When a multi-state wind-power company sells its interest in a partnership that owns a wind farm, is the gain sourced to Illinois based on where the buyer is located or based on where the company's own work took place?

Plain-English summary

This Private Letter Ruling was requested by a multi-state limited liability company that develops, builds, owns, and operates large-scale wind farms across the United States and abroad. Because wind farms are capital-intensive, each project is typically housed in its own partnership: the taxpayer builds and operates the project, brings in outside equity investors, and then -- once the wind farm is fully operational -- often sells all or part of its partnership interest to a buyer, frequently a publicly traded "Yield Company" that specializes in acquiring operating clean-energy assets. The taxpayer had sold roughly one to two such partnership interests per year since the company's founding and asked the Illinois Department of Revenue to confirm how the gain from its most recent sale should be sourced for purposes of the Illinois sales factor.

Under 35 ILCS 5/304(a)(3)(C-5)(iii), gains from the sale of intangible personal property (which includes a partnership interest) are sourced to Illinois one of two ways. If the taxpayer is a "dealer" in that type of intangible property within the meaning of IRC Section 475, the gain is sourced to wherever the buyer (customer) is located -- customer-based sourcing under subparagraph (a). If the taxpayer is not a dealer, the gain is instead sourced based on where the taxpayer's own income-producing activity took place, using a cost-of-performance test -- subparagraph (b). The taxpayer argued it was not a "dealer in securities" for federal tax purposes because a non-widely-held, non-publicly-traded partnership interest does not meet the strict definition of a "security" under IRC Section 475(c)(2). However, the ruling explains that Illinois deliberately broadened this federal concept: the state statute refers to a dealer "in the item of intangible personal property," not merely a dealer "in securities," so the analysis turns on whether the taxpayer would be a dealer under IRC Section 475(c)(1) if the partnership interest were treated as a security.

Applying the "merchant analogy" from case law (including Kemon v. C.I.R., 16 T.C. 1026) and a 2012 IRS Chief Counsel Advice memorandum, the Department reasoned that a dealer is someone who profits not from a rise in the value of an asset held for investment, but from adding value and then selling to "customers" as a middleman, the way a wholesaler or retailer does. Here, the taxpayer built wind farms from the ground up, secured long-term power-purchase contracts, and then sold the completed, cash-flow-generating partnership to Yield Company buyers at a price well above its development cost -- functioning much like a manufacturer selling a finished product to a business customer. The Department also found the taxpayer's sales were "regular": with an average of nearly two partnership-interest sales per year over a period of years, spread across a business model built around developing and then divesting completed projects, this frequency was enough to be "regular" within the ordinary meaning of that word, even though "regularly" is not specifically defined in the Internal Revenue Code or its regulations.

The Department also confirmed related, foundational points along the way: because the taxpayer elected to treat all of its income as business income under 35 ILCS 5/1501(a)(1), the gain on the partnership sale was apportionable business income (not allocable nonbusiness income under 35 ILCS 5/303), and it belonged in the sales factor as a "sale" under 35 ILCS 5/1501(a)(21) and 86 Ill. Adm. Code 100.3370. With those threshold questions resolved, the dealer-status analysis controlled the final sourcing outcome.

The Department ultimately ruled in the taxpayer's favor: because the taxpayer regularly sold partnership interests to customers (Yield Companies) in the ordinary course of its trade or business, it was a "dealer in the item of intangible personal property" within Illinois' modified meaning of IRC Section 475(c)(1). As a result, the gain on the sale of the partnership interest is included in the numerator of the Illinois sales factor only if the buyer (customer) is located in Illinois -- not based on where the taxpayer's own development or negotiation work occurred.

What this means for you

If you develop and periodically sell partnership interests in Illinois

If your business builds up an asset (a project, a portfolio, a book of business) inside a partnership and then routinely sells that partnership interest to outside buyers as part of your normal business model -- even if those interests are not "securities" in the strict federal sense -- Illinois may treat you as a "dealer" in that intangible property. That means the gain on the sale would be sourced to Illinois only if your buyer/customer is commercially domiciled or resident in Illinois, regardless of where your own development, negotiation, or closing work took place.

If your sales of similar interests are occasional, not regular

The outcome here depended heavily on the facts: a consistent, multi-year pattern of selling completed partnership interests (nearly two per year) to sophisticated buyers, priced well above development cost, following a repeatable business cycle. A one-off or truly occasional sale of a partnership interest -- not part of an established pattern of dealing -- would more likely fall under the income-producing-activity (cost-of-performance) test in subparagraph (b) instead, sourcing the gain based on where the taxpayer's own work happened rather than the buyer's location.

Common questions

Q: Does this ruling mean every sale of a partnership interest by an Illinois taxpayer is sourced to the buyer's location?
A: No. Customer-based sourcing under 35 ILCS 5/304(a)(3)(C-5)(iii)(a) only applies if the seller is a "dealer" in that type of intangible property -- meaning it regularly sells such interests to customers in the ordinary course of its trade or business. If the seller is not a dealer, the gain is instead sourced based on the location of the seller's income-producing activity under subparagraph (b).

Q: The taxpayer said it wasn't a "dealer in securities" for federal tax purposes -- so why was it treated as a dealer for Illinois purposes?
A: Because the Illinois statute does not use the federal term "securities." It refers more broadly to a dealer "in the item of intangible personal property within the meaning of Section 475 of the Internal Revenue Code." The ruling treats this as asking whether the taxpayer would meet the IRC Section 475(c)(1) "dealer" test if the partnership interest were a security, not whether the interest is actually a security under IRC Section 475(c)(2).

Q: What made these sales "regular" rather than occasional?
A: The Department pointed to the taxpayer's consistent, multi-year pattern -- averaging close to two partnership-interest sales per year since the company's founding, as part of a repeatable business cycle of developing wind farms and then selling completed projects to fund the next round of development.

Q: Is this ruling binding on other Illinois taxpayers?
A: No. As a Private Letter Ruling issued under 2 Ill. Adm. Code 1200.110, it binds the Department only with respect to the specific taxpayer who requested it, and only to the extent the facts as represented are correct and complete. Other taxpayers with similar facts may find it persuasive, but it does not bind the Department as to them.

Q: Did the ruling address whether the gain was business or nonbusiness income?
A: Yes, as a threshold matter. The taxpayer represented, and the Department accepted, that it had elected to treat all of its income as business income under 35 ILCS 5/1501(a)(1), so the gain on the partnership-interest sale was apportionable business income includible in the sales factor rather than nonbusiness income allocated under 35 ILCS 5/303.

Citations and references

• 35 ILCS 5/304(a) -- general apportionment requirement for nonresidents with business income from multiple states
• 35 ILCS 5/304(a)(3)(A) -- defines the sales factor as a fraction of in-state sales over total sales
• 35 ILCS 5/304(a)(3)(C-5)(iii)(a) and (b) -- customer-based sourcing for dealers vs. income-producing-activity (cost-of-performance) sourcing for non-dealers, for gains from intangible personal property
• 35 ILCS 5/305(c) -- base income of a partnership is allocated/apportioned the same way as for any other nonresident
• 35 ILCS 5/1501(a)(21) -- definition of "sales" for sales-factor purposes
• 35 ILCS 5/1501(a)(1) -- election to treat income as business income
• 35 ILCS 5/301, 5/302, 5/303 -- provisions governing residents' income, compensation, and nonbusiness income allocation, referenced in the "sales" definition
• 86 Ill. Adm. Code 100.3370(a)(1), (b), (c) -- administrative guidance on the sales-factor numerator and denominator
• 86 Ill. Adm. Code 100.3380(b) -- receipts excluded from the sales-factor denominator
• 2 Ill. Adm. Code 1200.110 -- procedural rule governing Private Letter Ruling requests
• IRC Section 475(a), (b), (c)(1), (c)(2) -- federal "dealer in securities" definition and mark-to-market accounting rules, incorporated by reference into Illinois' sourcing statute
• Treas. Reg. Section 1.475(b)-1(a) -- defines when a security is "held for investment" rather than for sale to customers
• Kemon v. C.I.R., 16 T.C. 1026 (1951) -- Tax Court "merchant analogy" for distinguishing dealers from investors/traders
• Chief Couns. Adv. 201238-025 (Sept. 21, 2012) -- IRS guidance on what constitutes a "customer" for dealer status under IRC Section 475
• General Information Letter IT 08-0028-GIL -- prior Illinois guidance applying the dealer/customer-based sourcing analysis to a different taxpayer's sale of intangible property
• Rev. Rul. 2007-65 -- IRS ruling that encouraged "Flip" partnership structures in wind-farm financing, cited for industry background

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2016.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2016/it-16-0002-plr.pdf

Original ruling text

IT 16-0002-PLR 11/18/2016 APPORTIONMENT
Income from Intangible Property – Where taxpayer is a dealer, gain from sale of
partnership interest is included in numerator of sales factor where gain is received
from customer in Illinois
November 18, 2016
Re:

Request for Private Letter Ruling
COMPANY

Dear Xxxxx:
This is in response to your letter dated April 14, 2016 in which you requested a Private
Letter Ruling on behalf of COMPANY. Review of your request for a Private Letter Ruling
indicates that all information described in paragraphs 1 through 8 of subsection (b) of 2
Ill. Adm. Code 1200.110 is contained in your request. This Private Letter Ruling will bind
the Department only with respect to COMPANY. Issuance of this ruling is conditioned
upon the understanding that COMPANY and/or any related taxpayer(s) is not currently
under audit or involved in litigation concerning the issues that are the subject of this ruling
request.
The facts and analysis as you have presented them are as follows:
We are writing to request a Private Letter Ruling in accordance with 2 Ill. Admin.
Code 1200.110 related to the disposition of partnership interests and the sourcing
provisions under Illinois Compiled Statutes 5/304(a)(3)(C-5)(iii)(a). The
transactions in question occurred during the tax year ended MONTH 31, 20XX.
Disclosures

1. Enclosed please find an original Form IL-2848, Power of Attorney, authorizing
   LEGAL TEAM to represent COMPANY (“COMPANY”) before the Illinois
   Department of Revenue (the “Department”).
2. This Private Letter Ruling (“PLR”) is not requested with regard to hypothetical or
   alternative proposed transactions.
3. The Taxpayer is not currently engaged in litigation with the Department in regard
   to this or any other tax matter.
4. The taxpayer is not currently under audit by the Department in regard to this
   matter, however, the Taxpayer is currently under audit related to its 20XX IL-1065
   replacement tax return.
5. The Taxpayer requests that certain information be redacted from the PLR prior
   to dissemination to others. The Taxpayer requests that its name, all contractual
   parties’ names, its exhibits, and the name of its representative be redacted.

6. The Taxpayer knows of no authority contrary to the authorities referred to and
cited below.
Tax Year
This ruling is requested for the tax year ending MONTH 31, 20XX (“the 20XX tax
year”).
Ruling Requested
Based on our analysis of ILCS 5/304(a)(3)(C-5)(iii)(a), it is our understanding that
the Taxpayer’s sales of partnership interests in the COMPANY 1 should be
sourced based on customer location. We respectfully request a Private Letter
Ruling in accordance with 2 Ill. Adm. Code 1200.110 that confirms that the
Taxpayer’s sales of partnership interests should be sourced under ILCS
5/304(a)(3)(C-5)(iii)(a).
Executive Summary
Illinois Statute governs when other items of income from intangible personal
property should be considered a sale within the state. ILCS 5/304(a)(3)(C-5)(iii)(b)
provides that the location of the income-producing activity should be used in
determining when such an item of income should be included in the sales factor
numerator. However, if the taxpayer is a dealer in the item of intangible personal
property within Illinois’ modified meaning of Section 475 of the Internal Revenue
Code, then ILCS 5/304(a)(3)(C-5)(iii)(a) requires a taxpayer to utilize a customerbased sourcing approach. For federal income tax purposes, the Taxpayer is not a
dealer under IRC Section 475 because the sale of the partnership interests in the
COMPANY 1 is not a “security” under IRC Section 475(c)(2). However, for Illinois
income tax purposes, the state replaced the word “security” with “intangible
personal property.” While the sale of the COMPANY 1 is not a “security” for federal
tax purposes, it is a sale of “intangible personal property” for purposes of Illinois’
statutory sourcing provision. Additionally, as detailed in the below analysis, the
Taxpayer regularly sells partnership interests to customers in the ordinary course
of its business. As a result, for Illinois purposes, the Taxpayer is a dealer in an item
of intangible personal property within the meaning of “dealer in securities” under
IRC Section 475(c)(1).
Therefore, based on our analysis of IRC Section 475(c)(1) for purposes of Illinois’
sourcing of income from intangible personal property and the Department’s
administrative guidance regarding ILCS 5/304(a)(3)(C-5)(iii)(a), the Taxpayer’s
sales of partnership interests should be sourced under the customer-based
sourcing methodology required under ILCS 5/304(a)(3)(C-5)(iii)(a). We are
requesting the Illinois Department of Revenue confirm our understanding of the
application of ILCS 5/304(a)(3)(C-5)(iii)(a) to Taxpayer’s fact pattern.
Facts
Organization and Activities
COMPANY (“the COMPANY”), a STATE organized limited liability company, has
been a regarded partnership for U.S. federal income tax purposes since 20XX. Its

current owners are COMPANY 2 owning #, COMPANY 3 owning # percent,
COMPANY 4 owning # percent, COMPANY 5 owning # percent and COMPANY 6
owning just under # percent. The Taxpayer, along with its affiliated companies, is
CONTINENT’s largest independent wind power generation company. It has fully
developed and placed into service # wind farms across the COUNTRY, COUNTRY
1, and CONTINENT 1. Specifically, the Taxpayer develops, owns, operates,
maintains, and sells these large-scale, capital intensive, renewable energy
projects.
Due to the capital intensive nature of developing wind farms, wind farm project
companies are held in separate legal entities for both legal and financing purposes.
Generally, each wind farm is held by a disregarded entity during the project’s
development phase. As the project construction is completed and the wind farm
becomes operational, the taxpayer introduces external equity finance investors
(i.e., partners) as an alternative means to traditional financing (e.g. bank loans).
The equity finance investors contribute capital to a disregarded holding company
that’s the single member of the disregarded project entity, and the disregarded
holding company becomes a federally regarded partnership.
Wind farm developers and equity finance investors sought mutual benefits in the
development and operations of wind farms, which evolved into the finance
structures employed today. Internal Revenue Service Ruling 2007-65 was issued
to encourage the development of the wind farm industry and to provide favorable
guidelines for investors and developers to finance wind farms. Revenue Ruling
2007-65 affirmed the underlying legal, finance, regulatory and tax implications of
building and financing these wind projects and generally led the industry to
structure them as “Flip” partnership structures. The utilization of this type of
partnership structure allows the Taxpayer to monetize certain tax attributes (e.g.
depreciation expense and tax credits) to achieve an investment return required by
the equity investor, while simultaneously providing critical financing for the project
and Taxpayer. The equity finance investor is allocated a certain percentage
(generally # percent) of taxable income/losses and credits until the investor has
achieved a defined after-tax internal rate of return (the “Flip Point”). The Taxpayer
is generally allocated 1 percent of taxable income/losses, and cash. Although the
Flip Point may occur sooner, it is expected that the Flip Point will not occur until
after the end of year 10 of the project. When the partnership reaches the Flip Point,
the allocations flip, and the Taxpayer is allocated the majority of the partnership’s
activity.
During the life of the partnership, the Taxpayer manages, maintains, and controls
the project company; the equity finance investors own a passive interest in the
partnership. As the project company partnership matures, the Taxpayer will either
(1) continue to own and operate the project company; or (2) the Taxpayer and /or
equity finance investor purposefully (i.e. actively solicit to) dispose of significant
portions of their interests in the project company partnership to third parties and
large, generally publicly traded “Yield Companies.” The sale to third party investors

and Yield Companies serves the market’s demand for the Taxpayer’s high quality,
valuable assets with a track record of operational excellence. In instances where
the Taxpayer sells partnership interests, it may either maintain some portion of
ownership and operation of the project company, or will fully divest of its interest
in the partnership. Under either scenario, the income and profit from the
partnership interest sale transactions are used to pay down existing debt, and to a
larger extent, used to finance the Taxpayer’s next development projects.
Given the life cycle of these projects, the Taxpayer at any given point holds various
projects through disregarded single member limited liability companies, or as a
partner in federally regarded partnerships. During the 2015 tax year, the Taxpayer
held 21 federally regarded domestic (U.S.) partnership interests, and 25 federally
regarded foreign (non-U.S.) partnership interests in operational wind project
companies, as well as numerous projects under development through SMLLCs.
Given the large scale nature of these projects (e.g. a single wind farm project can
cost several hundreds of millions of dollars), it can take several years from
development company ground breaking, to project company commercial
operation, to the point when equity investors are introduced, and ultimately to the
point where the project company is sold to a Yield Company, or the partnership
flips. As a result of market conditions and performance of the wind farms,
partnership interests have historically been sold prior to project company
partnerships reaching the Flip Point. The Taxpayer has yet to reach a Flip Point
with regards to any project company.
Taxpayer’s Operations
On an annual basis, the Taxpayer generates gross income from several activities
that are core to its business. The majority of the Taxpayer’s gross income is
generated from the following: (1) development fees; (2) sales of partnership
interests; (3) sales of wind farms under a build/transfer agreement; (4) distributive
shares of partnership income from the Taxpayer’s interest in underlying project
company partnerships; (5) income from wholly-owned wind farms; and (6) interest
income generated from loans to project companies. Below is a detailed description
of each activity of the Taxpayer.
Development fees – A fee paid to the Taxpayer for development services, which
include negotiating construction financing terms, negotiating the project and any
necessary operational documents, obtaining permits, and performing other
services relating to the project. The development fee is earned upon completion of
the development services, which occurs upon commercial operation of the project
company facilities. Development fees vary year to year depending on when
projects are completed and operational, but have historically contributed
substantial amounts to gross and taxable income.
Sales of Partnership Interests – As described above, the Taxpayer will actively
solicit buyers (e.g. Yield Companies) for wind farm project companies. The
Taxpayer has sold # partnership interests since 20XX (approximately # per year

including the current transaction; # per year excluding this transaction) which has
consistently contributed substantial amounts to gross and taxable income.
Build/Transfers – Under build/transfer agreements, the Taxpayer will contract with
customers to build a wind farm. Upon completion of the wind farm, the assets are
sold (transferred) to the customer. The Taxpayer will generally contract for several
build transfer projects throughout a tax year, which contributes substantially to
gross and taxable income.
Distributive Share of Partnership Income/Loss – As a project company becomes
operational, electricity produced by the project company is sold to a regional power
authority under a multi-decade master power and sale agreement. During the first
several years of a project company, the project company partnership will generate
substantial losses as depreciation expense on wind farm turbines exceeds the
taxable income generated from the sale of electricity. It is generally not until after
the assets have been fully depreciated (five plus years) that the partnership will
generate taxable income that is distributed to the Taxpayer. Note, the Taxpayer’s
allocation of partnership income/loss is generally small (e.g. 1 percent) until the
partnership flip occurs.
Income from Wholly Owned Wind Farms – The Taxpayer generates taxable
income/loss from two wholly owned operational wind farms.
Interest Income – In addition to other methods of financing project company
construction (e.g. traditional bank loans, equity finance investors), the Taxpayer
will lend project companies capital that generates interest income.
Transaction in Question
On MONTH 15, 20XX, COMPANY 7, a single member LLC disregarded subsidiary
of the Taxpayer, executed a purchase and sale agreement, whereby it sold #
percent of its partnership interests in COMPANY 8, COMPANY 9, COMPANY 10
and COMPANY 11 (collectively, the “COMPANY 1”). The interests were purchased
by three limited liability companies owned in whole or in part by COMPANY 12. –
COMPANY 13, COMPANY 14, and COMPANY 15. (As the structure of the
purchaser’s group is not relevant for purposes of this ruling request, the
COMPANY 12 group will be treated generally as a single entity and referred to
collectively as “COMPANY 16”.) For federal income tax purposes, the sale of the
partnership interests in the COMPANY 1 by the Taxpayer is treated as the sale of
intangible assets.
Additional Factual Representations

1. The Taxpayer is a multi-state taxpayer with the right to apportion base
   income under ILCS 5/304.
2. The Taxpayer will elect to treat all income as “business income” pursuant
   to ILCS 5/1501(a)(1). As a result, it is represented that the sale of the

COMPANY 1 results in apportionable business income, and as such, the
gain on the sale of the partnership interests is not subject to allocation under
ILCS 5/303 (nonbusiness income).

3. The Taxpayer is not a dealer for federal income tax purposes because the
   sale of the COMPANY 1 (non-widely held, non-publicly traded partnerships)
   is not treated as the sale of a “security” as defined under IRC Section
   475(c)(2).
4. The purchase price paid by COMPANY 16 for the COMPANY 1 significantly
   exceeded the costs paid by the Taxpayer for the development of the
   projects.
5. The Taxpayer has sold ## partnership interests (in addition to this
   transaction) since 20XX, in a fact pattern consistent to that described in the
   below analysis.
   RELEVANT AUTHORITY AND ANALYSIS
   To determine the sales factor sourcing rule applicable for the sale of the
   COMPANY 1, we will first review the State’s general allocation and apportionment
   provisions, and then will specifically analyze the Taxpayer’s status as a dealer in
   an item of intangible personal property (i.e., partnership interests).
   ILCS 5/305(c) states:
   Allocation and apportionment of base income by partnerships. Base income of a
   partnership shall be allocated or apportioned to this State pursuant to Article 3, in
   the same manner as it is allocated or apportioned for any other nonresident.
   ILCS 5/304(a) provides that:
   For tax years ending on or after December 31, 1998, and except as otherwise
   provided by this Section, persons other than residents who derive business income
   from this State and one or more other states shall compute their apportionment
   factor by weighting their property, payroll, and sales factors as provided in
   subsection (h) of this Section.
   Subsection (h)(3) of ILCS 5/304 states that for tax years ending on or after
   December 31, 2000, only the sales factor is used to apportion business income.
   As such, the Taxpayer is required to apportion its business income in tax year 2015
   by use of the sales factor, as calculated under ILCS 5/304.
   ILCS 5/304(a)(3)(A) describes the sales factor:
   The sales factor is a fraction, the numerator of which is the total sales of the person
   in this State during the taxable year, and the denominator of which is the total sales
   of the person everywhere during the taxable year.
   ILCS 5/1501(a)(21) defines “sales” as all gross receipts of the taxpayer not
   allocated under Sections 301 (relating to residents and income not subject to

apportionment under Section 304), 302 (relating to compensation) and 303
(relating to nonbusiness income).
Illinois Administrative Code 100.3370(a)(1) provides additional guidance on what
constitutes “sales”:
IITA Section 1501(a)(22) defines the term “sales” to mean all gross receipts of the
person not allocated under IITA Sections 301, 302, and 303. Thus, for the
purposes of the sales factor of the apportionment formula for each trade or
business of the person, the term “sales” means all gross receipts derived by the
person from transactions and activity in the regular course of such trade or
business.
The sale of the Taxpayer’s partnership interests in the COMPANY 1 are sales
under ILCS 5/1501(a)(21) as the sales are derived by the Taxpayer from
transactions and activity in the regular course of its trade or business and are not
specifically allocated under IITA Sections 301, 302, or 303. Accordingly, the sale
of the partnership interests should receive representation in the Taxpayer’s sales
factor.
For purposes of determining the sales factor denominator and numerator, Illinois
Administrative Code 100.3370(b) and (c) provides for the following:
(b) Denominator. The denominator of the sales factor shall include the total gross
receipts derived by the person from transactions and activity in the regular course
of its trade or business, except receipts excluded under 86 Ill. Adm. Code
100.3380(b).
(c) Numerator. The numerator of the sales factor shall include the gross receipts
attributable to this State and derived by the person from transactions and activity
in the regular course of its trade or business. All interest income, service charges,
carrying charges, or time-price differential charges incidental to such gross
receipts shall be included regardless of the place where the accounting records
are maintained or the location of the contract or other evidence of indebtedness.
ILCS 5/304(a)(3)(C-5)(iii) determines how the sale of a partnership interest (an
intangible asset) is attributed to Illinois (i.e., when is it included in the numerator of
the sales factor):
(C-5) For taxable years ending on or after December 31, 2008, sales, other than
sales governed by paragraphs (B) [sales of tangible personal property], (B-1)
[patents, copyrights, trademarks, and similar items of intangible personal property],
(B-2) [patents, copyrights, trademarks, and similar items of intangible personal
property], B-5 [telecommunications services], and (B-7) [broadcasting services],
are in this Sate if any of the following criteria are met:
(iii) In the case of interest, net gains (but not less than zero) and other items of
income from intangible personal property, the sale is in this State if:

(a) In the case of a taxpayer who is a dealer in the item of intangible personal
property within the meaning of Section 475 of the Internal Revenue Code,
the income or gain is received from a customer in this State. For purposes
of this subparagraph, a customer is in this State if the customer is an
individual, trust or estate who is a resident of this State and, for all other
customers, if the customer’s commercial domicile is in this State. Unless
the dealer has actual knowledge of the residence or commercial domicile
of a customer during a taxable year, the customer shall be deemed to be
a customer in this State if the billing address of the customer, as shown in
the records of the dealer, is in this State; or
(b) In all other cases, if the income-producing activity of the taxpayer is
performed in this State or, if the income-producing activity of the taxpayer
is performed both within and without this State, if a greater proportion of
the income-producing activity of the taxpayer is performed within this
State than in any other state, based on performance costs.
ILCS 5/304(a)(3)(C-5)(iii) clarifies that only the net gains (not gross receipts) from
the sale of intangible personal property (e.g., partnership interests) are to be
included in the sales factor, and additionally, provides for two avenues for how to
source these types of sales. If the Taxpayer is a “dealer in the item of intangible
personal property within the meaning of Section 475 of the Internal Revenue
Code”, then the Taxpayer sources the sale of the partnership interests based on
the location of the customer. If the Taxpayer is not a dealer in the item of intangible
personal property within the meaning of Section 475 of the Internal Revenue Code,
then the Taxpayer sources the sale of the partnership interests based on where
the taxpayer’s cost of performance related to the income-producing activity takes
place.
IRC Section 475 does not refer to “intangible personal property” but instead applies
only to dealers in “securities.” IRC Section 475(c)(1) defines the term “dealer in
securities” as a taxpayer that:
(A) regularly purchases securities from or sells securities to customers in the
ordinary course of a trade or business; or
(B) regularly offers to enter into, assume, offset, assign or otherwise terminate
positions in securities with customers in the ordinary course of a trade or
business.
IRC Section 475(c)(2) defines “securities” as:
(A) shares of stock in a corporation;
(B) partnership or beneficial ownership interest in a widely held or publicly
traded partnership or trust; (emphasis added)
(C) note, bond, debenture, or other evidence of indebtedness’
(D) interest rate, currency or equity notional principal contract;
(E) evidence of an interest in, or a derivative financial instrument in, any
security described in subparagraph (A), (B), (C), or (D), or any currency,

including any option, forward contract, short position, and any similar
financial instrument in such a security or currency; and
(F) position which (i) is not a security described in subparagraph (A), (B), (C),
(D), or (E), (ii) is a hedge with respect to such a security, and (iii) is clearly
identified in the dealer’s records as being described in this subparagraph
before the close of the day on which it was acquired or entered into (or
such other time as the Secretary may by regulations prescribe).
The Taxpayer is not a “dealer in securities” as the COMPANY 1 are not “securities”
under IRC Section 475(c)(2) because they are neither widely held nor publicly
traded. However, it’s important to note that ILCS 5/304(a)(3)(C-5)(iii)(a) does not
simply state “dealer in securities”, but rather “dealer in the item of intangible
personal property within the meaning of Section 475 of the Internal Revenue
Code.” Based on the plain language of the statute, it appears it was the intent of
the Illinois legislature to modify IRC Section 475 for purposes of the State’s
sourcing statute under ILCS 5/304(a)(3)(C-5)(iii)(a). The modification (“dealer in
the item of intangible personal property”) provides for a broader definition of the
types of intangible sales the State seeks to source, rather than limiting the
sourcing provision to the intangible personal property type of “securities” defined
under IRC Section 475(c)(2).
Based on the above analysis, if the Taxpayer would be a dealer in the item of
intangible personal property under Illinois’ modified meaning of IRC Section
475(c)(1), then the Taxpayer sources its sales of intangible personal property
based on the location of its customer. Said another way, if the Taxpayer is a dealer
within the Illinois modified meaning of IRC Section 475(c)(1) with regards to the
sale of partnership interests, then the Taxpayer would source the partnership
interest sales based on customer location. This logic and analysis are not
inconsistent with the state’s guidance in General Information Letter IT 08-0028GIL, which stated in pertinent part:
For this purpose, a taxpayer is a dealer with respect to an item of intangible
personal property if the taxpayer is actually a dealer with respect to the item under
IRC Section 475, or would be a dealer with respect to the item under IRC Section
475 if the item were a security as defined in IRC Section 475(c)(2). This is
consistent with the purpose of IITA Section 304(a)(3)(C-5)(iii) to create a
dichotomy between taxpayers that are in the business of selling the particular item
of intangible property and taxpayers not in such business. The purpose of the
Section is not to create a customer-based sourcing rule only for dealers in
securities, while leaving other taxpayers, including those whose business it is to
sell the particular intangible item, to apply the income-producing activity test.
Taxpayers in the business of selling a certain intangible item assign gross receipts
based on the location of their customers, while taxpayers not in the business of
selling such item assign gross receipts based on the income-producing activity.
[Emphasis added].
The taxpayer requesting the above general information letter sold online
memberships (self-created intangible assets that were not “securities” under IRC

Section 475(c)(2)) in the ordinary course of its trade or business. The
Department’s ruling concluded that the taxpayer “must assign its gross receipts
from sales of membership interests under IITA Section 304(a)(3)(C-5)(iii)(a)
because the taxpayer is in the trade or business of selling membership interests”.
Based on the above, the salient issue for purposes of the sourcing question under
ILCS 5/304(a)(3)(C-5)(iii)(a) is to determine whether the taxpayer either:

1. regularly purchases partnership interests from or sells partnership interests
   to customers in the ordinary course of a trade or business; or
2. regularly offers to enter into, assume, offset, assign or otherwise terminate
   positions in partnership interests with customers in the ordinary course of a
   trade or business.
   In the context of the GIL cited above and interpreting the conclusion contained
   therein, if the answer is “yes” to either one of the above, then the Taxpayer is a
   “dealer in the item of intangible property” and is required to utilize customer based
   sourcing.
   Based on the definition of dealer under IRC Section 475(c)(1) within the context of
   Illinois’ sourcing provisions (i.e., sales of intangible assets, not just those defined
   within IRC Section 475(c)(2)), the relevant section on which to focus our attention
   is whether the Taxpayer “regularly” purchases or sells partnership interests to
   “customers” in the ordinary course of a trade or business. It can be difficult to
   separate the concepts of “regular” and “customer” for purposes of IRC Section
3. Using a merchant analogy, administrative and judicial precedent have
   concluded a taxpayer had customers, and was therefore a dealer (under IRC
   Section 475). The taxpayer’s profit margin resulted from purchasing an item in
   one market, wholesale, and then selling the item in another market, retail, and
   earning a profit from the difference. In this sense, the taxpayer would be a “market
   maker”. Whether a taxpayer “regularly” does so requires that we look at the
   taxpayer’s business model. The below analysis first focuses on the federal
   interpretation of “customer” under IRC Section 475, and then focuses on what
   constitutes “regularly”.
   COMPANY 16 – the “Customer”
   IRC Section 475 does not define the term “customer”. In Chief Couns. Adv. 201238-025 (Sept. 21, 2012), the Office of Chief Counsel specifically addressed the
   determination of what constitutes a “customer”, stating the following:
   Section 475 does not define who is a customer, but we can look at case law prior
   to the enactment of section 475 to help in making that determination. In
   determining whether a taxpayer has customers, the courts have looked at how a
   taxpayer is compensated. The courts in finding dealer status outside of section
   475 have looked to whether a taxpayer is paid for its services as an intermediary
   – as a market-maker…We need to see whether Taxpayer was getting paid for
   making a market (dealer) and not profiting from a rise in values of the underlying
   assets during the interval of time between a purchase and resale (investor or
   trader). Several pre-section 475 cases have used a merchant analogy to
   distinguish dealers from traders. Dealers, like merchants, sell to customers and
   purchase the securities with the expectation of selling at a profit. This profit is not

because of a rise in value during the period of time between the purchase and
sale, but because they hope to find a market of buyers who will purchase from
them at a price in excess of their cost. This excess or mark-up represents
remuneration for acting as a middle man, bringing together buyer and seller. See
Kemon v. Commissioner, 16 T.C. 1026, 1031-1033.
In the instant case, the Taxpayer sold partnership interests to a Yield Company –
COMPANY 12. and its subsidiaries (i.e., COMPANY 16). Per COMPANY 16’s 10K annual report filed with the U.S. Securities and Exchange Commission, the
company describes itself as follows:
We are a dividend growth-oriented company formed to own and operate
contracted clean power generation assets acquired from COMPANY 17. and its
consolidated subsidiaries, or “COMPANY 17,” and third parties. Our business
objective is to acquire assets with high-quality contracted cash flows, primarily from
owning solar and wind generation assets serving utility, commercial and residential
customers. Over time, we intend to acquire other clean power generation assets,
including natural gas and hydro-electricity facilities, as well as hybrid energy
solutions that enable us to provide contracted power on a 24/7 basis. We believe
the renewable power generation segment is growing more rapidly than other power
generation segments due in part to the emergence in various energy markets of
“grid parity,” which is the point at which renewable energy sources can generate
electricity at a cost equal to or lower than prevailing electricity prices. We expect
retail electricity prices to continue to rise due to the increasing cost of producing
electricity from fossil fuels caused by required investments in generation facilities
and transmission and distribution infrastructure and increasing regulatory costs,
among other factors. Our portfolio consists of solar and wind projects located in
the CONTINENT, COUNTRY 1, and the COUNTRY 2 and COUNTRY 3 with an
aggregate nameplate capacity of 1,507.3 MW as of MONTH 20, 20XX.
Per the above, COMPANY 16 is in the business of owning and operating
alternative energy generation assets that produce steady cash flows, in a sector
poised for growth. COMPANY 16’s business model requires that they find the best
possible assets and operations teams in a highly technical and capital intensive
space. Suffice it to say, COMPANY 16 is not in the business of building or
developing these types of assets, they are in the business of acquiring high quality
assets, from highly reputable developers, that secure cash flows for their investors.
The above description of COMPANY 16 illustrates that the advent of alternative
energy technologies, and the companies that develop them, has created Yield
Companies, like COMPANY 16, that have subsequently created a demand for the
Taxpayer’s product – a high quality product developed and operated by a highly
skilled management team and group of engineers, with stable contracted cash
flows previously negotiated with regional power authorities. These companies are
not in the business to simply purchase wind farm assets (hence why these
transactions are not simply structured as asset sales), but rather to purchase the
entire platform (an entity that’s comprised of assets, negotiated electricity
purchase/sale agreements, and operations). It is this relatively recent market

appetite that has created a demand for the Taxpayer’s partnership interests over
the past six years. Overall, this relationship is not dissimilar to that of airplane
manufacturers, who are not in the business of running an airline, but who are in
the business of developing, selling, and maintaining aircraft to be used in an
airline’s (their customers’) publicly traded business.
Under the analysis provided in the Chief Counsel Advice Memorandum, the
Taxpayer is acting in the capacity of a market-maker in that the Taxpayer is
profiting from the value they created from the development of the wind farm
projects, creating an effective operating platform, securing long-term negotiated
power contracts, and bringing to market (unsolicited) that complete package (a
legal entity; a partnership), which is available for sale to COMPANY 16. The
Taxpayer’s profit was not derived merely from a rise in the underlying value of the
partnership interests, as evidenced by the purchase price that was negotiated at a
point substantially in excess of the costs of the projects. In addition, the Taxpayer
holds itself out to the public as a developer of these types of projects (i.e., seller;
a market leader in development and seller of build/transfer projects), and
COMPANY 16 (i.e., customer) holds itself out to the public (as evidenced by its
Form 10-K) as in the business of acquiring and operating assets produced by the
likes of the Taxpayer. Therefore, based on the above analysis and Taxpayer
representation that its historical sales of partnership interests were executed within
a consistent fact pattern, the Taxpayer sold partnership interests to customers in
the ordinary course of its trade or business.
Given that, our next, and final question to address is whether the Taxpayer
“regularly” sells partnership interests. In other words, to analyze whether the
Taxpayer sells partnership interests pursuant to some practice or order with
historical frequency.
Sales of Partnership Interests – “regularly” occurs in ordinary course of Taxpayer’s
business
IRC Section 475 does not expressly define the term “regularly”, and the exact term
“regularly” does not appear to be expressly defined elsewhere in the Code. In the
absence of a specific definition in the Code or the Regulations, and absent
evidence that Congress intended any special or peculiar meaning for the word, it
is proper to assume that Congress intended the word to be used “in its generally
accepted or ‘dictionary’ sense.” According to Merriam-Webster’s online dictionary,
“regularly” is an adverb formed from the word “regular”, which has the following
pertinent meanings: (1) orderly, methodical (regular habit); recurring, attending, or
functioning at fixed, uniform, or normal intervals; (2) constituted, conducted,
scheduled, or done in conformity with established or prescribed usage, rules, or
discipline; normal, standard (including thinking or behaving in an acceptable,
normal manner). The term “regularly” has been used to describe a matter of usual
practice. Synonyms of the term include routinely, systematically, usually,
habitually, ordinarily. Antonyms include uncommonly, unusually, and erratically.
Based on the facts presented, the Taxpayer’s recurring activities surrounding the
sales of partnership interests may be fairly described as normal, usual, systematic,
and a methodical practice whereby the Taxpayer’s conduct is pursuant to the
normal and ordinary course of its business. The activities surrounding the sales

of the partnership interests is not uncommon, unusual, or consummated erratically,
but rather through deliberate action by the Taxpayer to serve market demand (i.e.,
profit), which allows it to redeploy transaction proceeds for future capital intensive
development projects. In other words, the Taxpayer’s recurring sales of
partnership interests appear to be “regular”. In order to determine whether the
Taxpayer’s partnership interest sales rise to the level of frequency to be described
as “regularly” occurring within the meaning of IRC Section 475, requires that one
look at the Taxpayer’s business model, or how it has historically generated
gross/taxable income.
The Taxpayer has consistently generated significant amounts of gross and taxable
income from development fees, sales of partnership interests, and build/transfer
projects. Each stream of income has historically been core to the Taxpayer’s
normal course of business. Excluding the sale of partnership interests in question,
the Taxpayer has sold, on average, one partnership interest per year since 20XX.
Considering the nature of the Taxpayer’s business, project cycles, timeline for
projects that can take several years to complete, and the number and magnitude
of sales over that period of time, it is our understanding that the Taxpayer’s
recurring partnership interest sales activities occur with such a frequency and
continuity that these activities are considered to occur “regularly” in the normal
course of its business. Accordingly, we believe the Taxpayer regularly sells
partnership interests to customers in the ordinary course of its trade or business,
and as such, the related gains should be sourced based on the customer’s location
pursuant to ILCS 5/304(a)(3)(C-5)(iii)(a).
CONCLUSION
Based on the foregoing facts, representations, and analysis, the Taxpayer’s sales
of partnership interests is business income subject to apportionment by use of a
single sales factor. The sales factor will include the net gains from the sale of the
partnership interests, and the net gains should be sourced (i.e., included in the
numerator of the sales factor) based on the location of Taxpayer’s customer. This
determination is based on the foregoing analysis that the Taxpayer is a dealer in
the item of intangible personal property (i.e., the partnership interests) within
Illinois’ modified meaning of Section 475 of the Internal Revenue Code, for sole
purposes of Illinois’ sales factor sourcing statute under ILCS 5/304(a)(3)(C5)(iii)(a).

RULING
Section 304(a)(3)(C-5) of the Illinois Income Tax Act (“IITA,” 35 ILCS 5/304(a)(3)(C-5))
provides, for purposes of computing the sales factor, in part:
For taxable years ending on or after December 31, 2008, sales, other than sales
governed by paragraphs (B), (B-1), (B-2), (B-5), and (B-7), are in this State if any
of the following criteria are met:

…
(iii) In the case of interest, net gains (but not less than zero) and other items of
income from intangible personal property, the sale is in this State if
(a) in the case of a taxpayer who is a dealer in the item of intangible personal
property within the meaning of Section 475 of the Internal Revenue Code, the
income or gain is received from a customer in this State. For purposes of this
subparagraph, a customer is in this State if the customer is an individual, trust or
estate who is a resident of this State and, for all other customers, if the customer’s
commercial domicile is in this State. Unless the dealer has actual knowledge of the
residence or commercial domicile of a customer during a taxable year, the
customer shall be deemed to be a customer in this State if the billing address of
the customer, as shown in the records of the dealer, is in this State; or
(b) in all other cases, if the income-producing activity of the taxpayer is
performed in this State or, if the income-producing activity of the taxpayer is
performed both within and without this State, if a greater proportion of the incomeproducing activity of the taxpayer is performed within this State than any other
state, based on performance costs.
Under this provision, whether gross receipts from sales of intangible personal property
are assigned to Illinois for sales factor purposes depends on whether the taxpayer is a
dealer in the item of intangible personal property within the meaning of Section 475 of the
Internal Revenue Code (IRC). If the taxpayer is a dealer within the meaning of IRC
Section 475, the gross receipts are assigned to Illinois if the customer is in Illinois. If the
taxpayer is not a dealer within the meaning of IRC Section 475, the gross receipts are
assigned to Illinois if the income-producing activity is in Illinois. For purposes of this rule,
a taxpayer is a dealer with respect to an item of intangible personal property if the
taxpayer is a dealer with respect to the item under IRC Section 475(c)(1), or would be a
dealer with respect to the item under IRC Section 475(c)(1) if the item were a security for
purposes of IRC Section 475. IRC Section 475(c)(1) defines the term “dealer in securities”
as a taxpayer that:
(A) regularly purchases securities from or sells securities to customers in the
ordinary course of a trade or business; or
(B) regularly offers to enter into, assume, offset, assign or otherwise terminate
positions in securities with customers in the ordinary course of a trade or business.
Under IRC Section 475(a), a dealer in securities must apply the mark-to-market method
of accounting with respect to any security that is inventory in the hands of the dealer, and
to any security which is not inventory and which is held at the close of the taxable year.
Under IRC Section 475(b), the mark-to-market method of accounting does not apply to
any security held for investment, certain securities acquired (including originated) by the

taxpayer in the ordinary course of business which are not held for sale, and any security
which is a hedge with respect to a security not subject to mark-to-market accounting under
IRC Section 475(a). Treasury Regulations §1.475(b)-1(a) states that a security is held for
investment, or not held for sale, within the meaning of Section 475(b), if it is “not held by
the taxpayer primarily for sale to customers in the ordinary course of the taxpayer’s trade
or business.”
In Kemon v. C.I.R., 16 T.C. 1026 (1951), the Tax Court explained that a “merchant
analogy” is generally employed to determine whether a sale of securities is a sale “to
customers”:
In determining whether a seller of securities sells to ‘customers,’ the merchant
analogy has been employed. [citations omitted] Those who sell ‘to customers’ are
comparable to a merchant in that they purchase their stock in trade, in this case
securities, with the expectation of reselling at a profit, not because of a rise in value
during the interval of time between purchase and resale, but merely because they
have or hope to find a market of buyers who will purchase from them at a price in
excess of their cost. This excess or mark-up represents remuneration for their
labors as a middle man bringing together buyer and seller, and performing the
usual services of retailer or wholesaler of goods. [citations omitted] Such sellers
are known as dealers.
In the instant case, you have represented that the Taxpayer is not a dealer under IRC
Section 475 because the partnership interests in the COMPANY 1 are not “securities” as
that term is defined in IRC Section 475(c)(2). However, as indicated above, IITA Section
304(a)(3)(C-5)(iii)(a) applies if either the taxpayer is a dealer with respect to the item
under IRC Section 475(c)(1), or would be a dealer with respect to the item under IRC
Section 475(c)(1) if the item were a security for purposes of IRC Section 475. Therefore,
if Taxpayer would be considered a dealer with respect to the COMPANY 1, assuming that
the partnership interests is a security under IRC Section 475, then IITA Section
304(a)(3)(C-5)(iii)(a) applies to gain from the sale of those entities. Taxpayer will be
considered a dealer with respect to the COMPANY 1 if the partnership interest is held
primarily for sale to customers in the ordinary course of the Taxpayer’s trade or business.
You represent that the Taxpayer, a STATE limited liability company, has been treated as
a partnership for federal income tax purposes since 20XX. You represent that the
Taxpayer, along with its affiliated companies, is CONTINENT’s largest independent wind
power generation company, having fully developed and placed into service XX wind farms
across the COUNTRY, COUNTRY 1, and CONTINENT 1. You represent that during the
20XX tax year, the Taxpayer held ## COUNTRY partnership interests, and ## foreign
partnership interests, in operational wind project companies. You represent that the
Taxpayer has sold ## partnership interests since 20XX, including ## partnership interests
following a fact pattern consistent to the sale in the instant case. You represent that
substantial amounts of gross and taxable income are derived from development fees
related to wind farm projects, and from the sale of partnership interests in wind farm
projects. Finally, you represent that, historically, the Taxpayer has sold partnership

interests in wind farm projects before those projects have reached the Flip Point, and that
the Taxpayer has yet to reach the Flip Point with regards to any wind farm partnership.
Based on these representations, the Taxpayer is properly considered a dealer with
respect to the COMPANY 1. The Taxpayer is in the business of constructing and
developing wind farms. The wind farm assets and operations are usually held in LLCs,
which are taxed as partnerships. The Taxpayer’s business practice is to sell the
partnership interests upon the wind farm project becoming operational and as market
conditions will allow. Taxpayer does not hold the partnership interests for the purpose of
investment or for the purpose of generating distributive share income from the continuing
operation of the wind farm. In that regard, the Taxpayer has averaged almost two sales
of wind farm partnerships per year since 20XX, without retaining a single partnership past
the Flip Point, and using the proceeds from such sales primarily to finance subsequent
wind farm development projects, and thereby repeat its business cycle. Taxpayer’s profit,
namely, gain on the sale of partnership interests, is not attributable to a rise in market
value during the period between purchase and sale. Rather, the Taxpayer’s profit is
attributable to value added through the Taxpayer’s efforts to construct and develop wind
farm projects. In a sense, the Taxpayer originates partnership interests through its
manufacture of wind farms, in order to sell those interests in the wholesale and retail
investment markets, such as to Yield Companies. In short, the Taxpayer is performing a
merchant function with respect to wind farm partnerships.
Accordingly, the Taxpayer is a dealer with respect to the COMPANY 1. As a dealer, its
gain from the sale of partnership interests is sourced for sales factor purposes under the
rule at IITA Section 304(a)(3)(C-5)(iii)(a) based on the location of its customers.
This ruling shall bind the Department for the tax year ending MONTH 31, 20XX. The facts
upon which this ruling is based are subject to review by the Department during the course
of any audit, investigation or hearing and this ruling shall bind the Department only if the
material facts as recited and incorporated in this ruling are correct and complete. This
ruling will cease to bind the Department if there is a pertinent change in statutory law,
case law, rules or in the material facts recited in this ruling.
Sincerely,

Brian L. Stocker
Chairman, PLR Committee (Income Tax)