My out-of-state S-corp's only Illinois connection is a minority interest in a Chicago hotel partnership -- can I petition to allocate 100% of that partnership's K-1 income to Illinois instead of using the standard apportionment formula?

Plain-English summary

An S corporation based entirely outside Illinois -- with its sole business operation and place of business in another state -- has its only connection to Illinois through a minority partnership interest in a Chicago-area hotel. The corporation petitioned to use an "alternative allocation method": simply allocating 100% of the profits and losses reported on the hotel partnership's K-1 to Illinois each year, rather than applying the standard sales-factor apportionment formula to its overall income. It noted a Department revenue agent had already accepted this approach for prior-year amended returns and asked the Department to approve it going forward.

Why the petition, as filed, was denied. Illinois lets a taxpayer petition for an alternative apportionment method under 35 ILCS 5/304(f), but only where the standard formula genuinely doesn't fairly represent the taxpayer's Illinois business activity or market. Under 86 Ill. Adm. Code 100.3390(c), the taxpayer bears the burden of proving -- by clear and cogent evidence -- that the standard formula taxes extraterritorial values or arbitrarily attributes an out-of-proportion share of income to Illinois, AND that the proposed alternative fairly reflects Illinois activity instead. An alternative method can't be approved merely because it produces a different number. The Department found the taxpayer's petition contained no market evidence at all -- just an assertion that separate accounting for the hotel interest would be "more accurate" -- which doesn't meet that burden.

A different, easier path that doesn't need a petition at all. The Department pointed out that the taxpayer's petition never addressed whether its out-of-state operations and its Illinois hotel interest actually constitute a single unitary business or two genuinely SEPARATE trades or businesses. Under 86 Ill. Adm. Code 100.3010(b)(1)-(2), if a taxpayer conducts two or more separate trades or businesses, each one's income must be apportioned SEPARATELY using its own in-state/out-of-state factors -- and doing this does NOT require filing an alternative apportionment petition at all (citing the Department's own prior guidance, IT 17-0006-GIL). If the hotel interest is genuinely a separate business from the corporation's other operations, this rule alone could produce the same practical result the taxpayer was seeking through its petition.

The catch: the taxpayer has to make that determination itself. The Department expressly did NOT decide whether the hotel interest and the rest of the corporation's operations are actually separate businesses versus a single unitary business -- that's for the taxpayer to work out applying 86 Ill. Adm. Code 100.3010(b)(3)'s own rules. If they turn out to be unitary, the income must be combined and apportioned together under the standard formula, and the taxpayer would then need to satisfy the full alternative-apportionment burden of proof -- which, on this record, it hadn't done.

What this means for you

Multistate corporations with an isolated Illinois investment or minority interest

Before filing an alternative-apportionment petition, ask whether your Illinois connection is genuinely a SEPARATE trade or business from your other operations. If so, the separate-apportionment rule under 86 Ill. Adm. Code 100.3010(b) may get you the result you want without the much harder burden of proof an alternative-apportionment petition requires.

Taxpayers relying on informal prior acceptance by a revenue agent

A prior agent's acceptance of a reporting method for past years' amended returns is not the same as Department-approved authority going forward -- get the legal basis (separate-businesses vs. alternative apportionment) sorted out and documented, rather than relying on past informal acceptance to continue.

Accountants preparing an alternative-apportionment petition

Bring actual market-share or extraterritorial-taxation evidence, not just an assertion that a different method is "more accurate." And always check the separate-trades-or-businesses angle first -- it's a materially lower bar than an alternative-apportionment petition when it genuinely applies.

Common questions

Q: Can I get Illinois to approve an alternative apportionment method just because it seems more accurate for my situation?
A: No -- you must prove by clear and cogent evidence that the standard formula produces a genuinely distorted, out-of-proportion result, and that your proposed method fairly reflects your actual Illinois activity.

Q: Is there a way to apportion a genuinely separate line of business differently from my main operations without filing a petition?
A: Yes -- if you operate two or more truly separate (non-unitary) trades or businesses, 86 Ill. Adm. Code 100.3010(b)(1)-(2) requires each to be apportioned separately, with no alternative-apportionment petition required.

Q: How do I know if my businesses are "separate" or "unitary" for this purpose?
A: 86 Ill. Adm. Code 100.3010(b)(3) sets out the rules for making that determination -- it's a fact-specific analysis the taxpayer must work through, and the Department did not resolve it in this letter.

Q: What happens if my businesses turn out to be unitary rather than separate?
A: Their income must be combined and apportioned together under the standard formula (35 ILCS 5/304(a)), and any request to deviate from that would need to satisfy the full alternative-apportionment burden of proof.

Citations and references

Statutes, regulations, and prior guidance:

• 35 ILCS 5/304(a), (f) (standard apportionment; alternative apportionment petition)
• 86 Ill. Adm. Code 100.3390(c) (burden of proof for alternative apportionment)
• 86 Ill. Adm. Code 100.3010(b)(1)-(3) (separate apportionment for separate trades or businesses; unitary-business determination)
• IT 17-0006-GIL (prior Department guidance on the separate-businesses rule)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2025.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2025/it25-0003-gil.pdf

Original ruling text

IT 25-0003-GIL

03/26/2025

ALTERNATIVE APPORTIONMENT

Apportionment of separate businesses under 86 Ill. Adm. Code Section
100.3010(b) does not require petition for alternative apportionment. (This is
a GIL.)
March 26, 2025
NAME
COMPANY1
ADDRESS
EMAIL
Re:

Petition for Alternative Apportionment
COMPANY2
FEIN: #########
Tax Year Ended: YEAR

Dear NAME1:
This is in response to your February 22, 2025, petition on behalf of COMPANY2 to use
an alternative method of allocation or apportionment effective for tax year ending
YEAR and subsequent tax years. The nature of your request and the information you
have provided require that we respond with a General Information Letter, which is
designed to provide general information, is not a statement of Department policy,
and is not binding on the Department. See 2 Ill. Adm. Code Section 1200.120(b) and
(c), which may be found on the Department’s website at https://tax.illinois.gov/. For
the reasons discussed below, your petition cannot be granted.
Your petition for the YEAR tax year ended states as follows:
We are the accountants of the above-named taxpayer and would like
to request an alternative methodology of reporting Illinois income
since the standard apportionment method does not fairly and
accurately reflect the taxpayer’s income generated from Illinois.
The taxpayer is a STATE S corporation, whose sole business operation
and place of business is in CITY1, STATE. The only activity in the State
of Illinois is having an interest in a CITY2 Hotel (COMPANY3 with EIN:

###).

None of the other investments or activities of the taxpayer have any
connection to Illinois.
COMPANY2’s only presence and source of income in Illinois is as a
result of its partnership interest %%% in COMPANY3. Consequently,
it has been determined that the accurate measure of income sourced

COMPANY2
Page 2
March 26, 2025
to Illinois each year is to allocate 100% of the profits and losses
reported on the K-1s of this partnership.
The taxpayer had applied the alternative allocation of income method
for its prior years amended returns from years YEARS. And the
revenue agent of your department, NAME2 had accepted and
approved for using this alternative allocation method of reporting
Illinois income for those years. In addition, taxpayer is consistent in
using the same methodology of reporting its year YEARS Illinois
income.
We respectfully request the approval of using alternative allocation
method of reporting Illinois income from year YEAR and onwards for
the taxpayer. Kindly advise of your decision.
RULING
Section 304(a) of the Illinois Income Tax Act (“IITA” 35 ILCS 5/304) provides that
when a nonresident derives business income from Illinois and one or more other
states, such income shall be apportioned to Illinois by multiplying the income by
the taxpayer’s apportionment factor. For taxable years ending on and after
December 31, 1998, except in the case of an insurance company, financial
organization, transportation company, or federally regulated exchange, the
apportionment factor is equal to the sales factor. 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.
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 to 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

COMPANY2
Page 3
March 26, 2025
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.
Taxpayers who wish to use an alternative method of apportionment under IITA
Section 304(f) are required to file a petition complying with the requirements of 86
Ill. Adm. Code Section 100.3390. 86 Ill. Adm. Code Section 100.3390(c) provides:
A departure from the required apportionment method is allowed only where
such methods do not accurately and fairly reflect business activity 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 cogent evidence that the statutory formula results
in the taxation of extraterritorial values and operates unreasonably and
arbitrarily in attributing to Illinois a percentage of income which is out of all
proportion to the business transacted 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 business
activity in this State.
In applying IITA Section 304(a), 86 Ill. Adm. Code Sections 100.3010(b)(1) and (2)
provide that when a taxpayer conducts two or more separate businesses, the
business income of each such business must be separately apportioned:
A person may have more than one “trade or business”. In such cases, it is
necessary to determine the business income attributable to each separate
trade or business. In the case of a person other than a resident, the income
of each business is then apportioned by a formula that takes into
consideration the instate and outstate factors relating to the trade or
business the income of which is being apportioned.
Example: The person is a corporation with three operating divisions. One
division is engaged in manufacturing aerospace items for the federal
government. Another division is engaged in growing tobacco products. The
third division produces and distributes motion pictures for theaters and
television. Each division operates independently; there is no strong central

COMPANY2
Page 4
March 26, 2025
management. Each division operates in this State as well as in other states.
In this case, it is fair to conclude that the corporation is engaged in three
separate “trades or businesses”. Accordingly, the amount of business
income attributable to the corporation’s trade or business activities in this
State is determined by applying an apportionment formula to the business
income of each business.
Your petition does not address the issue of whether or not the business of
COMPANY2 and the business of COMPANY3 actually constitute a single unitary
business. If your petition for alternative apportionment is based on the position that
the taxpayer’s corporate operations in STATE and its interest in a CITY2 hotel
constitute separate trades or businesses, then 86 Ill. Adm. Code Section
100.3010(b)(1) provides for the business income of each such trade or business to
be apportioned separately. It is not necessary to file a petition for alternative
apportionment in order to apply the provisions of 86 Ill. Adm. Code Section
100.3010(b)(1). (See also IT 17-0006-GIL.) This will likely produce either the result
you are seeking in your petition or a result that you will not consider to be grossly
distorted.
This letter does not constitute a determination that the separate properties
described in your petition in fact constitute separate businesses. You must make
that determination applying the rules set forth in 86 Ill. Adm. Code Section
100.3010(b)(3). If in applying those rules you determine that the operations
constitute a single unitary business, then the income from each property must be
combined and apportioned applying IITA Section 304(a) to the activities as a single
business. In order to obtain an alternative apportionment ruling, you must satisfy the
burden of proof set forth in 86 Ill. Adm. Code Section 100.3390(c).
Alternatively, if the businesses are unitary, you have not presented evidence
sufficient to allow the Department to grant your request. 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 petition contains
no information relative to the market for the taxpayer’s goods or services, 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 the
proposed alternative method of separate accounting does produce a reasonable

COMPANY2
Page 5
March 26, 2025
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). Because your request merely states that
separate accounting for the taxpayer’s Illinois income more accurately reflects its
Illinois activity, your petition for alternative apportionment does not meet the
regulatory requirement and cannot be granted at this time.
Accordingly, your petition for alternative apportionment for tax year ended 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 return
for which permission is sought to use the alternative apportionment method. In
addition, each Private Letter Ruling 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 General Information Letter. A General Information Letter
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
JU:se