Could a taxpayer reduce Illinois asset-sale gain because old losses that reduced basis had expired before they could be used as Illinois carryovers?

Plain-English summary

Expired Illinois losses did not create a separate basis increase or subtraction. The taxpayer argued that old losses had reduced the investment's capital account and contributed to a federally reported gain, even though Illinois no longer allowed those losses as carryovers.

Illinois began with federal taxable income and allowed only modifications expressly listed in Section 203. No provision adjusted basis or removed the portion of gain associated with the expired losses.

The 1986–1992 losses themselves had exceeded the historical 15-year carryforward period by the 2008 taxable year. IDOR therefore upheld the gain and loss-deduction computations.

What this means for you

Track federal basis and state loss attributes separately. The expiration of a state loss carryover does not automatically change federal basis or create an Illinois subtraction on disposition.

Common questions

Q: Could the old losses be carried into 2008?
A: No.

Q: Could the taxpayer instead reduce the sale gain?
A: No.

Citations and references

• 35 ILCS 5/203, 203(h), 207(a)
• I.R.C. § 172(b)(2)(A)(ii)

Subject

Subtraction Modifications – Other Rulings

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2012.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2012/it-12-0006.pdf

Original ruling text

IT 12-0006-GIL 03/14/2012 SUBTRACTION MODIFICATIONS – OTHER RULINGS
General Information Letter: Taxpayer is not allowed a subtraction from federal taxable
income to exclude that portion of a gain recognized on the disposition of an asset that
resulted from basis reductions attributable to losses that the taxpayer was unable to use
to reduce net income in any year.
March 14, 2012
Dear:
This is in response to your letters dated November 19, 2010, and December 17, 2010. 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 86 Ill. Adm. Code 1200.120(b) and (c), which may
be found on the Department's web site at www. tax.illinois.gov.
In your letter dated November 19, 2010, you have stated the following:
It appears from the enclosed that you have different net operating loss carry forward
amounts than as set forth on the 2008 income tax return for the above-noted entity. We
are in the process of obtaining copies of all tax returns filed from inception to determine
the appropriate net operating loss carry forward.
If, in fact, there is a modification of the loss carry forward allowed for gain purposes,
there would also be a modification of the gain as reported.
In your letter dated December 17, 2010, you have stated the following:
I have analyzed your NOL carry forward schedule and noted that you disallowed the
losses from 1986 through 1992 totaling $1,006,194. All losses from prior years were
part of the phantom gain reported in 2008. The amount of proceeds received on sale
were insufficient to recover the taxpayer’s investment, and the gain was primarily
attributed to a negative capital account caused by prior deductible losses. If these
losses are disallowed, then there should be an adjustment in the basis of the gain.
Response
Under Section 203 of the Illinois Income Tax Act (35 ILCS 5/203), the computation of a taxpayer's
"net income" taxed by Illinois begins with the taxpayer's federal taxable income, as properly computed
for the taxable year. Various addition and subtraction modifications are then made, and the resulting
"base income" is then allocated and apportioned to Illinois. Section 203(h) provides that no
modification may be made to taxable income unless expressly provided in Section 203. There is no
provision in Section 203 that would allow the “adjustment to basis” you request or any equivalent
modification to the taxpayer’s federal taxable income.
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(b), paragraph (2) of Section 203(c) and paragraph (2) of Section 203(d) and (ii) the
allocation and apportionment provisions of Article 3 of this Act and subsection (c) of this

IT 12-0006-GIL
March 14, 2012
Page 2
Section, the taxpayer's net income results in a loss;
(1) for any taxable year ending prior to December 31, 1999, such loss shall be allowed
as a carryover or carryback deduction in the manner allowed under Section 172 of the
Internal Revenue Code;
(2) for any taxable year ending on or after December 31, 1999 and prior to December
31, 2003, such loss shall be allowed as a carryback to each of the 2 taxable years
preceding the taxable year of such loss and shall be a net operating loss carryover to
each of the 20 taxable years following the taxable year of such loss; and
(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.
Under this Section 172(b)(2)(a)(ii) of the Internal Revenue Code as in effect prior to amendment by
Public Law 105-34, losses incurred in taxable years beginning prior to August 6, 1997, could be
carried forward no more than 15 years. Accordingly, losses incurred in taxable years ending on or
before December 31, 1992, cannot be carried to taxable years ending on or after December 31, 2008.
Accordingly, based on the facts you have presented, the Department’s computation of the taxpayer’s
net income before net loss deduction and the computation of the net loss deduction for the year in
question were both 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