Can a taxpayer use separate accounting instead of Illinois's statutory apportionment formula just because separate accounting produces a lower or different tax liability?

Plain-English summary

A taxpayer organized as an LLC and taxed as a partnership asked the Illinois Department of Revenue for permission to use "separate accounting" to figure out how much of its income should be taxed by Illinois, instead of using the standard statutory apportionment formula on its Form IL-1065 for the tax year ended December 31, 2014. The taxpayer's stated reason was that the prescribed sales apportionment factor produced "a grossly distorted result that is not indicative of the actual Illinois activity for the year," and that a specific allocation method would more properly allocate Illinois activity to the partners.

The Department denied the petition. Under Section 304(f) of the Illinois Income Tax Act (the "IITA"; 35 ILCS 101 et seq.), a taxpayer may petition to use an alternative method — including separate accounting, excluding or adding apportionment factors, or another equitable method — but only if the standard formula does not fairly represent the taxpayer's business activity (for years before December 31, 2008) or the market for the taxpayer's goods, services, or income sources (for years on or after that date). The Department's regulation implementing that provision, 86 Ill. Adm. Code 100.3390(c), makes clear that an alternative method "may not be invoked ... merely because it reaches a different apportionment percentage than the required statutory formula." Instead, the taxpayer bears the burden of proving by "clear and cogent evidence" that the statutory formula taxes extraterritorial values and operates unreasonably and arbitrarily, attributing an out-of-proportion share of income to Illinois — and separately, that the proposed alternative method fairly and accurately apportions income to Illinois based on actual business activity there.

Here, the taxpayer's petition simply asserted that separate accounting "more accurately reflects its Illinois activity." The Department found that bare assertion insufficient to meet the regulatory standard, so the petition could not be granted at that time.

The Department also flagged an independent, timing-based problem: petitions under 86 Ill. Adm. Code 100.3390(e)(1) must be filed at least 120 days before the due date (including extensions) of the first return for which the alternative method is sought. Because partnerships get an automatic six-month filing extension under 86 Ill. Adm. Code 100.5030(b), the 2014 partnership return was due October 15, 2015. A petition filed September 1, 2015 — as this one was — fell short of the 120-day window, making it untimely for the 2014 tax year regardless of its merits. Under 86 Ill. Adm. Code 100.3390(e)(2), the taxpayer was told it must file its 2014 return using the standard statutory apportionment method, and could only pursue separate accounting for that year by filing an amended return that both used the desired method and included a new petition to use it.

What this means for you

Alternative apportionment is not a shortcut to a lower bill

You cannot get permission to use separate accounting, or any other alternative apportionment method, just because it produces a different — even a more favorable — tax result than the standard statutory formula. You must affirmatively prove, with clear and cogent evidence, that the statutory formula causes a grossly distorted result that taxes income unconnected to your actual Illinois business activity, and that your proposed alternative method fairly and accurately reflects that activity instead.

Timing matters as much as substance

Even a well-supported petition can fail on procedural grounds. A petition for alternative apportionment must be filed at least 120 days before the due date (including any extension) of the return it would apply to. For partnerships, remember that the automatic six-month extension under 86 Ill. Adm. Code 100.5030(b) pushes that due date — and therefore the 120-day deadline — later in the year than the unextended return due date. Filing close to the original due date, rather than the extended one, can cause you to miss the window entirely, as happened here.

If a petition is denied or untimely, an amended return is the fallback

If your petition wasn't timely (or is otherwise denied) for a year that has already been filed using the statutory formula, the path to seeking separate accounting for that year is to file an amended return using the desired alternative method and attach a new petition requesting permission to use it.

Common questions

Q: Does simply showing that separate accounting results in less Illinois tax justify using it?
A: No. The ruling is explicit that an alternative method "may not be invoked ... merely because it reaches a different apportionment percentage than the required statutory formula." You must show the statutory formula produces a grossly distorted, unreasonable result — not just a different number.

Q: Who has the burden of proof in an alternative apportionment petition?
A: The party seeking the alternative method (whether the taxpayer or, in other cases, the Director) has the burden of going forward with the evidence, and must prove by clear and cogent evidence both that the statutory formula operates unreasonably/arbitrarily and that the proposed alternative method fairly and accurately apportions income to Illinois.

Q: When must an alternative apportionment petition be filed?
A: At least 120 days before the due date, including extensions, of the first return for which the alternative method is sought, per 86 Ill. Adm. Code 100.3390(e)(1).

Q: What if my petition is filed too late for the year I originally wanted it to apply to?
A: Per 86 Ill. Adm. Code 100.3390(e)(2), you must file the original return using the statutory apportionment method, and then pursue separate accounting for that year (if still desired) by filing an amended return using the alternative method along with a petition to use it.

Citations and references

• Section 304(f) of the Illinois Income Tax Act (IITA), 35 ILCS 101 et seq.: authorizes petitions for alternative allocation and apportionment methods, including separate accounting, when the standard method does not fairly represent business activity or market in Illinois.
• 86 Ill. Adm. Code 1200.120(b) and (c): governs General Information Letters, confirming they provide general information and are not binding on the Department.
• 86 Ill. Adm. Code Section 100.3390: sets out the procedural and substantive requirements for petitioning to use an alternative apportionment method.
• 86 Ill. Adm. Code Section 100.3390(c): alternative apportionment may not be used merely because it reaches a different result than the statutory formula; requires clear and cogent evidence of distortion and of the fairness of the proposed alternative.
• 86 Ill. Adm. Code Section 100.3390(e)(1): petitions must be filed at least 120 days before the due date (including extensions) of the affected return.
• 86 Ill. Adm. Code Section 100.3390(e)(2): requires filing the original return under the statutory method if the petition is untimely, with alternative method relief pursued via amended return.
• 86 Ill. Adm. Code Section 100.5030(b): grants partnerships an automatic six-month filing extension for Illinois income tax returns.

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-15-0012-gil.pdf

Original ruling text

IT 15-0012 GIL 9/15/2015

Alternative Apportionment

Petition to use separate accounting cannot be granted merely because separate accounting
reaches a different tax liability than the statutory apportionment method.

September 15, 2015

Re:

YYYY, LLC
Petition for Alternative Apportionment

Dear Ms. XXXX:
This is in response to your letter dated September 1, 2015, in which you request permission to
use separate accounting to allocate income to Illinois, 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:
We have been asked to request permission to use an alternative apportionment
formula for Form IL-1065 for the tax year ended December 31, 2014. Using the
prescribed sales apportionment factor produces a grossly distorted result that is
not indicative of the actual Illinois activity for the year. The taxpayer requests
permission to use a specific allocation method in order to properly allocate Illinois
activity to the partners.
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.
Subsection (c) of that regulation provides:
A departure from the required apportionment method is allowed only where such
methods do not accurately and fairly reflect business activity in Illinois. An
alternative apportionment method may not be invoked, either by the Director or
by a taxpayer, merely because it reaches a different apportionment percentage
than the required statutory formula. However, if the application of the statutory
formula will lead to a grossly distorted result in a particular case, a fair and
accurate alternative method is appropriate. The party (the Director or the
taxpayer) seeking to utilize an alternative apportionment method has the burden
or going forward with the evidence and proving by clear and cogent evidence that
the statutory formula results in the taxation of extraterritorial values and operates
unreasonably and arbitrarily in attributing to Illinois a percentage of income
which is out of all proportion to the business transacted in this State. In addition,
the party seeking to use an alternative apportionment formula must go forward
with the evidence and prove that the proposed alternative apportionment method
fairly and accurately apportions income to Illinois based upon business activity in
this State.
Because your request merely states that separate accounting for the taxpayer’s Illinois income
more accurately reflects its Illinois activity, this petition does not meet this regulatory
requirement and cannot be granted at this time.
Also, 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
September 1, 2015, and will allow the taxpayer to use the requested method on original returns
due on or after December 30, 2015, if ultimately granted. Under 86 Ill. Adm. Code Section
100.5030(b), partnerships are granted an automatic six-month extension of time to file their

Illinois income tax returns, which are otherwise due on the fifteenth day of the fourth month after
the end of the taxable year. Accordingly, the return for a partnership for its taxable year ending
December 31, 2014, is October 15, 2015, and your petition was not timely for that taxable year.
Because you did not file a timely petition for permission to use separate accounting on the 2014
return, 86 Ill. Adm. Code Section 100.3390(e)(2) requires you to file the 2014 return using the
statutory apportionment method and to petition to use separate accounting by filing an amended
return using the desired separate accounting method and including with the amended return a
petition to use that method.
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