We sold a discrete segment of our multi-state business, and the small Illinois piece of that segment was only a sliver of the deal's value -- can we get Illinois to apportion the gain using just that entity's actual share instead of the standard sales-factor formula?

Plain-English summary

A telecommunications holding company -- built up over the years through mergers involving several local-exchange carriers and, more recently, a large fiber/enterprise-services provider -- sold a discrete portion of its local-exchange-carrier ("SEGMENT1") business, operating in a number of states in the Southeast and Mid-Atlantic, to a private-equity-affiliated buyer for several billion dollars in cash and assumed debt. The sale was structured entity-by-entity, and included the company's small Illinois local-exchange subsidiary, which the taxpayer said represented less than 1% of the transaction's total value. At the time of the petition, the final purchase-price allocation required under the sale agreement (a "Section 1060 Allocation") had not yet been finalized between the parties -- the taxpayer relied only on a preliminary draft allocation from a third-party valuation firm.

The taxpayer petitioned the Department under 35 ILCS 5/304(f) for alternative apportionment, asking that Illinois tax on the resulting gain be limited to the small share attributable to the Illinois local-exchange entity, rather than being run through the company's standard single-sales-factor formula. Its core argument was that local-exchange businesses are inherently local -- infrastructure, licenses, customers, and goodwill for each local-exchange company all sit in one jurisdiction -- so taxing more than a sliver of the gain to Illinois would tax "extraterritorial values" in violation of due process, regardless of which attribution method (customer location, purchaser benefit, location of operations, or location of goodwill) was used.

The Department denied the petition. It explained that before it can find the standard apportionment formula unfair, the taxpayer must first show what its own apportionment factor actually is under Section 304(a) through (h), and must provide information about the market for its goods and services showing that the statutory result fails to reflect that market. The petition did neither: it contained no computation of the taxpayer's standard apportionment factor, no evidence about its market, and no analysis of why the statutory formula distorted the taxpayer's Illinois business activity beyond the bare assertion that it would be unconstitutional. The Department also stressed that 86 Ill. Adm. Code 100.3390(c) bars an alternative method "merely because it reaches a different apportionment percentage than the required statutory formula" -- which is essentially all the petition demonstrated. Finally, because the Section 1060 Allocation was still only a preliminary draft, not finalized, the Department noted it does not issue letter rulings based on undetermined, preliminary allocation figures. The Department left the door open for the taxpayer to supplement the petition with additional information and have it reconsidered.

What this means for you

Businesses selling a discrete segment or subsidiary

If you're petitioning Illinois to apportion gain from a sale differently than the standard formula would, you need more than an argument that the business sold was "inherently local." You must show your actual computed apportionment factor under the standard rules, provide evidence about your market, and explain concretely why the statutory result is distorted -- not just assert that any other outcome would be unconstitutional.

Anyone relying on a not-yet-final purchase price allocation

Don't file (or expect a ruling on) an alternative apportionment petition, or any letter ruling, based on a preliminary or draft Section 1060 purchase-price allocation. The Department will not rule on numbers that are still subject to change between the buyer and seller.

Multi-entity combined groups apportioning a transaction gain

Even where a sale is structured entity-by-entity and one entity's share of value is genuinely small, Illinois still requires the combined group to work through the standard statutory apportionment analysis first and to affirmatively prove, with evidence, that the standard result is "grossly distorted" or taxes "extraterritorial values" -- a conclusion the Department will not simply infer from the deal's structure.

Anyone timing a petition around a pending transaction

If you plan to seek alternative apportionment for a transaction, remember 86 Ill. Adm. Code 100.3390(e)(1) requires the petition to be filed at least 120 days before the due date (including extensions) of the first return for which you want to use the alternative method -- plan well ahead of closing, not after it.

Common questions

Q: Why did the Department deny the petition here?
A: The taxpayer's petition did not compute its own apportionment factor under the standard statutory rules, did not provide evidence about the market for its goods and services, and did not explain why the statutory formula (as opposed to the taxpayer's proposed alternative) actually produced a distorted result -- it only showed that its proposed method reached a different, smaller percentage, which the regulations say is not enough by itself.

Q: Does it matter that the Illinois entity sold represented less than 1% of the deal's value?
A: Not by itself. The Department's ruling did not dispute that characterization, but explained that a small relative value alone doesn't satisfy the taxpayer's burden of proving the statutory formula produces a grossly distorted or unconstitutional result; the taxpayer still had to supply the underlying apportionment computation and market evidence.

Q: Why did the unresolved Section 1060 purchase price allocation matter?
A: Because the final allocation between the taxpayer and buyer had not been agreed upon, the taxpayer's request rested only on a preliminary, third-party draft figure. The Department stated it does not issue rulings based on preliminary, not-yet-finalized allocation determinations.

Q: What must a taxpayer show to get Illinois to grant alternative apportionment?
A: Under 86 Ill. Adm. Code 100.3390(c), the taxpayer must prove that the standard statutory formula results in taxation of extraterritorial values or attributes an out-of-proportion share of income to Illinois, and must separately show that its proposed alternative method would fairly and accurately apportion income instead -- an alternative method cannot be used merely because it produces a different percentage.

Q: Can this taxpayer try again?
A: Yes. The Department noted that if the taxpayer has additional information not previously submitted -- including, presumably, a finalized Section 1060 Allocation and the standard apportionment computation -- it may supplement the petition for reconsideration.

Citations and references

Statutes, regulations, and cases cited:

• 35 ILCS 5/304(a) (standard business income apportionment; sales factor)
• 35 ILCS 5/304(a)(3) (sales factor defined as Illinois sales over everywhere sales)
• 35 ILCS 5/304(f) (alternative apportionment petition)
• 86 Ill. Adm. Code 100.3380(a)(2) (apportionment methods and rulemaking procedure)
• 86 Ill. Adm. Code 100.3390(c) (burden of proof; alternative method not permitted merely because it reaches a different percentage)
• 86 Ill. Adm. Code 100.3390(e)(1) (120-day advance filing deadline for alternative apportionment petitions)
• 2 Ill. Adm. Code 1200.110 (Private Letter Ruling procedures and required information)
• 2 Ill. Adm. Code 1200.120(b), (c) (General Information Letters; non-binding, not a statement of policy)
• Moorman Mfg. Co. v. Bair, 437 U.S. 267 (1978) (cited by taxpayer)
• Allied-Signal, Inc. v. Director, Div. of Taxation, 504 U.S. 768 (1992) (cited by taxpayer)
• Adams Express Co. v. Ohio State Auditor, 165 U.S. 194 (1897) (cited by taxpayer)
• Container Corp. v. Franchise Tax Bd., 463 U.S. 159 (1983) (cited by taxpayer)
• Mobil Oil Corp. v. Commissioner of Taxes of Vt., 445 U.S. 425 (1980) (cited by taxpayer)
• Butler Brothers v. McColgan, 315 U.S. 501 (1940) (cited by taxpayer)
• Hans Rees' Sons, Inc. v. North Carolina ex rel. Maxwell, 283 U.S. 123 (1931) (cited by taxpayer)
• Bass, Ratcliff & Gretton, Ltd. v. State Tax Comm'n, 266 U.S. 271 (1924) (cited by taxpayer)

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/it23-0017-gil.pdf

Original ruling text

IT-23-0017-GIL 08/18/2023 ALTERNATIVE APPORTIONMENT
Petition for alternative apportionment cannot be granted based on the information
provided. (GIL)
August 18, 2023
NAME
ADDRESS
Re:

Petition for Alternative Apportionment
COMPANY
Tax Year Ended: ##/##/####

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
on the Department, but only as to the taxpayer who is the subject of the request for ruling and
only to the extent the facts recited in the PLR are correct and complete. Persons seeking PLRs
must comply with the procedures for PLRs. See 2 Ill. Adm. Code 1200.110. The purpose of a
GIL is to direct taxpayers to Department regulations or other sources of information regarding
the topic about which they have inquired. A GIL is not a statement of Department policy and is
not binding on the Department. See 2 Ill. Adm. Code 1200.120(b) and (c). You may access our
website at www.tax.illinois.gov to review regulations, letter rulings, and other types of
information relevant to your inquiry.
The nature of your inquiry and the information you have provided require that we respond with a
GIL.
For the reasons discussed below, your petition cannot be granted at this time.
Your petition states as follows:
Pursuant to Illinois Revised Statutes 35 ILCS 5/304(f), COMPANY1 and the
affiliates with which it files a combined Illinois Corporation Income Tax return
(collectively the “BUSINESS”) respectfully request alternative apportionment for
the gain from the sale of a discrete segment of the BUSINESS’s business. We
understand that, pursuant to the Department of Revenue’s regulations, alternative
apportionment is to be granted only if the “application of the statutory formula
will lead to a grossly distorted result.” The factual situation discussed herein is
unique and one of those unusual situations where the application of the statutory
apportionment rules does not produce a fair - or constitutional - apportionment
formula.

COMPANY
Page 2
As discussed in more detail below, on DATE, the BUSINESS sold a portion of its
SEGMENT1 business consisting of its SEGMENT1 COMPANIES in NUMBER
states primarily in the Southeast and Mid-Atlantic to a private equity firm (the
“TRANSACTION”). A SEGMENT1 COMPANY is an INDUSTRY company
that provides SEGMENT1 SERVICES. By its very nature, the conduct of a
SEGMENT1 business is markedly different from most other businesses. The
conduct of a SEGMENT1 business is completely centered around a locality, with
the licenses to operate, the activities and infrastructure, and the customers and
goodwill all located in the same jurisdiction. Except for COMPANY2, a
COMPANY1 entity typically only operated as a SEGMENT1 COMPANY in one
jurisdiction. The BUSINESS’s Illinois SEGMENT1 COMPANY, COMPANY3,
was included in the TRANSACTION but represented less than one percent of the
value of the TRANSACTION.
The BUSINESS continues to operate its other SEGMENT2 business in Illinois,
the bulk of which relates to the legacy business of COMPANY4. Illinois’s
taxation of the BUSINESS’s gain resulting from the TRANSACTION should be
limited only to that amount related to the Illinois SEGMENT1 COMPANY; any
taxation of the gain related to other states would be an unconstitutional imposition
of tax on extraterritorial values.
Accordingly, Illinois’s statutory method for taxation of the BUSINESS’s gain
from its sale of the SEGMENT1 businesses would be an unconstitutional
imposition of tax on extraterritorial values. Under any reasonable attribution
method - attribution by means of (a) the location of the customers of the
SEGMENT1 operations that were sold, (b) the location where the purchaser will
benefit from its acquisition of the SEGMENT1 operations, (c) the location of the
operations of the SEGMENT1 business that was sold, or (d) the location of the
goodwill from the SEGMENT1 operations that were sold - less than one percent
of the gain would be attributable to Illinois. Using the statutory apportionment
method to tax a greater portion of the BUSINESS’s gain from the sale of the
SEGMENT1 operations would be distortive and would result in taxable income
that does not reflect the BUSINESS’s business in Illinois. Thus, the BUSINESS
hereby requests alternative apportionment.
FACTS
The SEGMENT1 Business
A SEGMENT1 COMPANY is the SEGMENT1 COMPANY, i.e., SEGMENT1
companies, each of which had a regional monopoly with respect to the
SEGMENT1 SERVICES in a specific region. This monopolistic structure
changed in YEAR when Congress tried to spur competition by requiring
SEGMENT1 COMPANIES to provide access to their systems at regulated rates
to other carriers that would resell the service to local telephone customers. Even
though other companies - SEGMENT2 COMPANIES - were now able to

COMPANY
Page 3
compete with SEGMENT1 COMPANIES to provide SEGMENT1 service, the
SEGMENT1 COMPANIES retained their historic responsibility to own and
maintain the INDUSTY infrastructure in the regions they served. Because a
SEGMENT1 COMPANY must maintain the INDUSTRY infrastructure in its
“home” location, and because such infrastructure allows the SEGMENT1
COMPANY to provide SEGMENT1 SERVICES only in such location, a
SEGMENT1 COMPANY’s business and revenue are, by its very nature, tied to
the location in which the SEGMENT1 COMPANY business operates. Said
another way, a SEGMENT1 COMPANY’s infrastructure, operations, customers,
and goodwill are all located in the same jurisdiction.
History of the BUSINESS
The BUSINESS is involved in the conduct of an INDUSTRY business, which
was formed over the years through the merger and acquisition of various
INDUSTRY companies, including COMPANY5, COMPANY6, COMPANY2,
and COMPANY4. Prior to the acquisition of COMPANY4 in YEAR, the
BUSINESS was primarily involved in the provision of INDUSTRY SERVICES
to SEGMENT1 CUSTOMERS.
In YEAR, COMPANY7 acquired COMPANY6, with the combined company
changing its name to COMPANY5. Prior to this acquisition, COMPANY7 and
COMPANY6 each conducted a SEGMENT1 business operating largely in
REGIONS.1 The COMPANY5 operations expanded in YEAR when
COMPANY5 acquired COMPANY2, whose primary operations were as the
SEGMENT1 in NUMBER REGION STATES.2 The addition of COMPANY2
operations resulted in COMPANY5 becoming the third largest SEGMENT1
COMPANY in the United States.
On MONTH DAY, YEAR COMPANY5 acquired COMPANY4 in a deal valued
at approximately $$$ billion. The acquisition of COMPANY4 is notable because,
unlike the previous transactions, the acquisition of COMPANY4 resulted in
COMPANY5 expanding its business operations to encompass the conduct of a
different type of business - one focused on providing advanced communications
and technology services to large enterprise customers:
COMPANY5 and COMPANY4 have in the past focused primarily on
serving different geographic areas and customer segments. COMPANY5
is a mid-sized SEGMENT1 COMPANY that provides voice, broadband,
and video services to business and residential customers in rural, suburban
and urban territories. COMPANY4 serves some SEGMENT2 customers
1

2

Statement from Acting Chairman of Agency, Agency ##-##, Memorandum, Opinion & Order

COMPANY2 also operated a small SEGMENT2 business, primarily long-distance, now known as COMPANY8.
Unlike the SEGMENT1 COMPANIES that were sold as part of the TRANSACTION that primarily operated in one
jurisdiction, COMPANY2 operates as the SEGMENT1 in NUMBER states.

COMPANY
Page 4
both within and outside of its SEGMENT1 territory, but its fiber-based
footprint for high-demand services such as SEGMENT2 SERVICE is
limited relative to that of its largest competitors, especially outside of its
SEGMENT1 territory. COMPANY5 has a relatively modest ASSET and a
small resale-based presence in the international SEGMENT2 market. In
fact, it holds a small ownership interest in only one ASSET2 in the U.S.
and otherwise leases all of its international SEGMENT2 capacity
(including to and from the U.S.) from others.
In contrast, COMPANY4 serves no SEGMENT1 customers. It focuses on
serving SEGMENT2 customers. Most of COMPANY4’s customers are
located outside of COMPANY5’s SEGMENT1 territory. COMPANY4
serves customer locations via its own SEGMENT2 facilities where
possible, but COMPANY4 SEGMENT2 facilities do not reach the
majority of the customer locations it serves. Where this is the case,
COMPANY4 serves the customer locations via end user connections
leased from another INDUSTRY COMPANY. Still, COMPANY4 has
been able to use those connections to become a leader in the provisioning
of high-demand SEGMENT2 services to customers, again primarily
outside of COMPANY5’s SEGMENT1 territory. COMPANY4 also has a
significant SEGMENT2 business.3
On MONTH DAY, YEAR COMPANY5 announced that it had changed its name
to COMPANY1. After this change, all SEGMENT2 BUSINESS was marketed
under the name COMPANY1. BUSINESS continues to use the COMPANY5
brand as the customer-facing brand for its legacy SEGMENT1 business, while the
MATERIAL brand is being used for the SEGMENT2 SERVICES sold to
SEGMENT1 customers in what was historically the SEGMENT1 space.
The TRANSACTION of a Portion of the SEGMENT1 Business
In recent years, BUSINESS made the strategic decision to focus its operations on
those portions of its business that use more advanced infrastructure, including the
less rural portion of its SEGMENT1 business and the entirety of its SEGMENT2
business. Accordingly, on MONTH DATE, YEAR, BUSINESS entered into an
agreement to TRANSACT its SEGMENT1 operation in NUMBER states to an
affiliate of COMPANY9. The TRANSACTED operations were located in the
following NUMBER states: TRANSACTION STATES. The sale to
COMPANY9 (the “TRANSACTION”) was finalized on MONTH DAY, YEAR,
with BUSINESS receiving $$$ billion in consideration for the sale. (The
consideration consisted of approximately $$$ billion of cash and $$$ billion of
assumption of indebtedness.)4
3

AGENCY APPLICATION.

4

PRESS RELEASE.

COMPANY
Page 5
The TRANSACTION was structured as the sale of each of the SEGMENT1
entities that operate in the NUMBER-state region.5 This included the Illinois
SEGMENT1 COMPANY, COMPANY3, and NUMBER other legal entities. As
part of the TRANSACTION, COMPANY1, and COMPANY9 agreed to treat the
TRANSACTION as a sale of assets for income tax purposes.6 Under the Purchase
Agreement, COMPANY9 is required to provide a proposed allocation of the
purchase price as required (the “Section 1060 Allocation”).7 At the time of this
petition, the final closing statement has not been agreed between the BUSINESS
and the purchaser of the SEGMENT1 TRANSACTION. As a result, the final
Section 1060 Allocation has not been determined. However, the preliminary draft
purchase price allocation prepared by FIRM, a third-party valuation firm, shows
that the amount of consideration allocable to the Illinois SEGMENT1
COMPANY is %%% which represents less than one percent of the total
consideration received by BUSINESS.
LAW & ANALYSIS
The Department of Revenue (“Department”) has the authority to grant alternative
apportionment pursuant to 35 ILCS 5/304(f), which provides:
[i]f 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
5

See Section 2.1 of the Purchase Agreement, which is available in the Form 8-K filed DATE. WEBSITE

6

See Section 6.l(a) of the Purchase Agreement.

7

See Section 6.l(d) of the Purchase Agreement. While COMPANY9 is responsible for providing the initial proposed
Section 1060 Allocation, BUSINESS engaged FIRM, an independent third-party valuation firm, to prepare a
preliminary draft purchase price allocation.

COMPANY
Page 6
business income.
The Department’s regulations provide that alternative apportionment is
appropriate when “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 ...” 86 Ill. Admin. Code 100.3390(c)
The legislature gave the Department the authority to grant alternative
apportionment; such alternative apportionment must be used if the statutory
apportionment formula results in imposition of a tax that is unconstitutional.
The Due Process Clause, as interpreted by the United States Supreme Court,
mandates that “the income attributed to the State for tax purposes must be
rationally related to ‘values connected with the taxing State.’”8 In other words, a
state is prohibited from taxing income “which cannot in fairness be attributed to
the taxpayer’s activities within the State.”9
With respect to a unitary business conducting operations in many states, the
traditional statutory method of attributing income to a taxing state is to apply an
apportionment formula to the income conducted by the entire unitary business.
However, the rationale for use of the apportionment method does not apply to
taxation of the gain from the sale of a business like an SEGMENT1 company.
The unitary business principle was created in the property tax context for the
purpose of determining the tax base for certain horizontally integrated businesses

• such as railroads and telegraph companies - that conducted their business
  operations in many states. The unitary business principle was applied to these
  horizontally integrated businesses because it was determined that the isolated
  value of such a business’ property located within a state did not reflect the true
  value of the business’ property; the value was instead dependent upon all of the
  business’ property and operations, including that property and operations located
  outside of the state. Accordingly, the courts determined that the only way to
  properly value the in-state property of a horizontally integrated business was to
  value the unitary business’ property (both within and without the state) and
  attribute a portion of the unitary value to the taxing state. As the Supreme Court
  noted:
  When States attempted to value railroad or telegraph companies for
  property tax purposes, they encountered the difficulty that what makes
  such a business valuable is the enterprise as a whole, rather than the track
  or wires that happen to be located within a State’s borders. The Court held
  that, consistent with the Due Process Clause, a State could base its tax
  8

Moorman Mfg. Co. v. Bair, 437 U.S. 267, 272-73 (1978) (citation omitted).

9

Allied-Signal, Inc. v Director, Div. of Taxation, 504 U.S. 768 (1992).

COMPANY
Page 7
assessments upon “the proportionate part of the value resulting from the
combination of the means by which “the business was carried on, a value
existing to an appreciable extent throughout the entire domain of
operation.” Adams Express Co. v. Ohio State Auditor, 165 U.S. 194, 220221 (1897) (citing Western Union Telegraph Co. v. Attorney General of
Massachusetts, 125 U. S. 530 (1888)); Massachusetts v. Western Union
Telegraph Co., 141 U.S. 40 (1891); Maine v. Grand Trunk R. Co., 142
U.S. 217 (1891); Pittsburgh, c., C. & St. L. R. Co. v. Backus, 154 U.S. 421
(1894); Cleveland, c., C. & St. L. R. Co. v. Backus, 154 U. S. 439 (1894);
Western Union Telegraph Co. v. Taggart, 163 U. S. 1 (1896); Pullman’s
Palace Car Co. v. Pennsylvania, 141 U. S. 18 (1891).
Adams Express recognized that the principles that permit a State to levy a
tax on the capital stock of a railroad, telegraph, or sleeping car company
by reference to its unitary business also allow proportional valuation of a
unitary business in enterprises of other sorts. As the Court explained: “The
physical unity existing in the former is lacking in the latter; but there is the
same unity in the use of the entire property for the specific purpose, and
there are the same elements of value arising from such use.” 165 U.S., at
221.10
In the state income tax context, the unitary business principle is most often used
to determine whether income from different business activities can be jointly
apportioned to a state in computing the state tax base. The Supreme Court has
recognized that it is typically virtually impossible to allocate each sale or receipt
to a state and, thus, has allowed the states to use apportionment formulas to
determine the approximate portion of income of a unitary business that is
attributable to the taxing state.11 The use of an apportionment formula to compute
the tax of a unitary business is typically constitutional because “all the factors in
[the unitary] enterprise are essential to the realization of profits” and, thus, the
profits can be jointly apportioned to the various states in which the enterprise
conducts business.12 However, the use of an apportionment formula is
constitutional only if it fairly reflects the business conducted in the taxing state.13
The Supreme Court has held that the use of an apportionment formula is not

10

Allied-Signal, Inc. v. Director, Div. of Taxation, 504 U.S. 768, 777 - 78 (1992).

11

See e.g., Container Corp. v. Franchise Tax Bd., 463 U.S. 159 (1983); Mobil Oil Corp. v. Commissioner of Taxes
of Vt., 445 U.S. 425 (1980).
12

Butler Brothers v. McColgan, 315 U.S. 501 (1940); Hans Rees’ Sons, Inc. v. North Carolina ex rel. Maxwell, 283
U. S. 123 (1931).
See, e.g., Hans Rees’ Sons, Inc. v. North Carolina ex rel. Maxwell, 283 U.S. 123 (1931); Bass, Ratcliff & Gretton,
Ltd v. State Tax Comm’n, 266 U.S. 271 (1924).
13

COMPANY
Page 8
permitted when the income being apportioned “was earned in the course of
activities unrelated to [those] in [the taxing state].”14
Application
Unlike most businesses, it is quite easy to attribute the gain from the sale of the
SEGMENT1 businesses to a specific jurisdiction because of the localized nature
of the SEGMENT1 business sold in the TRANSACTION. That is particularly
true here where the Section 1060 Allocation will dictate how much of the
purchase price relates to each entity that was sold in the TRANSACTION.
Whether market-sourcing or cost of performance is used, all metrics result in the
Gain being attributable to the relevant local jurisdiction where the SEGMENT1
business is operated. The Gain from the TRANSACTION is wholly attributable to
local factors - the SEGMENT1 infrastructure and operations that are located
within the relevant jurisdiction, the customers that are located in that jurisdiction,
and the licenses to operate the SEGMENT1 business in that jurisdiction. The
SEGMENT1 businesses are discrete, localized businesses by nature because they
are not permitted or able to operate outside of their dedicated jurisdictions.
In the situation of the TRANSACTION, the SEGMENT1 operations in Illinois
were only conducted by one entity, COMPANY3. The portion of the tax gain on
the TRANSACTION related to that specific entity has been preliminary
determined to be %%%%%, which is less than one percent of the value of the
overall deal.
Conclusion
Alternative apportionment is necessary to maintain the constitutionality of
Illinois’s tax on the gain on the TRANSACTION. Accordingly, Petitioner
respectfully requests alternative apportionment pursuant to 35 ILCS 5/304(f).
Specifically, Petitioner requests that the Department permit it to allocate to
Illinois only that portion of the gain that relates to the Illinois SEGMENT1
COMPANY, as will be determined by the Section 1060 Allocation.
As noted above, the final Section 1060 Allocation has not yet been determined.
Therefore, BUSINESS reserves the right to amend this petition when the Section
1060 Allocation is finalized. Please contact NAME at PHONE or EMAIL if you
need additional information or would like to discuss this request in more detail.
RULING
Section 304(a) of the Illinois Income Tax Act (“IITA” 35 ILCS 5/304) provides that when a
nonresident derives business income from Illinois and one or more other states, such income
shall be apportioned to Illinois by multiplying the income by the taxpayer’s apportionment
14

Mobil Oil Corp. v. Commissioner of Taxes of Vt., 445 U.S. 425 (1980).

COMPANY
Page 9
factor. For taxable years ending on and after December 31, 1998, except in the case of an
insurance company, financial organization, transportation company, or federally regulated
exchange, the apportionment factor is equal to the sales factor. IITA Section 304(a)(3) defines
the sale factor as a fraction, the numerator of which is the total sales of the person in Illinois
during the taxable year, and the denominator of which is the total sales of the person everywhere
during the taxable year.
Section 304(f) of the IITA states:
If the allocation and apportionment provisions of subsections (a) through (e) and of
subsection (h) do not, for taxable years ending before December 31, 2008, fairly
represent the extent of a person’s business activity in this State, or, for taxable years
ending on or after December 31, 2008, fairly represent the market for the person’s goods,
services, or other sources of business income, the person may petition for, or the Director
may, without a petition, permit or require, in respect of all or any part of the person’s
business activity, if reasonable:
(1) Separate Accounting;
(2) The exclusion of any one or more factors;
(3) The inclusion of one or more additional factors which will fairly represent the
person’s business activities or market in this State; or
(4) The employment of any other method to effectuate an equitable allocation and
apportionment of the person’s business income.
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

COMPANY
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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.
86 Ill. Adm. Code Section 100.3390(c) provides:
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.
In order to make a determination under IITA Section 304(f) 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 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 an alternative
method produces a more reasonable result.
The facts stated in your petition are not sufficient to satisfy the burden set forth in 86 Ill. Adm.
Code Section 100.3390(c). The petition must explain why the statutory formula distorts business
activity in Illinois and why your proposed alternative apportionment method would fairly and
accurately apportion income to Illinois based upon the business activity in Illinois. Your petition
contains no analysis showing why the requested alternative apportionment formula is superior to
the statutory formula, other than to show it is necessary to maintain the constitutionality of
Illinois’ tax on the gain on the TRANSACTIONS. Your petition is merely a showing that the
requested alternative apportionment formula reaches a different result than the required statutory
formula. Furthermore, you indicate in your petition the final Section 1060 Allocation has not
been determined. The Department does not issue PLRs based on preliminary allocation
determinations.15
Because your request merely states that an allocation to Illinois of only the portion of the gain
that relates to the Illinois SEGMENT1 (as yet to be determined by the Section 1060 Allocation)
more accurately reflects your Illinois activity, this petition does not meet the regulatory
requirement and cannot be granted at this time.
Accordingly, your petition for alternative apportionment for tax year ended MONTH DATE,
YEAR 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
15

The Department also notes the discrepancy in the petition of the reported preliminary draft purchase price
allocation as %.%%%% and %.%%%%.

COMPANY
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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,

Jennifer Uhles
Associate Counsel (Income Tax)