Could a nationwide commercial-property owner use separate accounting for one Illinois rental property instead of Illinois's statutory apportionment formula?

Plain-English summary

The Department would not approve separate accounting merely because the taxpayer could isolate the income and expenses of its Illinois property. Section 304(f) allowed an alternative only when the statutory formula failed to fairly represent the market for the taxpayer's goods, services, or other business-income sources and the alternative method was reasonable.

The taxpayer owned commercial rental real estate nationwide and had recently purchased an Illinois property. Its petition included a schedule for that property, but the Department found no evidence showing how the statutory formula distorted the relevant market or why separate accounting produced a more equitable result.

The denial was not necessarily final. The taxpayer could supplement the petition under Regulation 100.3390. The GIL also noted the petition had to be filed at least 120 days before the due date, including extensions, of the first return for which the method was requested.

What this means for you

Property-specific books establish that separate accounting is possible; they do not establish that Illinois's statutory formula is unfair. A petition needs comparative evidence connecting the formula to market distortion and explaining why the proposed method fixes it.

Common questions

Q: Was an Illinois-property income statement enough?
A: No.

Q: Did the GIL permanently bar an alternative method?
A: No. It invited a properly supported supplement.

Q: What timing rule did the GIL identify?
A: At least 120 days before the relevant return's due date, including extensions.

Citations and references

• 35 ILCS 5/304(f) — permitted alternative-apportionment methods
• 35 ILCS 5/304(a) — statutory apportionment formula
• 86 Ill. Adm. Code 100.3390 — petition contents and timing

Subject

Alternative Apportionment

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2014.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2014/it-14-0007.pdf

Original ruling text

IT 14-0007-GIL 08/14/14 ALTERNATIVE APPORTIONMENT
Request to use separate accounting cannot be granted without evidence that the statutory
apportionment formula does not fairly reflect the market for the taxpayer’s services.
August 14, 2014

RE: Petition for Alternative Apportionment
Dear Xxxx:
This is in response to your letter dated July 30, 2014, in which you request permission to use
separate accounting to determine the taxpayer’s Illinois business income rather than the
statutorily-mandated apportionment formula, pursuant to Section 304(f) of the Illinois Income
Tax Act (the "IITA"; 35 ILCS 101 et seq.). The nature of your letter 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.revenue.state.il.us. For the reasons discussed below, your petition
cannot be granted at this time.
In your letter you have stated the following:
The purpose this letter is regarding the above referenced Taxpayer who recently
began business activities in the State of Illinois. Upon review of the Form IL1120 and respective instructions, we would like to request your approval of our
proposed alternative apportionment method. To help give you a background,
this company owns commercial rental real estate throughout the United States.
In 2013 the Taxpayer purchased a commercial rental property which is located
in the State of Illinois. As we can identify the specific activity related to the
property held in Illinois, we believe we should qualify for an alternative
apportionment method.
As the apportionment formula in Step 4 on page 2 of Form IL-1120 return does
not fairly and accu rately rep resent th e sources and uses of the business
income, we believe we should qualify for an alternative apportionment
formula. The formula in Step 4 distorts the actual results of our Illinois activity
and we are hopeful you will agree based on your review of the enclosed
documents. I have enclosed a schedule which reflects the specific activity related
to the property owned in Illinois.
Response
Section 304(f) of the IITA 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 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 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 this provision are
required to file a petition complying with the requirements of 86 Ill. Adm. Code Section
100.3390, which may be found on the Department's web site at www. tax.illinois.gov.
Nothing in your request or in the income statement attached provides any showing that the
apportionment formula prescribed in Section 304(a) of the IIITA fails to reflect the market for
the taxpayer’s sources of business income, or that the separate accounting requested reflects a
more equitable apportionment of the taxpayer’s business income. Accordingly, your request
cannot be granted without additional information.
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. Your petition was filed July 30, 2014, and
will allow the taxpayer to use the requested method on original returns due on or after November
27, 2014, if ultimately granted.
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 still believe that your petition should be granted, please supplement the petition in
accordance with the provisions of 86 Ill. Adm. Code Section 100.3390. If you have any
questions, you may contact me at (217) 524-3951.
Sincerely,

Paul S. Caselton
Deputy General Counsel -- Income Tax