Can an Illinois partnership claim a refund or credit itself when it overpaid pass-through withholding on behalf of its nonresident partners?

Plain-English summary

A tax representative asked the Illinois Department of Revenue for a private letter ruling on behalf of a partnership that had filed amended partnership returns (Form IL-1065-X) for 2014, 2015, and 2016. The partnership had received an amended Schedule K-1-P from another partnership it invested in, reflecting Illinois research credits for those years, and it wanted refunds of pass-through withholding it had paid on behalf of its nonresident partners. The Department had denied those refund claims, applying a rule that the corrected withholding amount on the amended Form 1065X (Line 59, Column B) could not be less than the amount originally reported (Column A). The requester argued that this administrative rule conflicted with the statute and the form instructions, and that the partnership itself should receive the refunds.

Because the request did not meet the requirements for a binding private letter ruling, the Department responded instead with this General Information Letter (GIL), which is general guidance only and not binding on the Department under 86 Ill. Adm. Code 1200.120(b) and (c).

On the merits, the Department explained that 35 ILCS 5/709.5(a) requires partnerships, S corporations, and trusts to withhold Illinois income tax on the Illinois-source business (and certain nonbusiness) income allocable to nonresident partners, shareholders, or beneficiaries. Under 35 ILCS 5/709.5(b), once that withheld amount is paid to the Department, it is treated as a payment of the individual partner's own estimated tax liability — not the partnership's payment. Following directly from that structure, 86 Ill. Adm. Code 100.7035(e) provides that a pass-through entity may not claim a refund or credit for an overpayment of withholding on behalf of an owner, and an owner has no right of action against the pass-through entity for the overpayment. The Department held that because the withheld amounts are treated as the individual partner's payments, they cannot be refunded to the partnership — the proper remedy is for each affected nonresident partner to file a timely individual claim for refund or credit.

What this means for you

Partnerships and other pass-through entities

If you are a partnership, S corporation, or trust that over-withheld Illinois tax on behalf of a nonresident owner (for example, because a corrected K-1 reduced an owner's share of Illinois income), you cannot get that overpayment refunded or credited to the entity itself. The withheld amount is legally treated as the owner's own estimated tax payment, so the entity has no independent refund right, and 86 Ill. Adm. Code 100.7035(e) also says the owner has no claim against the entity for the overpayment.

Nonresident partners, shareholders, and beneficiaries

If pass-through withholding was overpaid on your behalf, the remedy runs through you individually, not through the entity. You need to file your own timely claim for credit or refund (typically on your individual Illinois return) to recover the overpayment reflected on your corrected Schedule K-1-P.

Accountants and tax professionals

When an amended partnership return changes the withholding line because of a corrected K-1 from an upstream investment, remember that Illinois treats the pass-through withholding as a payment attributable to the individual owner under 35 ILCS 5/709.5(b), not the filing entity. Advise affected nonresident owners to pursue their own refund claims rather than expecting the entity-level amended return to generate a refund. Also note that this letter is a GIL, not a PLR — the taxpayer had asked for a private letter ruling, but the Department determined the request required general guidance instead, so this letter carries no binding weight for any taxpayer, including the one who asked for it.

Common questions

Q: Why didn't the Department issue a private letter ruling instead of a GIL?
A: The letter states that "the nature of your request and the information you have provided requires that we respond with a General Information Letter (GIL)," without further elaborating on why a PLR was unavailable. The response addresses the general withholding-refund rule rather than approving or denying the specific requested refund.

Q: Did the Department agree that the administrative rule limiting Line 59 was invalid, as the requester argued?
A: No. The ruling does not address the requester's argument about Section 709.5's administrative rule being inconsistent with the statute or form instructions. Instead, it answers the underlying question by explaining that, regardless of the mechanics of the amended return, the partnership itself is not entitled to a refund of withholding paid on a partner's behalf — that is an individual partner remedy under 86 Ill. Adm. Code 100.7035(e).

Q: Can a nonresident partner sue the partnership to recover an overpayment of withholding?
A: No. The regulation cited in the ruling, 86 Ill. Adm. Code 100.7035(e), specifically states that "an owner has no right of action against the pass-through entity for overpayment of withholding." The owner's remedy is a refund claim filed with the Department, not a claim against the entity.

Q: Is this GIL binding on the Department for other taxpayers?
A: No. As with all GILs, it is general information only, issued under 86 Ill. Adm. Code 1200.120(b) and (c), and is not a statement of Department policy or binding on the Department for this or any other taxpayer.

Citations and references

Statutes and regulations:

• 35 ILCS 5/709.5(a) (pass-through withholding requirement on nonresident partners, shareholders, beneficiaries)
• 35 ILCS 5/709.5(b) (withheld amounts treated as the partner's own estimated tax payment)
• 86 Ill. Adm. Code 100.7035(e) (pass-through entity cannot claim refund/credit for overpaid withholding; owner has no right of action against the entity)
• 86 Ill. Adm. Code 1200.120(b), (c) (GIL is general information, not binding Department policy)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2019.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2019/it19-0002-gil.pdf

Original ruling text

IT 19-0002-GIL 01/30/2019 PARTNERSHIPS – PASS-THROUGH WITHHOLDING
Pass-through entity may not claim refund or credit for overpayment of withholding. (This is a
GIL).

January 30, 2019

Re:

Illinois income tax

Dear Xxxxx:
This is in response to your letter dated December 26, 2018. The nature of your request and the
information you have 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 86 Ill. Adm. Code 1200.120(b) and (c), which may be accessed from the
Department’s web site at www.ILtax.com.
In your letter you have stated the following:
I am writing you in connection with amended partnership returns filed for our above-named client
for the calendar years of 2014, 2015 and 2016. I would like to request a private letter ruling for
the three years referenced above in connection with amended partnership returns filed for the
referenced years. COMPANY filed amended partnership returns for 2014, 2015 and 2016 due
to the fact that they received an amended K-1 from an investment in COMPANY 1 which they
own. COMPANY 1 amended its partnership return to claim research credits for 2014, 2015, and
2016. The results of these amended returns are summarized as follows:
[Tabular materials omitted].
The above claimed refunds have been denied by the Department of Revenue on the theory that
Line 59, Column B cannot be less than Line 59, Column A of the Form 1065X. Apparently, this
limitation has been imposed as a result of the Administrative Rules contained in IITA, Section
709.5. This administrative rule is not consistent with either the instructions to Form 1065 nor the
Illinois Code Section 709. Following are the instructions for Form 1065 for the relevant years:
2014 1065X Instructions. Line 59- Complete all steps of Illinois Schedule B and enter the amount
from Illinois Schedule B, Step 1, Line 8 on this line. This is the amount of pass-through
withholding payments you reported on behalf of your members. You must attach a corrected
Illinois Schedule B if there is a change in the information reported on your most recently filed

Illinois Schedule B. You must also issue revised Schedule(s) K-1-P to your partners if any
amounts reported to them on the original Schedule(s) K-1-P you issued have changed. Mark the
top of the revised Schedule(s) K-1-P you issue as “Revised.”
2015 1065X Instructions. Line 59 – Complete all sections of Illinois Schedule B and enter the
amount from Illinois Schedule B, Section A, Line 8 on this line. This is the amount of passthrough withholding payments you owe on behalf of your members. Attach Illinois Schedule B
to your Form IL-1065. See “Definitions to help you complete your Form IL-1065” in these

IT 19-0002-GIL
Page 2
instructions for more information. Do not include on Line 59 any pass-through withholding
payments reported to you on Schedule(s) K-1-P or K-1-T. Pass through withholding payment
amounts reported to you are included on Step 9, Line 61c.
2016 1065X Instructions. Line 59 – Complete all sections of Illinois Schedule B and enter the
amount from Illinois Schedule B, Section A, Line 9 on this line. This is the amount of passthrough withholding payments you owe on behalf of your members. You must attach a corrected
Illinois Schedule B if there is a change in the information reported on your most recently filed
Illinois Schedule B. See “Definitions to help you complete your Form IL-1065” in the Form IL1065 instructions for more information. Do not include on Line 59 any pass-through withholding
payments reported to you on Schedule(s) K-1-P or K-1-T. Pass-through withholding payment
amounts reported to you are included on Step 10, Line 61c. You must also issue revised
Schedule(s) K-1-P to your partners if any amounts reported to them on the original Schedule(s)
K-1-P you issued have changed. Mark the top of the revised Schedule(s) K-1-P you issue as
“Revised.”
The above referenced instructions for all three years make it clear that an amended partnership
return should “attach a corrected Illinois Schedule B if there is a change in the information
reported on your most recently filed Illinois Schedule B.” I believe that the above instructions are
consistent with Section 709.5 of the Illinois Code (copy attached) and that the administrative rule
under IITA Section 709.5 is not consistent with the language or intent of the Illinois law. It is also
my belief that the amended returns filed for COMPANY were filed in complete compliance with
the Illinois statutes and that the refund claimed should be allowed in full.
Further, it is not possible to complete Form IL1065X in a manner which complies with the
Administrative Rule in a situation where taxable income changes due to the fact that income
reported on Schedule B must reconcile with income reported on Form 1065X. It appears to this
writer that the Administrative Rule was adopted (without reference to the Illinois Statute) for the
simple reason that it is believed that taxpayers may not file amended returns as required by
Illinois law to reflect reduced withholding. In this case, the flow-through of the Illinois research
credit should cause non-resident withholding to decrease which will result in the individual
taxpayers being allowed smaller refunds on their individual 1040X returns due to the reduced
non-resident withholding reported on amended Illinois K-1-Ps. It seems to this writer that the
adoption of the administrative rule under Section 709.5 is inconsistent with the requirements of
the Illinois Statutes that require non-residents to file returns on Illinois income and is contrary to
the proper administration of the Illinois Statutes.
I believe that these arguments support the fact that COMPANY filed its amended Illinois 1065X
properly and in accordance with the Illinois Statutes and is entitled to receive the refunds for
each of the years involved as outline above.

RULING
IITA Section 709.5(a) imposes an income tax withholding requirement on partnerships, S corporations,
and trusts, with respect to the shares of business income, and certain nonbusiness income, of
nonresident partners, shareholders, or beneficiaries. IITA Section 709.5(b) provides, in part:

IT 19-0002-GIL
Page 3
Credit for taxes withheld. Any amount withheld under subsection (a) of this Section and paid to
the Department shall be treated as a payment of the estimated tax liability … of the partner,
shareholder, or beneficiary to whom the income is distributable for the taxable year in which that
person incurred a liability under this Act with respect to that income.
As IITA Section 709.5 indicates, once an amount withheld has been paid to the Department, the amount
is treated as a payment of the estimated tax liability of the partner.
Pursuant to this provision, the Department promulgated Regulations Section 100.7035(e), which states:
Overpayments. A pass-through entity may not claim a refund or credit for any overpayment of
withholding due under subsection (a) with respect to any owner. In addition, an owner has no
right of action against the pass-through entity for overpayment of withholding. (See IITA Section
712.) In the case of any overpayment, the remedy is for the owner to file a timely claim for credit
or refund for any amount withheld under subsection (a) with respect to it.
Because amounts withheld and paid under IITA Section 709.5 are considered payments of the partner,
these amounts may not be refunded to the partnership. As Regulations Section 100.7035(e) provides,
if as a result of an overpayment of pass-through withholding the individual partner has an overpayment
for the taxable year, the proper remedy is for the individual partner to file a timely claim for refund.
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 further questions
regarding this GIL, please call (217) 782-7055. If you have additional questions regarding Illinois income
tax laws, please visit the Department’s web site at www.ILtax.com.

Sincerely,

Brian L. Stocker
(Associate Counsel – Income tax)