Did a federal technical termination and deemed asset transfer trigger Illinois reversals of prior bonus-depreciation modifications?

Plain-English summary

The federal technical termination triggered Illinois's disposition adjustments for prior bonus depreciation. More than 50% of the partnership's capital and profits changed hands within 12 months. Under the federal rule cited in the GIL, the old partnership was deemed to contribute all assets and liabilities to a new partnership and distribute interests in that new partnership.

Illinois generally followed federal entity classification, taxable years, accounting methods, and deemed transactions. The old partnership therefore terminated for Illinois purposes, its taxable year ended, and it was deemed to transfer the assets to the new partnership.

Because Sections 203(d)(2)(D-6) and (P) applied when bonus-depreciation property was sold, transferred, abandoned, or otherwise disposed of, the terminating partnership had to reverse its prior Illinois adjustments. It added back the aggregate subtractions previously claimed under subsection (O) and could subtract the additions previously made under subsection (D-5).

What this means for you

An ownership transaction can trigger state depreciation cleanup even when assets do not physically leave the business. Reconstruct prior-year Illinois bonus-depreciation additions and subtractions asset by asset before the termination return.

This is a historical rule tied to the federal technical-termination provisions applied in 2013; verify current federal and Illinois law for a later transaction.

Common questions

Q: Did the deemed federal transfer also count for Illinois?
A: Yes.

Q: What happened to prior Illinois bonus-depreciation subtractions?
A: The terminating partnership added them back.

Q: What happened to prior Illinois bonus-depreciation additions?
A: The terminating partnership could deduct them under the cited subtraction provision.

Citations and references

• 35 ILCS 5/203(d)(2)(D-5), (D-6), (O), (P) — bonus-depreciation modifications
• 35 ILCS 5/203(e)(1), 401–403 — federal tax base, taxable year, accounting, and item treatment
• 35 ILCS 5/102, 1501(a)(16) — federal conformity and partnership definition
• I.R.C. § 708(b)(1)(B) — technical-termination rule cited in the GIL
• Treas. Reg. § 1.708-1(b)(3), (4) — deemed transfer and year closing
• 86 Ill. Adm. Code 100.9750(d)(1) — partnership classification

Subject

INFORMATION

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2013.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2013/it-13-0010.pdf

Original ruling text

IT 13-0010-GIL
INFORMATION

*09/27/2013

ADDITION

MODIFICATIONS-OTHER

RULINGS-GENERAL

Technical termination of a partnership triggers the requirements in IITA Section 203 (d)(2)(D-6)
and (P) to reverse the bonus depreciation modifications reported by the taxpayer in prior years.

September 27, 2013

IT 13-0010-GIL
Re:

Illinois replacement tax

Dear Xxxxx:
This is in response to your letter dated August 30, 2013 regarding the Illinois personal property tax
replacement income tax. The nature of your letter and the information provided require that we
respond with a General Information Letter (GIL). A GIL 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 accessed from the Department’s web site at www.ILtax.com.
Your letter states as follows:
We are writing to request a General Information Letter under 2 Ill. Adm. Code Sec. 1200.120,
on behalf of our client (“Taxpayer or Partnership”) in relation to their Illinois Personal Property
Tax Replacement Income Tax (“Replacement Tax”) liability. Specifically, the Illinois tax issue
on which we would like the Department of Revenue’s guidance is the addition modification
under 35 ILCS 5/203(d)(2)(D-6) for bonus depreciation, and the subtraction modification under
35 ILCS 5/203(d)(2)(P) for bonus depreciation, as it relates to a period in which Partnership
has a change in ownership interest which triggers a technical termination under Internal
Revenue Code (IRC) § 708(b). Immediately below are the specific detailed facts, which we
believe would be relevant to this issue.
Taxpayer is a partnership for federal and Illinois income tax purposes. For federal income tax
purposes, Partnership claimed 50% bonus depreciation on assets placed in service during
2009, 2010, and 2011. Partnership’s Illinois IL-1065 tax return added back the 50% bonus
depreciation for each of these years, pursuant to 35 ILCS 5/203(d)(2)(D-5). Partnership also
made subtraction modifications to its base income for bonus depreciation for the 50% bonus
depreciation assets placed into service, pursuant to 35 ILCS 5/203(d)(2)(O). In the aggregate,
the addition modifications are greater than the subtraction modifications.
Within a 12 month period partners exchanged over 50 percent of the total interests in
Partnership. As a result Partnership was considered to technically terminate under IRC §
708(b).
For the reasons stated in our analysis below, we respectfully request guidance regarding the
following:

That upon the technical termination under IRC § 708(b)(1)(B), the assets of the Partnership
are deemed to be transferred, and the Partnership should add back any previous bonus
depreciation subtractions and subtract any previous bonus depreciation additions under 35
ILCS 5/203(d)(2)(D-6) and (P), respectively, in the period of the technical termination.
35 ILCS 5/203(d)(2)(D-6) provides for an addition modification,
If the taxpayer sells, transfers, abandons, or otherwise disposes of property for which
the taxpayer was required in any taxable year to make an addition modification under
subparagraph (D-5), then an amount equal to the aggregate amount of the deductions
taken in all taxable years under subparagraph (O) with respect to that property.
If the taxpayer continues to own property through the last day of the last tax year for
which the taxpayer may claim a depreciation deduction for federal income tax purposes
and for which the taxpayer was allowed in any taxable year to make a subtraction
modification under subparagraph (O), then an amount equal to that subtraction
modification.
The taxpayer is required to make the addition modification under this subparagraph only
once with respect to any one piece of property.
35 ILCS 5/203(d)(2)(P) provides for a deduction or subtraction modification,
If the taxpayer sells, transfers, abandons, or otherwise disposes of property for which
the taxpayer was required in any taxable year to make an addition modification under
subparagraph (D-5), then an amount equal to that addition modification.
If the taxpayer continues to own property through the last day of the last tax year for
which the taxpayer may claim a depreciation deduction for federal income tax purposes
and for which the taxpayer was required in any taxable year to make an addition
modification under subparagraph (D-5), then an amount equal to that addition
modification.
The taxpayer is allowed to take the deduction under this subparagraph only once with
respect to any one piece of property.
This subparagraph (P) is exempt from the provisions of Section 250.
Under IRC Section 708(b)(1)(B), a partnership will terminate if “within a 12-month period there
is a sale or exchange of 50 percent or more of the total interest in partnership capital and
profits.” Upon a technical termination, the following is deemed to occur:
The partnership contributes all of its assets and liabilities to a new partnership in
exchange for an interest in the new partnership and, immediately thereafter, the
terminated partnership distributes interests in the new partnership to the purchasing
partner and the other remaining partners in proportion to their respective interests in the
terminated partnership in liquidation of the terminated partnership, either for the
continuation of the business by the new partnership or for its dissolution and winding up.
Upon the deemed transfer of property under IRC § 708(b)(1)(B), the depreciation of the
partnership’s assets for federal income tax purposes restarts for the new partnership, under
IRC § 168(i)(7)(B). The tax basis of the property subject to depreciation in the new partnership
carries over from the terminating partnership. This tax basis is net of the depreciation,
including bonus depreciation taken by the terminating partnership.

The provisions in sections 35 ILCS 5/203(d)(2)(D-6) and (P) are triggered because a technical
termination results in a deemed transfer of property from the existing partnership to a new
partnership under IRC § 708(b)(1)(B). Therefore, the Illinois bonus depreciation addition and
subtraction modifications previously made by the Partnership should be subtracted and added
back, respectively, in the period of the technical termination.

RULING
Section 203(e)(1) of the Illinois Income Tax Act (“IITA” 35 ILCS 5/203(e)(1)) provides that for
purposes of Section 203 a taxpayer’s gross income, adjusted gross income, or taxable income for the
taxable year shall mean the amount of gross income, adjusted gross income or taxable income
properly reportable for federal income tax purposes for the taxable year under the provisions of the
Internal Revenue Code. This provision, which couples the Illinois tax base to the federal tax base, is
complimented by three other rules. First, IITA Section 401 provides that a taxpayer’s taxable year
under the IITA is generally the same as the taxpayer’s taxable year for federal income tax purposes.
Second, IITA Section 402 states that a taxpayer’s method of accounting under the IITA is the same
as the taxpayer’s method of accounting for federal income tax purposes. Finally, IITA Section 403
requires each taxpayer to take into account on his or her Illinois income tax return items of income,
deduction and exclusion in the same manner as reflected on the taxpayer’s federal income tax return.
Primarily as a result of these provisions, transactions that are deemed to occur for federal income tax
purposes, and the tax consequences that result from those deemed transactions, likewise are
deemed to occur and apply for purposes of the IITA. In addition, pursuant to IITA Sections 102 and
1501(a)(16), Department Regulations Section 100.9750(d)(1) provides that every entity treated as a
partnership for federal income tax purposes shall be treated as a partnership under the IITA, and that
no entity that is not treated as a partnership for federal income tax purposes will be treated as a
partnership for purposes of the IITA.
Internal Revenue Code (IRC) Section 708(a)(1)(B) provides that a partnership shall be considered as
terminated if within a 12-month period there is a sale or exchange of 50% or more of the total interest
in partnership capital and profits. Treasury Regulations Section 1.708-1(b)(3) provides that for
purposes of subchapter K and chapter 1 of the IRC, a partnership taxable year closes with respect to
all partners on the date on which the partnership terminates. Treasury Regulations Section 1.7081(b)(4) states that where a partnership terminates under IRC Section 708(a)(1)(B), the following is
deemed to occur:
The partnership contributes all of its assets and liabilities to a new partnership in exchange for
an interest in the new partnership; and, immediately thereafter, the terminated partnership
distributes interests in the new partnership to the purchasing partner and the other remaining
partners in proportion to their respective interests in the terminated partnership in liquidation of
the terminated partnership, either for the continuation of the business by the new partnership
or for its dissolution and winding up.
Under the provisions of the IITA discussed above, where a partnership terminates for federal income
tax purposes, it likewise terminates for Illinois income tax purposes. Further, the transactions that are
deemed to occur for federal purposes incident to a termination, and the tax consequences that result
from those deemed transactions, are likewise deemed to occur and apply for Illinois income tax
purposes. Accordingly, a partnership termination causes the partnership’s taxable year to end under
the IITA, and the terminated partnership is deemed to transfer all of its assets and liabilities to a new
partnership.

IITA Sections 203(d)(2)(D-6) and (P) require a partnership to make an addition and subtraction
modification where property with respect to which bonus depreciation modifications have been
required is sold, transferred, abandoned, or otherwise is disposed. Because a partnership terminated
under IRC Section 708(a)(1)(B) is deemed to have contributed all of its assets to a new partnership,
the addition and subtraction modifications under IITA Section 203(d)(2)(D-6) and (P) apply. For the
taxable year of its termination, the partnership must add back the aggregate amount of subtraction
modifications claimed on property under IITA Section 203(d)(2)(O), and may subtract the amount of
the addition modification claimed on property under IITA Section 203(d)(2)(D-5).
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. If you have questions regarding
this GIL you may contact Legal Services at (217) 782-7055. If you have further questions related to
Illinois income tax laws, visit our website at www.revenue.state.il.us or contact the Department’s
Taxpayer Information Division at (217) 782-3336.

Sincerely,

Brian L. Stocker
Associate Counsel (Income Tax)