the standard apportionment factor.
COMPANY1 will provide a specific calculation with the apportionment data
is available, closer to the Illinois filing deadline.
If Illinois does not accept the above alternative formula, COMPANY1
proposes that Illinois simply allow the gain from the sale of goodwill to be
added back to the factor and the numerator sourced appropriately to
STATE1.
III. Conclusion
In sum, COMPANY1 respectfully requests a letter ruling pursuant to 2 Ill.
Admin. Code § 1200.110 confirming our understanding of how Illinois
standard statutory apportionment provisions apply to receipts from gain on
the sale of goodwill. If Department does not agree with our understanding,
we request permission to use an alternative apportionment formula
pursuant to 35 Ill. Comp. Stat. § 5/304(f) and 86 Ill. Admin. Code §
100.3390 in connection with its taxable year ended December 31, 20##.
Based on the information above, and any and all evidence required by the
Department, the statutory formula under 35 Ill. Comp. Stat. § 5/304(a)
through (e) does not fairly represent the extent of Taxpayer’s market,
business activities, or income in Illinois and alternative apportionment, as
proposed by the Taxpayer, is justified under Illinois law and the U.S.
Constitution. To the extent that additional information is needed or can be
provided, please contact TAXPAYER REPRESENTATIVE.

COMPANY/ NAME
Page 16
September 13, 2022
RULING
Section 304(f) of the Illinois Income Tax Act (“IITA”, 35 ILCS 5/304(f)) provides:
If the allocation and apportionment provisions of subsections (a) through
(e) and of subsection (h) do not, for taxable years ending before
December 31, 2008, fairly represent the extent of a person’s business
activity in this State, or, for taxable years ending on or after December 31,
2008, fairly represent the market for the person’s goods, services, or other
sources of business income, the person may petition for, or the Director
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.
In addition, 86 Ill. Adm. Code Section 100.3380(a)(2) provides:
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

COMPANY/ NAME
Page 17
September 13, 2022
showing that that method will not fairly represent the extent of a person’s
business activity or market in Illinois.
86 Ill. Adm. Code Section 100.3390 outlines the procedures in which a taxpayer
may petition the Department for an alternative allocation or apportionment
formula. The burden of proof for alternative allocation or apportionment petitions
is explained in Section 100.3390(c):
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).
Section 304(a) of the IITA 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. Section 304(h) of the IITA provides for taxable years ending on and after
December 31, 2000, the apportionment factor for taxpayers apportioning
business income under Section 304(a) is equal to the sales factor. Section
304(a)(3)(A) of the IITA defines the sales factor as follows:
The sales factor is a fraction, the numerator of which is the total sales of
the person in this State during the taxable year, and the denominator of
which is the total sales of the person everywhere during the taxable year.

COMPANY/ NAME
Page 18
September 13, 2022
The term “sales” is defined under Section 1501(a)(21) of the IITA to mean all
gross receipts of the taxpayer not allocated under Sections 301, 302, and 303.
For purposes of the sales factor of the apportionment formula for each trade or
business of the person, 86 Ill. Adm. Code Section 100.3370(a)(1) defines “sales”
to mean “all gross receipts derived by the person from transactions and activity in
the regular course of his or her trade or business.”
In applying IITA Section 304(a), 86 Ill. Adm. Code Section 100.3380(c)(2)
provides the following special rule:
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

COMPANY/ NAME
Page 19
September 13, 2022
D. in the case of sales of assets that are made in connection with a
partial or complete withdrawal from the market in the state in
which the assets are located, including the gross receipts from
those sales in the sales factor would increase the business
income apportioned to that state when the taxpayer’s market in
that state has decreased.
Your petition indicates that in DATE2, COMPANY1 completed the sale of
COMPANY2, which reflects the disposition of COMPANY1’s entire companyowned and operated retail store business segment. You indicate that “the sale
completely divested COMPANY1 of its retail operations.” You indicate that the
gain from such sale is AMOUNT5 and the gain on goodwill is approximately
AMOUNT6, “representing roughly %%% of the taxpayer’s entire gain.” Your
petition asserts that the failure to include in COMPANY1’s sales factor the
goodwill receipts from this sale results in an amount of income apportioned to
Illinois that does not fairly represent the market for COMPANY1’s goods,
services, or other sources of business income. Your primary basis for this
assertion is the exclusion is unfair and would lead to distortion in overstating its
market in Illinois as the gain on goodwill is traceable to STATE1. However, your
petition does not indicate the potential quantitative difference in apportionment
percentage assuming the sale receipts were to be excluded from the standard
apportionment formula, or alternatively, were to be sourced outside of Illinois for
purposes of the numerator but included in the everywhere sales of the
denominator, and whether the Department were to grant an alternative
apportionment method.
Your petition also indicates that the nature of the transaction – “the sale of an
entire business or line of business” – should not be considered an occasional
sale because “COMPANY1 regularly receives receipts from goodwill through
trademarks and tradenames, making it an ordinary source of business income.”
The purpose of 86 Ill. Adm. Code Section 100.3380(c)(2)(A) 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 of such receipts from the sales factor
thereby prevents distortion of the sales factor that would otherwise occur where
assets which are generally used to conduct a business are removed from the
business by sale to a third-party purchaser. The gross receipts from such a sale
do not reflect the market for the taxpayer’s ordinary sources of business income,
which is the income generated by the use of those assets in generating sales to
customers, as opposed to a sale of those assets to a non-customer. As
indicated above, incidental or occasional sales are not made in the market for the
taxpayer’s ordinary sources of business income.

COMPANY/ NAME
Page 20
September 13, 2022
Based on the facts you represent, 86 Ill. Adm. Code Section 100.3380(c)(2)
properly applies in this case. Your request for alternative apportionment cannot
be granted.
Your letter indicates COMPANY1’s business operating segments consist of
INDUSTRY1 and INDUSTRY2, INDUSTRY3, and retailing. Prior to the DATE2
sale, COMPANY1’s Illinois business operations included operation of an
PRODUCT1 FACILITY in Illinois, operation of INDUSTRY3 property in Illinois,
operation of INDUSTRY1 and INDUSTRY2 in Illinois, operation of retail property
in Illinois, and receipts from the retail operations. Following the sale,
COMPANY1’s retail operations will no longer contribute to COMPANY1’s Illinois
apportionment factor as the sale completely divested COMPANY1 from retail
operations. Therefore, COMPANY1’s DATE2 sale of COMPANY2 to a thirdparty purchaser is an incidental or occasional sale of assets used in the trade or
business and not a sale made in the market for COMPANY1’s goods, services,
or other ordinary sources of business income made in the regular course of
business conducted by COMPANY1. The sale of COMPANY2 is a cessation of
the company’s complete retail operations – one of COMPANY1’s three business
operating segments. Including gross receipts from the DATE2 sale in the sales
factor does not “fairly represent the extent of a person’s business activity or
market within Illinois.” Including such gross receipts in the sales factor results in
distortion for the very reasons set forth in 86 Ill. Adm. Code Section
100.3380(c)(2). Accordingly, gross receipts from the sale (including goodwill)
must be excluded from COMPANY1’s sales factor.
86 Ill. Adm. Code Section 100.3380(c)(2)(C) provides “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.”
Your letter indicates goodwill represents “roughly %%% of the taxpayer’s entire
gain” on the sale. As goodwill is an asset that appreciates in value over many
taxable years, it is presumed that any goodwill inherent in COMPANY1’s
business in Illinois was generated over multiple years as the taxpayer operated
its retail business. The increase in value of COMPANY1’s goodwill was not
realized for tax purposes until the goodwill was sold, but the value was generated
in the behavior of the business over the years in which the business was
conducted. Furthermore, the costs incurred in generating the asset goodwill,
including advertising expenses and other ordinary business expenses, were
likewise deducted over the years the business was conducted. As such, the tax
deductions attributable to the costs of generating the goodwill were apportioned
to Illinois using the apportionment factor for COMPANY1’s business in the years
the costs were incurred. Therefore, including all of the gross receipts attributable
to the sale of goodwill in the sales factor denominator does not reflect the market

COMPANY/ NAME
Page 21
September 13, 2022
for the taxpayer’s goods, services or other ordinary sources of business income
because such sourcing differs from the sales factor computed without regard to
that sale. See also IT 21-0002-GIL.
86 Ill. Adm. Code Section 100.3380(c)(2)(D) provides that where “sales of assets
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.” In this case,
COMPANY1 sold all its retail operations in Illinois and is withdrawing from the
Illinois retail market. Including the gross receipts from the DATE2 sale in the
sales factor increases the amount of income apportioned to a market
COMPANY1 is exiting. See also IT 18-0003-GIL; IT 13-0001-PLR.
As stated above, this is a GIL. 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. In addition, this GIL makes no determination on
COMPANY1’s request to be classified as a dealer in goodwill under Internal
Revenue Code Section 475, IITA 5/304(a)(3)(C-5)(iii), and 86 Ill. Adm. Code
Section 100.3370.
Sincerely,

Jennifer Uhles
Associate Counsel (Income Tax)