Does Illinois tax a nonresident's capital gain from the sale of stock in an Illinois company received as farm patronage dividends?

Plain-English summary

A married couple, both residents of another state, wrote to the Illinois Department of Revenue about a large capital gain. The wife grew up in Illinois but had moved away years earlier; the couple still had to file an Illinois income tax return because she owned a half interest in a farm near an Illinois town, which was rented out to a tenant farmer in exchange for a share of the crop. She sold her share of the crop each year through an Illinois grain company, and because she did business with that company she received patronage dividends from it — some in cash and some as preferred stock and stock credits, all reported as farm rental income on both her federal and Illinois returns. Her stock in the company was acquired entirely through these patronage dividends.

Earlier in the year of the ruling, the grain company merged with another company, and as part of the merger the stockholders were bought out for far more than the tax basis of their stock. This produced a large capital gain, taxable for federal purposes, but the couple was unsure whether Illinois could tax it too, since they were nonresidents. They had read in the Schedule NR instructions that gains from sales of intangibles are not taxed by Illinois and thought stock might qualify, but wanted the Department to confirm an answer they had already received informally from the Taxpayer Assistance Division.

The Department agreed with the taxpayers. Under the Illinois Income Tax Act, a nonresident is taxed only on "net income," which is the portion of base income allocated or apportioned to Illinois under Article 3 of the Act. Nonbusiness income — which includes capital gains from the sale of intangible personal property like stock — is allocated to Illinois under Section 303(b)(3) only if the taxpayer had its commercial domicile in Illinois at the time of the sale. Because the gain from the sale of the grain-company stock was nonbusiness income and the taxpayers had no Illinois commercial domicile, the gain was not allocated to Illinois and was therefore not subject to Illinois income tax — even though the couple otherwise had an Illinois filing obligation because of the farm rental income.

Because this letter answered a specific factual scenario rather than announcing broadly applicable Department policy, the Department issued it as a General Information Letter (GIL) rather than a binding Private Letter Ruling.

What this means for you

If you are a nonresident receiving Illinois-source income

Owning Illinois real estate or receiving Illinois farm rental income can create an Illinois filing obligation, but it does not automatically make every other item of income taxable by Illinois. Each item of nonbusiness income — like a capital gain from selling stock — is analyzed separately under the allocation rules in Article 3 of the Illinois Income Tax Act (35 ILCS 5/301 and 5/303).

If you receive patronage dividends in the form of stock

Stock or stock credits received as patronage dividends from a cooperative or similar entity are intangible personal property. If you later sell or exchange that stock at a gain and you are a nonresident without an Illinois commercial domicile, Section 303(b)(3) generally keeps that gain out of Illinois's tax base, even if the stock came from an Illinois-based company and even if related income (like the underlying crop sale) was reportable to Illinois.

If you are relying on informal guidance

This letter shows the Department's process: taxpayers who get an informal answer (here, from the Taxpayer Assistance Division) can request written confirmation. Because the request was fact-specific rather than a request to interpret general policy, the Department responded with a non-binding GIL rather than a Private Letter Ruling — a useful reminder that GILs, while helpful, do not carry the same binding weight.

Common questions

Q: Is stock the same as "intangible personal property" for Illinois allocation purposes?
A: Yes. The ruling treats capital gains and losses from sales or exchanges of stock as gains from intangible personal property, governed by IITA Section 303(b)(3).

Q: Does filing an Illinois return for farm rental income mean all of a nonresident's other income becomes taxable by Illinois?
A: No. Each item of nonbusiness income is allocated separately under Article 3 of the IITA. Having an Illinois filing obligation for one item (farm rental income) does not by itself pull an unrelated capital gain into the Illinois tax base.

Q: What made the stock-sale gain nonbusiness income not allocable to Illinois?
A: The taxpayers were nonresidents and did not have their commercial domicile in Illinois. Under Section 303(b)(3), capital gains from intangible personal property are allocable to Illinois only if the taxpayer's commercial domicile was in Illinois at the time of the sale or exchange.

Q: Why was this issued as a GIL instead of a private letter ruling?
A: The Department explained that the nature of the request and the information provided required a General Information Letter response. A GIL provides general information but is not a statement of Department policy and is not binding on the Department, per 2 Ill. Adm. Code § 1200.120(b) and (c).

Citations and references

• 35 ILCS 5/201(a) — imposes Illinois income tax, measured by net income, on individuals, corporations, trusts, and estates
• 35 ILCS 5/202 — defines a nonresident's "net income" as the portion of base income allocated or apportioned to Illinois
• 35 ILCS 5/203 — defines "base income"
• 35 ILCS 5/301(c)(1) — general allocation rule for nonresidents' nonbusiness and business income under Sections 302–304
• 35 ILCS 5/303(b)(3) — capital gains from intangible personal property allocable to Illinois only if commercial domicile is in Illinois at time of sale
• Schedule NR Instructions, Line 11 — nonbusiness capital gains or losses from the sale of intangibles are not taxed by Illinois
• 2 Ill. Adm. Code § 1200.120(b) and (c) — governs General Information Letters (GILs); non-binding and not a statement of Department policy

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-16-0006-gil.pdf

Original ruling text

IT 16-0006-GIL 11/23/2016

ALLOCATION

Gain from sale of stock is not allocated to Illinois where taxpayer is a nonresident and
gain is nonbusiness income. (This is a GIL)
November 23, 2016
Re:

Illinois income tax

Dear Xxxxx:
This is in response to your letter dated October 24, 2016 in which you request a letter ruling. The
nature of your request and the information provided requires 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 2 Ill. Adm. Code § 1200.120(b)
and (c), which may be accessed from the Department’s web site at www.tax.iIllinois.gov.
Your letter states as follows:
I am writing to request a legal ruling on a question I have about the treatment of a capital
gain my wife had for Illinois income tax. I have sent my question over the internet. The
incident number is ####. I received a response from NAME in the Taxpayer Assistance
Division. I am satisfied with her response, but would like to have it confirmed by your
office.
My wife and I are both residents of the state of STATE. My wife grew up in Illinois, but left
it many years ago. We are required to file an Illinois income tax return because she owns
a one-half interest in a farm located near the town of CITY, Illinois which is rented to a
tenant farmer. She receives a share of the crop as rent.
She has sold her share of the crops each year through COMPANY located in the town of
CITY, Illinois. Since she did business with this company, she received patronage
dividends from it. Some of these were in cash and some were in the form of preferred
stock and stock credits. These were all included in her farm rental income on both the
federal and Illinois income tax returns. My wife’s stock in this company was acquired as
patronage dividends.
In May of this year, COMPANY was merged with COMPANY 1. As part of the merger,
the COMPANY stockholders were bought out for an amount much larger than the tax
basis of this stock. This resulted in a large capital gain for us.
This gain is taxable for the federal income tax, but we are not sure if it is taxable for the
Illinois income tax since we are not residents of Illinois. In the Schedule NR instructions
for 2015, it says that gains from the sales of intangibles are not taxed by Illinois. It seems
like shares of stock would be intangibles. Please let us know about this.
RULING

Section 201(a) of the Illinois Income Tax Act ("IITA" ; 35 ILCS 5/201) imposes a tax, measured
by “net income,” upon every individual, corporation, trust and estate for the privilege of earning
or receiving income in or as a resident of this State. A nonresident individual is liable for Illinois
income tax under Section 201 if he or she derives “net income” as defined under IITA Section

202. IITA Section 202 defines net income as that portion of the taxpayer’s “base income” as
     defined in Section 203, which is allocated or apportioned to Illinois under the provisions of Article
     3 of the IITA, less certain deductions.
     Base income that constitutes nonbusiness income is allocated to Illinois under IITA Sections
     301(c) and 303. IITA Section 301(c)(1) states:
     In general. 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 referred to in Section 302, 303, or 304 (relating to compensation, nonbusiness
     income and business income, respectively) shall be allocated to this State only to the
     extent provided by such section.
     IITA Section 303(b)(3) states:
     Capital gains and losses from sales or exchanges of intangible personal property are
     allocable to this State if the taxpayer had its commercial domicile in this State at the time
     of such sale or exchange.
     Consistent with these provisions, the Instructions to Line 11 of the Schedule NR state,
     “Nonbusiness capital gains or losses that resulted from your sale of intangibles are not taxed by
     Illinois.”
     In this case, based on the information provided, it appears that the gain from exchange of your
     shares of COMPANY. is nonbusiness income. Accordingly, such gain is not allocated to Illinois,
     and therefore is not taxed by Illinois.
     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) 782-2844. If you have
     further questions related to Illinois income tax laws, visit our website at www.tax.illinois.gov or
     contact the Department’s Taxpayer Information Division at (217) 782-3336.

Sincerely,

Brian L. Stocker
Associate Counsel (Income Tax)

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