Could a corporation claim an Illinois subtraction for basis differences caused by federal bankruptcy discharge-of-debt attribute reductions?

Plain-English summary

Illinois did not allow the corporation to create a separate Illinois asset basis or claim the requested subtraction. Corporate Illinois base income began with federal taxable income, and Section 203 allowed only expressly listed modifications. The GIL said asset basis remained the same for federal and Illinois income tax, so the Department's correction notices were proper.

Illinois net losses or carryovers were reduced under Section 207(c) only when federal net operating losses or carryovers were reduced under IRC Section 108(b)(2)(A), using the statutory Illinois fraction. If federal law instead reduced asset basis or general business credits, the GIL said no Illinois net-loss reduction was required.

What this means for you

Identify which federal attribute was actually reduced after excluded discharge-of-debt income. Do not assume Illinois creates a separate asset basis or subtraction merely because Illinois and federal loss attributes differ.

Common questions

Q: Could the company report an Illinois-only lower asset basis?
A: No. The GIL said federal and Illinois asset basis must be the same.

Q: Did every federal attribute reduction reduce Illinois net losses?
A: No. The cited Illinois reduction depended on a federal NOL reduction under IRC Section 108(b)(2)(A).

Citations and references

• 35 ILCS 5/203(b), (h)
• 35 ILCS 5/207(a), (c)
• IRC § 108(a), (b)(2)(A), and (b)(2)(E)
• 86 Ill. Adm. Code 100.2310(c)

Subject

Subtraction Modification

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2015.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2015/it-15-0005-gil.pdf

Original ruling text

IT 15-0005 GIL — 7/10/2015 — Subtraction Modification

The Illinois Income Tax Act does not allow or require modifications to the attribute reductions
made for federal income tax purposes as the result of excluding discharge of indebtedness
income from taxable income.

July 10, 2015

Re: Illinois income tax
Dear Mr. XXXX:

This is in response to your letter dated June 15, 2015. 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.lLtax.com.
Your letter states as follows:

We are writing for your guidance in resolving an ongoing dispute between COMPANY and
Illinois Department of Revenue regarding how to properly report a subtraction for federal and
state attribute reduction adjustments.

In the 2008 tax year, COMPANY emerged from bankruptcy. In accordance with federal
regulations the company exchanged tax attributes in exchange for the discharge of indebtedness.
Prior to 2008, the company had carried back a significant amount of net operating losses and
general business credits federally. The result was that the assets exchanged for federal attribute
reduction consist primarily of depreciable assets, amortizable assets, other assets and
investments. This differs significantly from the attribute reduction assets exchanged in your state
where net operating losses account for the majority of assets exchanged for the discharge of
indebtedness. As a result of this significant basis difference the company has an ongoing
adjustment in the amount of depreciation, amortization and other expense differences. This will
be the case for many years. We ask that you offer us guidance in how to report this significant
difference on the IL-1120.

Originally, COMPANY submitted the 2009 Form IL-1120 along with appropriate schedules
deducting $5,480,163 on line 23 (other subtractions). The company received a Return Correction
Notice dated September 12, 2011 stating that Illinois had reduced our “other subtractions” by the
$5,480,163. We responded on October 6, 2011 with an explanation of this subtraction along with
documentation explaining the attribute reduction adjustments. At the time, COMPANY was
going through an Illinois audit. We explained the situation to the auditor who advised us to
adjust Form IL-1120 by netting the subtraction to the line 1 (federal taxable income) for IL-1120.
Following this guidance, we submitted a Form IL-1120X, netting the attribute reduction
adjustments with federal taxable income. Next we received an Error Notification Response
stating that we need to submit a federal 1120X showing adjusted federal taxable income, which
obviously does not apply.

After many conversations and attempts to explain our position, Illinois Department of Revenue is
disallowing us to report the federal and state attribute adjustments on any line of the IL-1120. In
accordance with the Illinois bankruptcy cancellation of debt adjustment requirements, however,
these adjustments should somehow be allowed. We are seeking assistance from your department
as to the best way to submit this adjustment on the 2009 IL-1120 as well as all of the years
following until the depreciation and amortization of the asset basis has concluded.

RULING

Under the Illinois Income Tax Act (“IITA” ; 35 ILCS 5/101 et seq.), the calculation of a corporation’s
Illinois base income begins with its federal taxable income, which is then adjusted by the addition and
subtraction modifications set forth in ITA Section 203(b). Regarding these modifications, IITA Section
203(h) states that no modifications shall be made to federal taxable income except as expressly provided
in Section 203. There is no provision in IITA Section 203 that authorizes the subtraction modification
described in your letter. Similarly, the IITA does not provide for an asset basis that is different from the
asset basis that applies for federal income tax purposes. As discussed below, IITA Section 207 may
require reduction of a taxpayer’s Illinois net loss or Illinois net loss carryovers where the taxpayer has
excluded discharge of indebtedness income under IRC Section 108(a). However, no provision of the
IITA mandates reduction of asset basis different from the basis reduction required under IRC Section
108(b)(2)(E), nor does the IITA require reduction of any Illinois credits incident to excluded discharge
of indebtedness income. In all events, a taxpayer’s asset basis is the same for both federal and Illinois
income tax purposes. Therefore, the Department’s notices in this case were properly issued.

Section 207(a) of the ITTA allows corporations a deduction for Illinois net losses. For net losses incurred
for taxable years ending on or after December 31, 2003, the loss may generally be carried over to the 12
taxable years following the taxable year of the loss. However, under IITA Section 207(c) the net loss
and net operating loss carryover must be reduced if the taxpayer is required to reduce a federal net
operating loss or federal net operating loss carryover under Internal Revenue Code (IRC) Section
108(b)(2)(A) on account of excluded discharge of indebtedness income. IITA Section 207(c) states:

(c) Notwithstanding any other provision of this Act, for each taxable year ending on or after
December 31, 2008, for purposes of computing the loss for the taxable year under subsection (a)
of this Section and the deduction taken into account for the taxable year for a net operating loss
carryover under paragraphs (1), (2), and (3) of subsection (a) of this Section, the loss and net
operating loss carryover shall be reduced in an amount equal to the reduction to the net operating
loss and net operating loss carryover to the taxable year, respectively, required under Section
108(b)(2)(A) of the Internal Revenue Code, multiplied by a fraction, the numerator of which is
the amount of discharge of indebtedness income that is excluded from gross income for the
taxable year (but only if the taxable year ends on or after December 31, 2008) under Section
108(a) of the Internal Revenue Code and that would have been allocated and apportioned to this
State under Article 3 of this Act but for that exclusion, and the denominator of which is the total
amount of discharge of indebtedness income excluded from gross income under Section 108(a)
of the Internal Revenue Code for the taxable year. The reduction required under this subsection
(c) shall be made after the determination of Illinois net income for the taxable year in which the
indebtedness is discharged.

Department Regulations § 100.2310(c) provides rules under IITA Section 207(c). A copy of the
regulation is enclosed. As indicated by Regulations § 100.2310(c)(1)(B), the amount of reduction, if
any, depends on the amount of the reduction required under IRC Section 108(b)(2)(A) to your federal
net operating loss or federal net operating loss carryover. Therefore, if you were required under federal
law to reduce asset basis or general business credits rather than a federal net operating loss or federal net
operating loss carryover, then you would not be required under IITA Section 207(c) to reduce an Illinois
net loss or Illinois net loss carryover. In addition, in no event should you determine an asset basis for
Illinois income tax purposes that differs from your asset basis for federal income tax purposes.

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
Staff Attorney (Income Tax)