What does Illinois General Information Letter IT 23-0002-GIL conclude about Alternative Apportionment?

Plain-English summary

The Illinois Department of Revenue reviewed a petition from an S corporation that wanted to skip Illinois's standard single-sales-factor apportionment formula and instead report to Illinois only the actual rental income and expenses tied to its one Illinois property. The Department's answer: not at this time. The taxpayer did not present enough evidence to show the standard formula produces a distorted result, so the petition was denied for now, though the taxpayer may resubmit with stronger support.

The taxpayer was an S corporation formed in another state that had owned and rented real estate solely in that state for its entire existence. It then sold that property using a qualified intermediary and an IRC Section 1031 like-kind exchange, reinvesting only part of the proceeds in replacement rental properties across several states, including one multifamily property in Illinois. Because only part of the proceeds were reinvested, the sale still triggered a large taxable capital gain, recognized before the Illinois property was even acquired. The taxpayer argued that including this out-of-state gain in its everywhere-sales denominator would unfairly dilute (or, from Illinois's perspective, distort) the share of income apportioned to Illinois, and asked to use separate/direct accounting instead, tied to its per-property books. It also noted it planned to elect Illinois's 4.95% PTE tax and was filing similar requests in other states.

The Department held that a taxpayer seeking alternative apportionment under IITA Section 304(f) and 86 Ill. Adm. Code Section 100.3390(c) must prove, by clear and convincing evidence, both that (1) the standard formula produces a result that's out of proportion to the taxpayer's actual Illinois business activity or market, and (2) the taxpayer's own proposed alternative method would more fairly and accurately apportion its income. Wanting a different, and possibly lower, apportionment percentage is not by itself grounds for relief. Here, the taxpayer never even calculated its apportionment under the standard Section 304 method, supplied no market data, and simply asserted -- without evidence -- that separate accounting would be more accurate. The Department also rejected the argument that the timing of the gain's recognition (before the Illinois property was acquired) made the formula distortive, citing IRC Section 451(a)'s general income-timing rule and Rockwood Holding Co. v. Department of Revenue, which held that Section 304(f) addresses the fairness of how business activity/market is represented, not "glitches" in when income happens to be recognized. The Department also pointed out that the statutory formula already sources gain from an out-of-state property sale to that other state for that state's own sales factor, while including it in the denominator (everywhere sales) for Illinois purposes -- which is exactly how the standard formula is designed to work.

What this means for you

Multistate real estate investors doing 1031 exchanges

If you complete a partial 1031 exchange that leaves a recognized capital gain, and you later acquire replacement property in Illinois, that gain can end up counted in your everywhere-sales denominator for Illinois apportionment purposes -- even though the gain arose from property never located in Illinois and was recognized before you owned anything in the state. Don't assume the timing or origin of a gain by itself justifies a different apportionment method; Illinois has already rejected that argument once.

Corporate tax directors and accountants

A bare assertion that "separate accounting is more accurate" will not carry a Section 304(f)/100.3390(c) petition. To have any realistic chance, first calculate apportionment under the standard IITA Section 304 formula, then build an evidentiary record showing that formula produces a genuinely disproportionate result relative to your actual Illinois business activity or market -- and show why your proposed alternative method would produce a fairer one. Also build in the 120-day-before-due-date filing window under 86 Ill. Adm. Code Section 100.3390(e)(1); a rushed or thin petition can be denied "at this time" without foreclosing a better-supported resubmission.

S corporations and pass-through entities

Electing Illinois's PTE tax does not change how apportionment works; this taxpayer's stated intent to elect the 4.95% PTE tax had no bearing on the Department's apportionment analysis. Apportionment and the PTE election are separate questions.

Common questions

Q: Does a partial 1031 like-kind exchange automatically create an Illinois apportionment problem?
A: Not automatically, but it can. If only part of the sale proceeds are reinvested, the resulting recognized capital gain becomes part of your everywhere-sales denominator once you have Illinois-sourced sales, potentially shrinking your Illinois apportionment percentage relative to a scenario without that gain -- which is how the statutory formula is designed to operate, not a "distortion" by itself.

Q: Can a taxpayer just switch to separate/direct accounting because its books already track income property-by-property?
A: No. Having per-property accounting records available does not, by itself, satisfy the clear-and-convincing-evidence burden under 86 Ill. Adm. Code Section 100.3390(c). The taxpayer must still show the standard formula is disproportionate to its actual Illinois business activity or market, and that its proposed method is more accurate -- not merely different.

Q: Does the timing of when a gain is recognized (before or after acquiring Illinois property) matter for apportionment fairness?
A: The Department said no. Citing Rockwood Holding Co. v. Department of Revenue, it held that IITA Section 304(f) is about whether the formula fairly represents the extent of business activity or market in Illinois, not about correcting timing "glitches" in when income happens to be recognized under IRC Section 451(a).

Q: Is this ruling the final word for this taxpayer?
A: No. The Department explicitly said the petition "cannot be granted at this time" and invited the taxpayer to supplement its petition with additional evidence for reconsideration, subject to the 120-day filing deadline in 86 Ill. Adm. Code Section 100.3390(e)(1).

Q: Is a GIL binding on the Department?
A: No. This is a General Information Letter, not a Private Letter Ruling. It merely directs taxpayers to relevant law and does not bind the Department as to any taxpayer, including the one who requested it.

Citations and references

Statutes and rules:

• 35 ILCS 5/203(e)(1) (IITA Section 203(e)(1), definition of taxable income)
• 35 ILCS 5/304(a) (IITA Section 304(a), standard single-sales-factor apportionment)
• 35 ILCS 5/304(a)(3)(C-5)(i) (sourcing of real-property sale gains to the state where the property is located)
• 35 ILCS 5/304(f) (IITA Section 304(f), alternative apportionment)
• 35 ILCS 5/1501(a)(21) (IITA Section 1501(a)(21), definition of "sales")
• 86 Ill. Adm. Code Section 100.3370(a)(1) (definition of "sales" for apportionment)
• 86 Ill. Adm. Code Section 100.3380(a)(2) (Director-prescribed apportionment methods)
• 86 Ill. Adm. Code Section 100.3390(c) (burden of proof for alternative apportionment petitions)
• 86 Ill. Adm. Code Section 100.3390(e)(1) (120-day filing deadline for petitions)
• 2 Ill. Adm. Code 1200.120(b) and (c) (PLRs vs. GILs)
• 2 Ill. Adm. Code Section 1200.110 (required contents of a letter ruling request)
• Internal Revenue Code Section 451(a) (general timing rule for recognizing gross income)
• Internal Revenue Code Section 1031 (like-kind exchange)
• Rockwood Holding Co. v. Department of Revenue, 312 Ill. App. 3d 1120 (1st Dist. 2000)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2023.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2023/IT23-0002-gil.pdf

Original ruling text

IT 23-0002 03/22/2023 ALTERNATIVE APPORTIONMENT
General Information Letter: Alternative apportionment not allowed unless
taxpayer demonstrates sales factor does not fairly reflect market for goods or
services.

March 22, 2023
NAME
ADDRESS
E-MAIL
Re:

Petition for Alternative Apportionment
CORPORATION
FEIN: ##-#######
Tax Year Ended: YEAR

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 at this time.
Your petition states as follows:
We are the accountants for the captioned taxpayer and we are herein
submitting this request on behalf of the taxpayer. The taxpayer is a STATE
S-Corp. which will begin filing Illinois Form IL-1120-ST for the calendar year
YEAR. Should you have any questions please contact NAME at the
ADDRESS office address/phone number noted above. NAME email
address is E-MAIL.
Background:
The taxpayer is an S corporation incorporated in the State of STATE on
DATE. For all of its existence, from DATE until DATE this S corporation has
owned rental real estate located solely in the State of STATE and conducted
rental activities solely in the State of STATE. On DATE this entity sold its
only property (located in STATE) and utilizing the services of a qualified
intermediary, elected under Internal Revenue Code section 1031 to qualify

CPA /NAME
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March 22, 2023
for like kind exchange treatment by acquiring interests in various rental real
estate properties located in various U.S. states other than the State of
STATE. One (1) of these like kind replacement investments consisted of a
multifamily residential rental property located in Illinois. This investment was
acquired on DATE.
Alternate Method of Accounting Requested:
Pursuant to the instructions to Form IL-1120-ST, “... if the apportionment
methods prescribed by IITA, Sections 304(a) through (d), and (h) do not
fairly and accurately represent the market for your goods, services, or other
sources of business income, or lead to a grossly distorted result, you may
want to use a more accurate alternative method ...”. We do believe the
apportionment method as prescribed by the aforementioned rules and
regulations would result in an unfair and distorted result.
The use of the prescribed apportionment method (based on a ratio of
income within the state of Illinois as a percentage of income from other
states) is not equitable since the company’s sales from other states will
include a large capital gain from the sale of the company’s STATE property
on DATE. Prior to DATE the taxpayer operated solely within the State of
STATE. It should be noted that although an IRC sec. 1031 election was
made in connection with the sale of the STATE property, the sale
transaction still generated a significant taxable gain which will be reportable
on the company’s YEAR Federal S Corp. return. The reason a taxable gain
was generated is because the taxpayer only reinvested a portion of the
sales proceeds in replacement properties. The non-reinvested proceeds
subjected the taxpayer to a large recognized capital gain. This gain was
generated on DATE which was prior to the acquisition of the Illinois property
on DATE.
Furthermore, some of the other states in which the taxpayer purchased
properties, provide that rental real estate income is not subject to
apportionment but instead is allocated directly to the state in which the
property is physically located. As such, in order to be consistent with those
other states and also for the appropriate amount of income to be recorded
and taxed by the State of Illinois, we request that the State grant permission
for the taxpayer to allocate to the State of Illinois, the rental income and all
related expenses that are earned/incurred directly from the property
physically located in Illinois. The taxpayer’s accounting system specifically
tracks the rental activities for each and every property it owns on a stateby-state basis. Accordingly, the taxpayer has the ability to separately
account for each rental property’s income and expenses and report such
accounting results specifically to the State of Illinois. Reporting the actual
rental income and expenses to the individual state where each property is
located reflects the most accurate and appropriate representation of net

CPA /NAME
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March 22, 2023
income earned in that state and reflects the true economic reality of that
investment.
Use of the apportionment method would result in a distortion of income
being allocated to the State of Illinois, especially in YEAR since a significant
portion of sales that would be allocated to Illinois using the apportionment
method would include income from a very large capital gain that was
recognized from the sale of the original STATE property. This sale occurred
prior to the taxpayer’s acquisition of the property located in Illinois and other
states and prior to the commencement of any activities in the State of Illinois
or other states.
Conclusion:
Therefore, it is the taxpayer’s position that the aforementioned facts are
sufficient for the State of Illinois to grant permission for the taxpayer to use
a separate or direct method of accounting, wherein the taxpayer reports
only the rental income and expenses to the State of Illinois that pertain to
the property located in Illinois as opposed to using the apportionment
prescribed IITA, Sections 304(a) through (d), and (h). Using a direct
accounting method would result in reporting the true economic substance
of the net rental income earned from the Illinois rental property.
Please note that the taxpayer is submitting similar requests to all states,
other than STATE, in which it owns and operates rental real estate and
which states allow for such submission to elect a separate or direct method
of accounting rather than the use of an apportionment factors method.
Furthermore, we want to inform you that the taxpayer intends to elect to be
subject to the Illinois PTE tax of 4.95% for the tax year YEAR.
RULING
“Taxable income” is defined by Section 203(e)(1) of the Illinois Income Tax Act (“IITA” 35
ILCS 5/203(e)(1)) as “income properly reportable for federal income tax purposes for the
taxable year under the provisions of the Internal Revenue Code.”
IITA Section 304(a) provides that when a nonresident derives business income from
Illinois and one or more other states, such income shall be apportioned to Illinois by
multiplying the income by the taxpayer’s apportionment factor. For taxable years ending
on and after December 31, 1998, except in the case of an insurance company, financial
organization, transportation company, or federally regulated exchange, the
apportionment factor is equal to the sales factor. IITA Section 304(a)(3) defines the 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.

CPA /NAME
Page 4
March 22, 2023
IITA Section 1501(a)(21) defines the term “sales” as all gross receipts of the taxpayer not
characterized as business income. Further, for the purposes of the sales factor of the
apportionment formula, Section 100.3370(a)(1) of the Illinois Administrative Code (“Ill.
Adm. Code”) (86 Ill. Adm. Code Section 100.3370(a)(1)) provides the term “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. 86 Ill. Adm. Code Section 100.3370 provides for
the rules in determining “sales” in various situations, except in instances in which an
alternative method of determining the sales factor is prescribed in 86 Ill. Adm. Code
Section 100.3380. IITA Section 304(a)(3)(C-5)(i) provides sales from the sale or lease of
real property are in this state if the property is located in Illinois.
IITA Section 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.
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

CPA /NAME
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March 22, 2023
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).
In order to make a determination under IITA Section 304(h) as to whether or not the
apportionment provisions of subsections (a) through (e) and of subsection (h) reflect the
market for the person’s goods, services, or other sources of business income, it is
necessary that the taxpayer first determine its apportionment under such sections. If the
apportionment under such sections does not fairly reflect the taxpayer’s market, then an
alternative apportionment method may be permitted. Your request does not indicate
whether the taxpayer has determined its apportionment under IITA Section 304. Your
request contains no information relative to the market for the taxpayer’s goods, nor does
it contain information by which a determination can be made as to whether the
apportionment resulting under IITA Section 304 fails to fairly reflect that market. Your

CPA /NAME
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March 22, 2023
request contains no evidence that the statutory apportionment formula does not fairly
represent the extent of the taxpayer’s business activities in Illinois or that the proposed
alternative method of separate accounting does produce a reasonable result.
Furthermore, the statutory apportionment formula is not rendered distortive based on the
timing of when income is recognized for federal income tax purposes. The general rule
pursuant to Internal Revenue Code § 451(a) is that the amount of any item of gross
income shall be included in the gross income for the taxable year in which received by
the taxpayer, unless, under the method of accounting used in computing taxable income,
such amount is to be properly accounted for as of a different period. IITA Section 304(f)
relief was unavailable to a taxpayer questioning whether any portion of the distributive
share of expenses allocated against apportionable business income could be carried
forward to another tax year from an alleged distortion in income apparently the result of
partnership loss that was deductible for federal purposes but not for Illinois purposes.
See Rockwood Holding Co. v. Department of Revenue, 312 Ill. App. 3d 1120 (1st Dist.
2000). The Court declined to read Section 304(f) broadly so as to correct “glitches” that
were not foreseen at the time of enactment. The Court stated “the plain language of
section 304(f) seeks to achieve a fair representation of ‘the extent of a person’s business
activity’ in Illinois” and “does not address the calculation of the taxpayer’s tax liability.” Id.
at 1126. In this matter, it is the income for the taxpayer’s YEAR taxable year that is being
apportioned and taxed. As indicated above, “taxable income” is defined by IITA Section
203(e)(1) as “income properly reportable for federal income tax purposes for the taxable
year” under provisions of the IRC (emphasis added). The statutory apportionment
formula is not distortive simply based on the timing of the recognition of capital gain
income.
The facts stated in your petition are not sufficient to satisfy the burden set forth in 86 Ill.
Adm. Code Section 100.3390(c). Because your request merely states that separate
accounting for the taxpayer’s Illinois income more accurately reflects its Illinois activity,
this petition does not meet this regulatory requirement and cannot be granted at this time.
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 the Department will
reconsider your request. Please note that 86 Ill. Adm. Code Section 100.3390(e)(1)
requires a petition to be filed at least 120 days prior to the due date (including extensions)
for the first return for which permission is sought to use the alternative apportionment
method. In addition, each PLR request submitted to the Department for consideration
must include certain information outlined in 2 Ill. Adm. Code Section 1200.110.
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,

CPA /NAME
Page 7
March 22, 2023
Jennifer Uhles
Associate Counsel (Income Tax)