Could a trust succeed to an Illinois net loss incurred by a terminated estate under the federal Section 642(h) carryover rule?

Plain-English summary

The beneficiary trust could not use the terminated estate's Illinois net loss because Illinois had no counterpart to IRC Section 642(h). Federal law allowed certain unused net operating loss, capital loss, and excess-deduction items to pass to beneficiaries when an estate or trust terminated, but Illinois law did not transfer the estate's separate Illinois net-loss carryover.

The trust also could not revise its Illinois starting point by recomputing federal taxable income as though it had not claimed the federal net operating loss deduction. Illinois began with federal taxable income properly reported on the federal return, then required the trust to add back that federal NOL deduction under Section 203(c)(2)(D).

Because the trust had incurred no Illinois net loss in its own prior years, it had no 2007 carryforward deduction. IDOR upheld the return adjustments.

What this means for you

Track Illinois net losses by the taxpayer that incurred them. A federal successor deduction does not automatically transfer the corresponding Illinois loss, and the Illinois return must use the federal taxable-income amount actually and properly reported before state modifications.

Common questions

Q: Did federal Section 642(h) transfer the estate's Illinois loss?
A: No. IDOR found no Illinois provision allowing that succession.

Q: Could the trust remove the federal NOL deduction from its federal taxable-income starting point?
A: No. It had to use reported federal taxable income and make the required Illinois addback.

Citations and references

• 35 ILCS 5/203(c)(1), (c)(2)(D), (e)(1), (h)
• 35 ILCS 5/207(a)
• 35 ILCS 5/405(a)
• IRC § 642(h)

Subject

Net Income (Loss) And Net Loss Deduction (Iita §207)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2010.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2010/ig100013.pdf

Original ruling text

IT 10-0013-GIL 06/22/2010 NET INCOME (LOSS) AND NET LOSS DEDUCTION (IITA §207)
General Information Letter: Illinois has no equivalent of IRC Section 642(h) that would
allow a beneficiary of a terminated estate to claim a carryforward deduction of an Illinois
net loss incurred by the estate.
June 22, 2010
Dear:
The original Illinois income tax returns filed by the TRUST for 2007 and 2008, and the amended
return filed for 2007, together with various correspondence between your firm and the Department,
have been forwarded to me for review. The nature of 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 86 Ill. Adm. Code
1200.120(b) and (c), which may be found on the Department's web site at www.tax.illinois.gov. If you
wish to contest the determination of the Department, the TRUST will have to either pay the tax
assessed by the Department under protest as provided in the State Officers and Employees Money
Disposition Act, 30 ILCS Act 230, and proceed to court, or pay the tax assessed by the Department
and file a refund claim. When the claim is disallowed, the TRUST may protest the disallowance and
request a hearing.
Background
On its 2007 Form IL-1041, Fiduciary Income and Replacement Tax Return, the TRUST
claimed an Illinois net loss carryover deduction of $85,972, which reduced its net
income to zero. The Schedule INL subsequently provided showed a carryforward of an
Illinois net loss in the amount of $115,071 from 2005, offsetting income of $85,972 and
leaving $29,099 to be carried forward. On its 2008 Form IL-1041, Fiduciary Income and
Replacement Tax Return, the TRUST A claimed a deduction for the remaining $29,099
in Illinois net loss.
Because the TRUST had not previously reported an Illinois net loss, the carryforward
deduction for 2007 was disallowed. In subsequent conversations with representatives
of the Department, it was disclosed that the net loss being carried forward had been
incurred by an estate whose federal net operating loss had been carried forward by the
TRUST under the provisions of Section 642(h) of the Internal Revenue Code, which
provides:
If on the termination of an estate or trust, the estate or trust has (1) a net operating loss carryover under section 172 or a capital
loss carryover under section 1212, or
(2) for the last taxable year of the estate or trust deductions (other
than the deductions allowed under subsections (b) or (c)) in excess
of gross income for such year,
then such carryover or such excess shall be allowed as a deduction, in
accordance with regulations prescribed by the Secretary, to the
beneficiaries succeeding to the property of the estate or trust.

IT 10-0013-GIL
June 22, 2010
Page 2
The deduction was disallowed because Illinois law has no equivalent of Section 642(h)
of the Internal Revenue Code that would allow the TRUST to deduct an Illinois net loss
incurred by an estate.
In response to this determination, the TRUST filed a Form IL-1040-X, Amended
Fiduciary Income and Replacement Tax Return, for 2007. In a cover letter dated
September 29, 2009, your firm explained the revisions reported as follows:
Since the Illinois Department of Revenue has taken the stance that the
NOL carryforward can not come from the Estate to the following Trust, we
have taken the stance that the trust would not incur a tax liability because
of the status of the trust. The trust in question is an Irrevocable Simple
trust which requires all income to be passed to the beneficiary. The
amended return reflects that without the NOL, the income would pass
through and be taxable to the beneficiary of the trust.
The Form IL-1040-X shows that the federal taxable income of the TRUST, as originally
reported on the Form IL-1040, was a negative $75,046. A federal net operating
deduction of $160,035 claimed on the federal return had been added back, leaving the
TRUST with positive Illinois base income after other modifications were made. The
Form IL-1040-X reported the “corrected amount” of federal taxable income to be a
negative $983, with no add-back for any federal net operating loss deduction. No
Illinois income or replacement tax had been paid by the TRUST, so neither the original
nor the amended return showed an overpayment of tax.
Response
Under Section 203(c)(1) of the Illinois Income Tax Act (35 ILCS 5/203), the computation of a trust’s
"net income" taxed by Illinois begins with the trust's federal taxable income. Under Section 203(c)(2),
various addition and subtraction modifications are then made, and the resulting "base income" is then
allocated and apportioned to Illinois. Section 203(c)(2)(D) requires a trust to add back “any net
operating loss deduction taken in arriving at taxable income, other than a net operating loss carried
forward from a taxable year ending prior to December 31, 1986.”
Section 203(e)(1) defines “taxable income” to mean “taxable income properly reportable for federal
income tax purposes for the taxable year under the provisions of the Internal Revenue Code.”
Section 203(h) provides that no modification may be made to taxable income unless expressly
provided in Section 203.
Section 207(a) of the Illinois Income Tax Act (35 ILCS 5/207) provides:
If after applying all of the (i) modifications provided for in paragraph (2) of . . . Section
203(c) . . . (ii) the allocation and apportionment provisions of Article 3 of this Act and
subsection (c) of this Section, the taxpayer's net income results in a loss . . .
(3) for any taxable year ending on or after December 31, 2003, such loss shall be
allowed as a net operating loss carryover to each of the 12 taxable years following the
taxable year of such loss.

IT 10-0013-GIL
June 22, 2010
Page 3

Section 405(a) of the Illinois Income Tax Act (35 ILCS 5/405) provides that a corporation may
succeed to the Illinois net loss carryovers of another corporation when it acquires the assets of that
corporation in a transaction described in Section 381(a) of the Internal Revenue Code. However,
there is no provision in the Illinois Income Tax Act similar to Section 642(h) of the Internal Revenue
Code, that would permit a beneficiary of a terminated estate to succeed to an unused Illinois net loss
of the estate.
Under these provisions, the TRUST is required to compute its 2007 Illinois net income by starting with
the negative $75,046 in federal taxable income reported on its federal income tax return for the year,
and adding back the $160,035 federal net operating loss deduction claimed on its federal income tax
return. Section 203(e)(1) does not permit the recomputation of federal taxable income as if no federal
net operating loss deduction had been claimed. Because the TRUST had incurred no Illinois net loss
in prior years, no carryforward deduction was allowable in 2007. The adjustments made by the
Department to the original return are therefore correct.
As stated above, this is a general information letter which does not constitute a statement of policy
that applies, interprets or prescribes the tax laws, and it is not binding on the Department. If you are
not under audit and you wish to obtain a binding Private Letter Ruling regarding your factual situation,
please submit all of the information set out in items 1 through 8 of Section 1200.110(b). If you have
any further questions, you may contact me at (217) 782-7055.
Sincerely,

Paul S. Caselton
Deputy General Counsel – Income Tax