Could an Illinois resident claim an other-state tax credit attributable only to nonprofessional gambling or lottery winnings?

Plain-English summary

Illinois did not treat a nonprofessional resident's gambling or lottery winnings as out-of-state income when limiting the credit for tax paid to another state. Section 601(b)(3) capped the credit by the ratio of income that would be allocated or apportioned outside Illinois if every state used Illinois's sourcing rules.

Schedule CR implemented that rule by placing total income in column A and only income sourced outside Illinois under Illinois law in column B. The GIL said nonprofessional gambling winnings did not fit a provision that would source them to Illinois if earned by a nonresident. The same logic meant an Illinois resident could not place those winnings in the out-of-state column merely because another state taxed them.

If gambling winnings were the taxpayer's only item taxed by another state and there was no other income sourced outside Illinois under Illinois rules, the limitation fraction—and therefore the resident credit—was zero.

What this means for you

An Illinois resident credit depends on Illinois sourcing, not only on proof that another state collected tax. Review each income item under Article 3 before calculating Schedule CR.

The GIL carved out professional gamblers: gambling winnings treated as business income could be apportioned under Section 304. It did not analyze that different fact pattern.

Common questions

Q: Did tax paid to the casino or lottery state guarantee an Illinois credit?
A: No.

Q: Why could the credit be zero?
A: With no income in Schedule CR's Illinois-defined out-of-state column, the credit limitation fraction was zero.

Q: Did the same answer necessarily apply to a professional gambler?
A: No. The GIL said professional-gambling business income could be apportioned under Section 304.

Citations and references

• 35 ILCS 5/601(b)(3) — resident credit and Illinois-sourcing limitation
• 35 ILCS 5/301(c)(2) — residual rule quoted in the GIL
• 35 ILCS 5/302–304 — allocation and apportionment provisions
• 35 ILCS 5/304 — business-income apportionment relevant to professional gamblers

Subject

Credits – Foreign Tax

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-14-0016.pdf

Original ruling text

IT 14-0016 GIL 10/03/2014 Credits – Foreign Tax
The credit for taxes paid to other states may not exceed the amount of Illinois income tax attributable
to income that would be sourced to other states if all other states used Illinois’ allocation and
apportionment rules. Because nonbusiness gambling winnings are sourced to the state of residency
under the Illinois Income Tax Act, this limitation does not include Illinois taxes attributable to
gambling winnings. (This is a GIL.)
October 3, 2014
Re:

Credit for taxes paid to other states on gambling/lottery winnings

Dear Xxxx:
This is in response to your letter dated September 4, 2014 in which you request a legal tax ruling
regarding the treatment of gambling winnings. The Department’s regulations require that the
Department issue only two types of letter rulings, Private Letter Rulings (“PLRs”) and General
Information Letters (“GILs”). PLRs are issued by the Department in response to specific taxpayer
inquiries concerning the application of a tax statute or rule to a particular fact situation. A PLR is
binding against the Department, but only as to the taxpayer issued the ruling and only to the extent the
facts recited in the PLR are correct and complete. GILs do not constitute statements of Department
policy that apply, interpret or prescribe the tax laws and are not binding against the Department. See 2
Ill. Adm. Code 100.1200(b) and (c). The nature of your letter and the information provided require
that we respond with a General Information Letter.
Your letter states as follows:
Please be advised that I am writing this letter in effort to request a private letter ruling
regarding an unresolved tax issue for credit I have claimed for taxes paid to other states. I
received a Return Correction Notice dated MONTH XX, 20XX regarding my IL-1040 Income
Tax Return for the tax year 20XX. The notice proposed to disallow my credit for taxes paid to
other states for my gambling winnings. After speaking with various representatives at the
Illinois Department of Revenue I was sent a copy of the Illinois Income Tax Act. My
interpretation of the act does not completely state that I can not take credit for taxes paid to
another state but it does present a limitation of the income tax to be X% or X% of the gambling
winnings from the other state. I have not been able to resolve this issue through the regular
channels so I was advised to submit a request to the Legal Service Department to have a
private letter ruling issued to me on this matter.
RESPONSE

Section 601(b)(3) of the Illinois Income Tax Act (35 ILCS 5/601) allows residents to claim a credit for
income taxes paid to other states. That section also provides:
For taxable years ending on or after December 31, 2009, the credit provided under this
paragraph for tax paid to other states shall not exceed that amount which bears the same ratio
to the tax imposed by . . . this Act as the amount of the taxpayer's base income that would be
allocated or apportioned to other states if all other states had adopted the provisions in Article 3

of this Act bears to the taxpayer's total base income subject to tax by this State for the taxable
year.
The Schedule CR, Credit for Tax Paid to Other States, implements this limitation by having the
taxpayer list items of income from all sources in Column A; write the amount that is sourced to other
states using Illinois’ sourcing rules in Article 3 of the Illinois Income Tax Act in Column B of each
line; then writing the total income and total non-Illinois sourced income on Line 42; and computing
the fraction of income that is from non-Illinois sources. This fraction, multiplied by the taxpayer’s
Illinois income tax liability before credits, yields the limit on the credit allowed for taxes paid to other
states.
In Article 3 of the Illinois Income Tax Act, Section 301(c)(2) (35 ILCS 5/302) provides:
Any item of income or deduction which was taken into account in the computation of base
income for the taxable year by any person other than a resident and which is not otherwise
specifically allocated or apportioned pursuant to Section 302, 303 or 304 . . . in the case of an
individual, trust or estate, shall not be allocated to this State.
Except in the case of a professional gambler, who would apportion his or her gambling winnings as
business income under the provisions of Section 304 of the Illinois Income Tax Act (35 ILCS 5/304),
there is no provision in Sections 302, 303 or 304 that would allocate gambling winnings of a
nonresident to Illinois. Thus, if all states used Illinois’ rules for sourcing income, no other state would
tax gambling winnings of a nonresident gambler who is not a professional. Accordingly, pursuant to
the provision in Section 601(b)(3) quoted above, there is no provision in the instructions to the
Schedule CR that allows gambling winnings of a nonprofessional gambler to be included in Column B
of any line. For the vast majority of residents who are taxed by another state only on gambling
winnings, this means that the total income sourced to other states under Illinois’ rules is zero, and the
credit allowed under Section 601(b)(3) is zero.
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 have any
further questions, you may contact me at (217) 524-7580.
Sincerely,

Matthew Crain
Associate Counsel (Income Tax)