Can a taxpayer keep using an alternative apportionment method the Department approved in an earlier ruling when it later sells the rights to its remaining contingent payments?

Subject

Alternative Apportionment

Plain-English summary

Illinois renewed a company's earlier permission to use a special, alternative way of apportioning certain income to Illinois, instead of the standard statutory formula that would otherwise tax 100% of that income to the state.

The taxpayer is a former biopharmaceutical company (organized as an LLC taxed as a partnership) that, years earlier, sold the rights to an approved drug product and all related assets to an unrelated buyer for a lump sum plus contingent "Earn-Out" payments tied to the buyer's future sales, plus a possible one-time "Milestone" payment. The company treated that original asset sale as an "occasional sale," excluded from its Illinois sales factor, and in a 2019 PLR the Department had already approved an alternative apportionment method: use the Illinois apportionment percentage from the year of that original sale to source any future Earn-Out or Milestone payments and interest income, rather than the 100% that the standard formula would otherwise produce.

By the tax year at issue in this new ruling, the company (by then renamed, with the drug-sale entity operating as its subsidiary) no longer had any employees or Earn-Out/Milestone payments coming in — its only income was portfolio interest and proceeds from selling off its remaining right to receive future Earn-Out payments to a third party under a "Contingent Payment Agreement." Interest income sources 100% to Illinois (the company's commercial domicile) under IITA Section 304(a)(3)(C-5)(iii)(b), and the proceeds from selling the Earn-Out rights would be excluded from the sales factor as an occasional sale — which together would source 100% of the company's income to Illinois. The company argued, and the Department agreed, that 100% apportionment doesn't fairly represent its actual market activity, so the Department renewed the 2019 alternative apportionment method: the company may use its historical apportionment percentage (from the year it sold the original drug rights) to source both the interest income and the proceeds from selling Earn-Out rights, for this tax year and future years, including any future Earn-Out, Milestone, or contingent-payment-rights sale proceeds.

What this means for you

Businesses winding down after selling their core assets

If your company sold off substantially all its operating assets and now has only residual income streams — like interest on sale proceeds, deferred/contingent payments (earn-outs), or gains from selling the rights to those future payments — the standard Illinois apportionment formula can produce a distorted result. Here, because the company had no remaining sales factor activity, the formula would have sourced 100% of its income to Illinois even though its underlying business generated multi-state sales. This ruling shows the Department will consider extending relief already granted for the original transaction to later, related transactions (like selling the rights to receive the earn-out itself).

Taxpayers with a prior alternative apportionment ruling

An existing PLR granting alternative apportionment isn't necessarily a one-time fix. Here, the taxpayer's 2019 PLR already contemplated "future taxable years" use of the same method for Earn-Out and Milestone payments, and when a new type of transaction arose (selling the Earn-Out rights themselves, rather than receiving the Earn-Out payments directly), the taxpayer went back to the Department and got that same historical percentage applied to the new income stream too. If your facts evolve within the scope of an earlier ruling's logic, you may be able to request an extension rather than starting from scratch — but you still must file a timely new petition under 86 Ill. Adm. Code 100.3390(e)(1) (120 days before the return's due date).

Accountants and tax professionals advising on apportionment

This ruling illustrates the interaction between the interest-sourcing rule (35 ILCS 5/304(a)(3)(C-5)(iii)(b), sourcing interest to where the income-producing activity occurs — here, the commercial domicile) and the occasional/incidental-sale exclusion from the sales factor (86 Ill. Adm. Code 100.3380(c)(2)). When those two rules combine to source 100% of a taxpayer's income to Illinois despite genuine multi-state business activity, that can meet the "grossly distorted result" standard for alternative apportionment under 35 ILCS 5/304(f) and 86 Ill. Adm. Code 100.3390(c) — as it did in the Department's own cited precedent, IT 13-0003-PLR (sale of Illinois real property with no resulting Illinois sales factor).

Common questions

Q: What did the Department actually approve?
A: The Department renewed the taxpayer's 2019 alternative apportionment method, letting the company use its Illinois apportionment percentage from the year it sold the underlying drug rights to source (1) the interest income it received in the year at issue and (2) the proceeds from selling the rights to its remaining future Earn-Out payments — instead of sourcing 100% of that income to Illinois under the standard formula.

Q: Why would the standard formula have sourced 100% of the income to Illinois?
A: Because the interest income sources 100% to Illinois (the company's commercial domicile) under the interest-sourcing rule, and the proceeds from selling the Earn-Out rights would be excluded entirely from both the numerator and denominator of the sales factor as an "incidental or occasional sale" under 86 Ill. Adm. Code 100.3380(c)(2). With no other sales factor activity, that combination would apportion all the income to Illinois even though the underlying drug business had activity in multiple states.

Q: Does this ruling apply going forward, or just for one tax year?
A: The Department extended the same methodology to future taxable years too — for any further Earn-Out payments, the Milestone payment, or proceeds from selling additional rights to future contingent payments. However, the ruling itself states it binds the Department only for the specific taxable year identified in the ruling, and (per 2 Ill. Adm. Code 1200.110(d) and (e)) it is revoked and stops binding the Department 10 years after its date, or sooner if there's a relevant change in the law or in the facts as recited.

Q: Can another company rely on this PLR for its own similar transaction?
A: No. This is a Private Letter Ruling, binding only on the taxpayer who requested it, and only to the extent the facts it recited were correct and complete. Other taxpayers facing similar contingent-payment or occasional-sale apportionment issues would need to petition for their own ruling under 86 Ill. Adm. Code 100.3390.

Q: Was this the company's first time asking for this kind of relief?
A: No. The company disclosed that in 2019 it had already received a favorable alternative apportionment ruling covering the original sale of the drug rights and the resulting Earn-Out payments; this 2022 ruling is described as an extension of that earlier PLR to cover the sale of the rights to receive the remaining Earn-Out payments.

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2022.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2022/it22-0003-plr.pdf

Original ruling text

IT-22-0003 08/02/2022 ALTERNATIVE APPORTIONMENT
Taxpayer is granted permission to apportion interest income and income
received from the sale of the right to receive future contingent payments by using
the same apportionment factor for the year in which Taxpayer sold rights and
property to a third party. (This is a PLR.)
August 2, 2022
NAME/TAXPAYER REPRESENTATIVE/ADDRESS
Re:

Request for Private Letter Ruling – Alternative Apportionment
COMPANY1
FEIN: ##-#######
Tax Year Ended: 12/31/20##

Dear XXX:
This is in response to your letter dated April 5, 2022, in which you request a Private
Letter Ruling (“PLR”) on behalf of COMPANY1 to use an alternative method of
apportionment. Department of Revenue (“Department”) regulations require that the
Department issue only two types of letter rulings: Private Letter Rulings (“PLRs”) and
General Information Letters (“GILs”). PLRs are issued by the Department in response
to specific taxpayer inquiries concerning the application of a tax statute or rule to a
particular fact situation. A PLR is binding on the Department, but only as to the taxpayer
issued the ruling and only to the extent the facts recited in the PLR are correct and
complete. GILs do not constitute statements of Department policy that apply, interpret,
or prescribe the tax laws and are not binding on the Department. See 2 Ill. Adm. Code
Section 1200.100(b) and (c). Procedures for alternative allocation or apportionment
petitions are outlined in 86 Ill. Adm. Code Section 100.3390. The petition procedures
provided in this section are the exclusive means by which a taxpayer may petition for an
alternative allocation or apportionment formula.
The Department has considered the petition and determined it satisfies the
requirements in 86 Ill. Adm. Code Section 100.3390(c), (d), and (e). In addition, the
review of your request for a PLR indicates that all information described in paragraphs 1
through 8 of subsection (b) of 2 Ill. Adm. Code Section 1200.110 is contained in your
request.
The Department accepts the petition for alternative apportionment. Pursuant to 86 Ill.
Adm. Code Section 100.3390(e)(1) and 2 Ill. Adm. Code Section 1200.110, the
Department issues this PLR and grants permission to COMPANY1 to use an alternative
apportionment formula. This PLR will bind the Department only with respect to
COMPANY1 for the issues presented in this ruling. Issuance of this PLR is conditioned
upon the understanding that COMPANY1 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.

COMPANY/NAME
Page 2
August 2, 2022
The facts and analysis as you have presented them in your letter are as follows:
TAXPAYER REPRESENTATIVE, on behalf of COMPANY1 (“COMPANY1”,
“Company” or “taxpayer”), requests a Private Letter Ruling regarding the use of
an alternative apportionment method relating to certain receipts received during
20##. Please find attached an executed form IL-2848 Power of Attorney.
DISCLOSURES
In accordance with 2 Ill. Adm. Code Section 1200.110(b)(3), the subject of this
request is not being examined as part of an audit by the Illinois Department of
Revenue (“Department”).
In accordance with 2 Ill. Adm. Code Section 1200.110(b)(4), in 2019 the taxpayer
requested and received a favorable ruling authorizing the use of an alternative
apportionment method and this ruling request is an extension of said earlier
issued Private Letter Ruling. (see Private Letter Ruling Issued December 17,
2019 attached) In addition, neither the taxpayer nor its representatives have
previously submitted the same or a similar issue to the Department and withdrew
it before a letter ruling was issued.
TAX YEAR
The ruling is requested for tax year ended on 12/31/20##.
TAXPAYER
COMPANY1 is a limited liability company (“LLC”) and is treated as a partnership
for federal income tax and Illinois personal property replacement income tax
(“Income Tax”) purposes. COMPANY1 has a calendar year ending December
31st.
STATEMENT OF FACTS
As provided in the 2019 Private Letter Ruling, COMPANY1 (formerly
COMPANY2 HOLDINGS, “COMPANY2 HOLDINGS”) is a privately held
biopharmaceutical company currently headquartered in CITY1, STATE1.
COMPANY1 is a regarded entity treated as a partnership for federal and state
Income Tax purposes. COMPANY1 has a wholly owned subsidiary, COMPANY1
HOLDINGS (“COMPANY1 HOLDINGS”) (formerly COMPANY2, “COMPANY2”).
COMPANY1 HOLDINGS is a disregarded LLC for federal and state Income Tax
purposes.
COMPANY2 was founded in 20## and was headquartered in CITY2, STATE1
with additional locations in CITY1, CITY3, STATE2 and STATE3. From inception
through February 20##, COMPANY2 core business was the manufacturing,
distribution, and retail sale of approved pharmaceutical products to
pharmaceutical wholesalers. In February of 20##, COMPANY2 divested the
intellectual property associated with most of its approved pharmaceutical

COMPANY/NAME
Page 3
August 2, 2022
products and devoted its efforts on advancing its drug development program.
COMPANY2 focused all its resources on the development of PRODUCT1 and
PRODUCT2 with the goal of US regulatory approval and commercial launch of
the associated pharmaceutical products to wholesalers.
Following several years of clinical development activity, the COMPANY1
accumulated sufficient clinical, manufacturing, and technical data to submit a
drug application to the US Food and Drug Administration (“FDA”) in June of 20##
seeking US regulatory approval for PRODUCT1. Concurrently to the
submission, the COMPANY1 began its launch readiness efforts, including hiring

employees, including field-based sales representatives, sales and marketing

executives, managed care and supply chain management specialists and backoffice infrastructure support teams. In advance of the launch, the COMPANY1
entered into contracts for warehousing and logistics management, order to cash
management and other on-going requirements for US drug sellers such as the
Affordable Care Act reporting.
In February 20##, COMPANY2’s new drug application for PRODUCT1 was
approved by the FDA under the trade name PRODUCT3. At the time of approval,
COMPANY2 announced that the product would be launched by the Company.
Shortly thereafter, because of market and industry factors, COMPANY2
concluded that an outright sale of the rights to PRODUCT3 would result in more
value than a commercial launch of the drug.
On March ## 20##, COMPANY2 sold the rights to PRODUCT3 to COMPANY3,
an unrelated pharmaceutical company, for $$$. As part of the sale of
PRODUCT3, COMPANY2 sold all associated inventory, all intellectual property,
all world-wide regulatory filings, all product books and records, all product
materials and data, all bottling machinery and equipment and all goodwill
associated with PRODUCT3. At that time, COMPANY2 initiated a workforce
reduction and terminated all but ## of its employees over the period from April
20## to June 20## (a total of ## employees). The ## remaining employees were
terminated on September ##, 20##.
In addition to the $$$ received in 20##, the sales contract called for contingent
payments (“Earn-Outs”) based on the buyer’s net sales beginning in 20##. There
was a $$$ cap placed on the Earn-Outs. Also included as part of the
consideration was a one-time Milestone payment of $$$ if the “Milestone Event”
as defined in the asset purchase agreement was achieved.
COMPANY1 excluded the gain from sale of the intangible and personal property
on its 20## Illinois partnership return as an occasional sale. The sale of the
intangibles could also be viewed as a sale of an intangible covered under Illinois
Income Tax Act (“IITA”) Sections 304(a)(3)(B-1and B-2) and the proceeds from
the sale of the intangibles would also be excluded from the Illinois sales factor

COMPANY/NAME
Page 4
August 2, 2022
numerator and denominator. COMPANY1’s Illinois apportionment factor for the
20## tax year was %%%.
In 20##, COMPANY2 changed its name to COMPANY1 HOLDINGS and
COMPANY2 HOLDINGS changed its name to COMPANY1. COMPANY1
HOLDINGS is a SMLLC and is owned %%% by COMPANY1, a partnership for
federal and Illinois income tax purposes. During 20##, COMPANY1 HOLDINGS
received two Earn-Out payments totaling some $$$ relating to the 20## sale of
PRODUCT3. In December 20##, COMPANY1 HOLDINGS entered into a
Contingent Payment Agreement (“Agreement”) with COMPANY4
(“COMPANY4”), an unrelated third party. Under the terms of the Agreement,
COMPANY1 HOLDINGS sold the rights to certain future Earn-Out payments.
COMPANY1 HOLDINGS sold the contractual rights to the Earn-Out payments for
$$$. COMPANY1 HOLDINGS retained the rights to the Milestone payment and
to certain future Earn-Out payments if certain sales of the drug were achieved.
In 20##, other than the Earn-Out payments and the proceeds from the
Agreement, COMPANY1’s only income was from portfolio interest income and
imputed interest income on the Earn-Out payments. Although COMPANY1 is still
in existence as a legal entity, it is no longer an active company, has no
employees and no physical locations.
In the 2019 issued Private Letter Ruling, the Department permitted COMPANY1
the use of alternative apportionment method based on the 20## apportionment
factor for the Earn-Out payment. This was the year of the sale of PRODUCT3. In
addition, the PLR stated that “you (Taxpayer) may use the same methodology for
future taxable years with respect to any Earn-Out payments (including the
Milestone payment) received.”
During 20##, COMPANY1 HOLDINGS only received portfolio interest income.
They did not receive any Earn-Out payments nor Milestone payments.
In December 20##, COMPANY4 purchased an additional tranche from
COMPANY1 HOLDINGS for the right to receive future Earn-Out payments.
COMPANY4 paid COMPANY1 HOLDINGS $$$ for the rights to receive %%% of
the Earn-Out payments paid to COMPANY1 HOLDINGS through December ##,
20##, and %%% of the first $$$ in Earn-Out payments beginning in the period
starting January ##, 20##. COMPANY1 HOLDINGS retained all other Earn-Out
payments as well as the Milestone payment.
During 20##, COMPANY1 only received interest income and the $$$ from the
sale of the right to receive future Earn-Out payments. COMPANY1 did not
receive any Earn-Out or Milestone payments in 20##.
RULING REQUESTED

COMPANY/NAME
Page 5
August 2, 2022
COMPANY1 requests the use the same alternative apportionment method that
the Department authorized in the 2019 Private Letter Ruling to be applied against
the $$$ that Taxpayer received in 20## from the sale of the right to receive
certain future Earn-Out payments.
If COMPANY1 receives any payment for the sale of any future Earn-Out
payments or the sale of the Milestone payment, COMPANY1 further requests the
use of the same alternative apportionment that was permitted in the 2019 Private
Letter Ruling to be applied to these payments.
DISCUSSION
In 20##, COMPANY1 earned only two types of income. They earned interest
from cash on deposit maintained to service tax obligations. The other receipt is
the $$$ of income that was earned when they sold the rights to certain future
Earn-Out payments.
Interest Income Sourcing
The sourcing of interest is governed by IITA Section 304(a)(3)(C-5)(iii) (a) and
(b). Subsection (a) addresses the sourcing of interest if the taxpayer is a dealer.
For purposes of this ruling request, it is presumed that COMPANY1 is not a
dealer in the item of interest so the sourcing of the interest would be governed by
subsection (b). This subsection provides that interest is sourced to Illinois, “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.” Based on this sourcing provision, 100% of the interest from various bank
accounts would be sourced to Illinois, the commercial domicile of COMPANY1.
Income from the sale of the intangible right to receive future Earn-Out payments
The other receipt that that COMPANY1 received during 20## is the proceeds
from the sale of certain Earn-Out rights to future payments. In this sale,
COMPANY1 sold most of it rights to the future Earn-Out payments.
COMPANY1, continued to retain the rights to the Milestone payment. The sale of
Earn-Out rights was a sale of an intangible. In general, net gains from the sale of
an intangible are governed by IITA Section 304(a)(3)(C-5)(iii)(a) and (b).
However, Illinois has an “incidental or occasional sale” provision which would
eliminate these net proceeds from COMPANY1’s Illinois sales factor.
On August 27, 2017, the Department revised 86 Ill. Admin. Code Section
100.3380(c)(2) to provide the following:
When gross receipts arise from an incidental or occasional sale of assets
used in the regular course of the person’s trade or business, those gross
receipts shall be excluded from the sales factor. For example, gross

COMPANY/NAME
Page 6
August 2, 2022
receipts from the sale of a factory or plant will be excluded. Gross receipts
from an incidental or occasional sale of stock in a subsidiary will also be
excluded. Exclusion of these gross receipts from the sale factor is
appropriate for several reasons, more than one of which may apply to a
particular sale, including:
A. incidental or occasional sales are not made in the market for the
person’s goods, services or other ordinary sources of business
income;
B. to the extent that gains realized on the sale of assets used in a
taxpayer’s business are comprised of recapture of depreciation
deductions, the economic income of the taxpayer was
understated in the years in which those deductions were taken.
The recapture gains that reflect a correction of that
understatement should be allocated using a method
approximating the factors that were used in apportioning the
deductions. If the business otherwise remains unchanged,
including the gross receipts from the sale in the sales factor
numerator of the state in which the assets were located would
allocate a disproportionate amount of the recapture gains to that
state compared to how the deductions being recaptured were
allocated;
C. to the extent the gain on the sale is attributable to goodwill or
similar intangibles representing the value of customer
relationships, including the gross receipts from the sale in the
sales factor will not reflect the market for the taxpayer’s goods,
services or other ordinary sources of business income to the
extent the sourcing of the receipts from that sale differs from the
sales factor computed without regard to that sale; and
D. in the case of sales of assets that are made in connection with a
partial or complete withdrawal from the market in the state in
which the assets are located, including the gross receipts from
those sales in the sales factor would increase the business
income apportioned to that state when the taxpayer’s market in
that state has decreased.
The purpose of 86 Ill. Admin. Code Section 100.3380(c)(2) is to exclude from
both the numerator and denominator of the sales factor gross receipts from a
transaction that, while generating business income, does not arise from
transactions and activity that may be regarded as the taxpayer’s regular or
ordinary course of business. The sale of the future Earn-Out rights is an isolated
transaction not made in COMPANY1’s market for its goods, services or other

COMPANY/NAME
Page 7
August 2, 2022
ordinary sources of COMPANY1s business income. As an isolated or occasional
sale, the net gain from the sale of the Earn-Out rights would be excluded from
the numerator and denominator of the Illinois sales factor.
Assuming that the net gain from the sale of the Earn-Out rights is excluded from
the Illinois sales factor numerator and denominator. Illinois would apportion all
income earned in 20## based on COMPANY1’s interest received. In essence,
without the use of an alternative apportionment method, Illinois would source
100% of COMPANY1’s income to Illinois.
COMPANY1 maintains that the use of 100% apportionment does not fairly reflect
the sale of the Earn-Out rights and Earn-Out payments activities in Illinois and is
requesting the use of an alternative apportionment method.
IITA Section 304(f) Alternative allocation 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, service 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) Separating 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 or market in this State; or (4) The employment of any other
method to effectuate an equitable allocation and apportionment of the
person’s business income.
On August 3, 2017, the Department modified its regulations for petitioning for
alternative apportionment 86 Ill. Admin. Code Section 100.3390. Under 86 Ill.
Admin. Code Section 100.3390(e) Timely Filed Petitions:
A taxpayer petition for use of a separate accounting method or any other
alternative apportionment method will not be considered by the Director
unless such petition has been timely filed. A taxpayer who petitions the
Director for an alternative apportionment formula does so subject to the
Department’s right to verify, by audit of the taxpayer’s return and
supporting books and records within the applicable statute of limitations,
the facts submitted as the basis of the petition. A petition for alternative
allocation or apportionment is timely filed if the petitions is filed:
(e)(1) 120 days prior to the date of the tax return (including extensions) for
which permission to use such alternative method is sought. A taxpayer

COMPANY/NAME
Page 8
August 2, 2022
who does not petition more than 120 days prior to the due date of the
original return must file their return and pay tax according to the statutorily
approved apportionment method.
In IT 13-0003-PLR, 9/18/2013, the taxpayer requested the use of an alternative
apportionment where the only activity in the tax year was the sale of the
taxpayer’s real property located in Illinois that was formerly used in the taxpayer’s
trade or business. As a result of the application of the incidental or occasional
sale provision, the sale of the taxpayer’s real property could not be included in
the taxpayer’s Illinois sales factor. The taxpayer was left with no sales factor in
Illinois to apportion the gain from the sale of the real property. In this matter, the
taxpayer was able to show that the standard apportionment formula would have
apportioned zero income to Illinois; did not fairly represent that market for the
taxpayer’s goods, services, or other sources of business income in Illinois and
was permitted the use of an alternative apportionment method.
In the facts presented herein, the exclusion of the proceeds from the sale of the
right to the future Earn-Out payments from the sales factor would result in the
sourcing of this income to Illinois based on COMPANY1’s interest income
sourced 100% to Illinois. Similar to sourcing none of the proceeds from the sale
of the proceeds from the sale of the real property, the sourcing 100% of the
proceeds from the sale of the future Earn-Out payments does not fairly represent
the market for the taxpayer’s goods, services or other sources of business
income and the use of an alternative apportionment method is warranted. The
sourcing of interest income to Illinois should not be used to determine the
sourcing of the proceeds from the sale of the rights to the future Earn-Out
payments.
We are requesting under IITA Section 304(f) and 86 Ill. Admin. Code Section
100.3390(e)(1) the use of an alternative apportionment method because we
believe that the application of the required statutory formula for apportionment
will lead to a grossly distorted result. We request to use the Illinois apportionment
percentage that COMPANY1 had in Illinois for 20##. This percentage was %%%.
This is the year the COMPANY1 sold the drug PRODUCT3 to a third-party
pharmaceutical. The Earn-Out payments ultimately relate to this initial sale. This
was the alternative apportionment method that was permitted in the 2019 Private
Letter Ruling.
Should the Department grant the Company’s request for the use of an alternative
apportionment for 20##, the Company would be interested in applying the same
alternative apportionment methodology for any future sale of any Earn-Out
payments or the sale of the Milestone payment currently retained by the
Company.
PROCEDURAL MATTERS

COMPANY/NAME
Page 9
August 2, 2022
TAXPAYER REPRESENTATIVE is requesting this Private Letter Ruling on
behalf of said taxpayer. Please contact me at ###-###-####, or NAME2 at ######-#### or NAME3 at ###-###-#### should you have questions or require
additional information. If the Department determines that alternative
apportionment is not warranted, we respectfully request a conference to discuss
this matter in further detail and reserve the right to withdraw this Private Letter
Ruling request.
RULING
Section 304(a) of the Illinois Income Tax Act (“IITA”, 35 ILCS 5/304(a)) provides that
when a nonresident derives business income from Illinois and one or more other states,
such income shall be apportioned to Illinois by multiplying the income by the taxpayer’s
apportionment factor. Section 304(h) of the IITA provides for taxable years ending on
and after December 31, 2000, the apportionment factor for taxpayers apportioning
business income under Section 304(a) is equal to the sales factor. Section 304(a)(3)(A)
of the IITA defines the sales factor as follows:
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.
The term “sales” is defined under Section 1501(a)(21) of the IITA to mean all gross
receipts of the taxpayer not allocated under Sections 301, 302, and 303.
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 or market in this State; or
(4) The employment of any other method to effectuate an equitable
allocation and apportionment of the person’s business income.
86 Ill. Adm. Code Section 100.3390 outlines the procedures in which a taxpayer may
petition the Department for an alternative allocation or apportionment formula. The

COMPANY/NAME
Page 10
August 2, 2022
burden of proof for alternative allocation or apportionment petitions is explained in
Section 100.3390(c):
A departure from the required apportionment method is allowed only when those
methods do not accurately and fairly reflect business activity in Illinois (for
taxable years ending before December 31, 2008) or market in Illinois (for taxable
years ending on or after December 31, 2008). 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 convincing evidence that the statutory formula
results in the taxation of extraterritorial values or operates unreasonably and
arbitrarily in attributing to Illinois a percentage of income that is out of all
proportion to the business transacted in this State (for taxable years ending
before December 31, 2008) or the market for the taxpayer’s goods, services or
other sources of business income in this State (for taxable years ending on or
after December 31, 2008). 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 (for taxable years
ending before December 31, 2008) or the market for the taxpayer’s goods,
services or other sources of business income in this State (for taxable years
ending on or after December 31, 2008).
86 Ill. Adm. Code Section 100.3380 provides special rules regarding Section 304 of the
IITA. This section provides in relevant part:
a) 2) Director’s Determination
The Director has determined that, in the instances described in this Section,
the apportionment provisions provided in IITA Section 304(a) through (e) and
(h) do not fairly represent the extent of a person’s business activity or market
within Illinois.

c) Sales Factor. The following special rules are established in respect to the
sales factor in IITA Section 304(a)(3):

2) When gross receipts arise from an incidental or occasional sale of assets
used in the regular course of the person’s trade or business, those gross
receipts shall be excluded from the sales factor. For example, gross receipts

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from the sale of a factory or plant shall be excluded. Gross receipts from an
incidental or occasional sale of stock in a subsidiary shall also be excluded.
Exclusion of these gross receipts from the sales factor is appropriate for
several reasons, more than one of which may apply to a particular sale,
including:
A. incidental or occasional sales are not made in the market for the
person’s goods, services or other ordinary sources of business
income;
B. to the extent that gains realized on the sale of assets used in a
taxpayer’s business are comprised of recapture of depreciation
deductions, the economic income of the taxpayer was understated in
the years in which those deductions were taken. The recapture gains
that reflect a correction of that understatement should be allocated
using a method approximating the factors that were used in
apportioning the deductions. If the business otherwise remains
unchanged, including the gross receipts from the sale in the sales
factor numerator of the state in which the assets were located would
allocate a disproportionate amount of the recapture gains to that state
compared to how the deductions being recaptured were allocated;
C. to the extent the gain on the sale is attributable to goodwill or similar
intangibles representing the value of customer relationships, including
the gross receipts from the sale in the sales factor shall not reflect the
market for the taxpayer’s goods, services or other ordinary sources of
business income to the extent the sourcing of the receipts from that
sale differs from the sales factor computed without regard to that sale;
and
D. in the case of sales of assets that are made in connection with a partial
or complete withdrawal from the market in the state in which the assets
are located, including the gross receipts from those sales in the sales
factor would increase the business income apportioned to that state
when the taxpayer’s market in that state has decreased.
Your letter represents on March ##,20##, COMPANY1 (“Taxpayer”) sold substantially
all of the assets used in its trade or business, including the rights to PRODUCT3 and all
associated assets, to a third-party purchaser for an immediate cash payment plus the
third-party purchaser’s obligation to make certain contingent payments in future taxable
years. Further, your letter represents in December 20##, Taxpayer entered into a
contingent payment agreement with an unrelated party for the sale of the rights to the
certain contingent payments in future taxable years. In December 20##, this unrelated
third party purchased an additional tranche from Taxpayer for the right to receive future

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contingent payments. During 20##, Taxpayer only received interest income and the
proceeds from the additional tranche.
Based on the facts as described in your letter, the March ##, 20##, asset sale
constituted an incidental or occasional sale of assets used in the regular course of
business pursuant to 86 Ill. Adm. Code Section 100.3380. Therefore, the gross receipts
from such sale must be excluded from the Taxpayer’s sales factor.
Your letter indicates that Taxpayer’s sale of PRODUCT3 and associated assets
qualified as a contingent payment sale under Treasury Regulations Section 15a.453l(c), which requires that such sales be reported under the installment method. Under the
installment method, gain from the asset sale is taken into account proportionately as
payments are received based on the ratio of the gross profit realized or to be realized
over the total contract price. Under Treasury Regulations Section 15a.453-1(c)(2)(i), the
stated maximum selling price is treated as the selling price (and thus included in the
contract price) for purposes of applying the installment method. The contract price does
not include interest, whether stated or unstated, or original issue discount.
Where an occasional sale of assets is reported under the installment method, the
portion of the contract price received during the taxable year must be excluded from the
sales factor under 86 Ill. Adm. Code Section 100.3380. In addition, under Internal
Revenue Code Section 453B and Treasury Regulations Section 1.453-9(a), the entire
amount of gain or loss on the sale of an installment obligation is recognized in the
taxable year of sale and is considered as resulting from the sale or exchange of the
property in respect of which the installment obligation was received. Accordingly, where
the taxpayer sells an installment obligation received by the taxpayer in connection with
an incidental or occasional sale of assets, gross receipts from the sale of the installment
obligation must likewise be excluded from the sales factor pursuant to 86 Ill. Adm. Code
Section 100.3380.
On December 17, 2019, the Department issued Taxpayer a PLR granting permission to
use an alternative apportionment method as the allocation and apportionment
provisions of subsections (a) through (e) and of subsection (h) of IITA Section 304 do
not fairly represent the market for Taxpayer’s goods, services, or other sources of
business income. In applying the provisions of 86 Ill. Adm. Code Section 100.3380 to
the facts, the PLR outlined that Taxpayer “must exclude from its sales factor the $$$ of
Earn-Out payments received in 20##, as well as the $$$ received in 20## from its sale
of the Earn-Out rights.” In addition, “any Earn-Out payments received in future taxable
years (including the Milestone payment) must be excluded from Taxpayer’s sales
factor.” For the 20## taxable year, Taxpayer was permitted to compute its
apportionment factor “by including in the numerator of the sales factor the percentage of
the net gain taken into account on payments received in 20## under the installment
obligation, plus the net gain taken into account from the sale of the installment
obligation, equal to Taxpayer’s 20## Illinois apportionment factor (which you represent
to be %%%).” The entire net gain was to be included in the denominator, and 100% of

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the interest income taken into account in 20## (including imputed interest taken into
account, if any) was to be included in the numerator of the sales factor (with the same
amount included in the denominator). The PLR permitted the same methodology for
future taxable years with respect to any Earn-Out payments (including the Milestone
payment) received and including 100% of the interest income taken into account in
future taxable years (including imputed interest) in the numerator of the sales factor.
The Department renews the 2019 PLR and permits the same alternative apportionment
methodology authorized in 2019 to be applied against the interest income Taxpayer
received in 20## and the $$$ Taxpayer received in 20## from the sale of the right to
receive certain future Earn-Out payments. Taxpayer may compute its apportionment
factor for the 20## taxable year by using its Illinois apportionment percentage for the
20## taxable year (which you represent to be %%%) to source the proceeds from the
sale of the right to receive certain future Earn-Out payments. Taxpayer may use the
same methodology for future taxable years with respect to any Earn-Out payments
received (including the Milestone payment) and 100% of the interest income (including
imputed interest) taken into account in the numerator of the sales factor. In addition, the
Department permits Taxpayer to apply this same alternative apportionment
methodology for future taxable years with respect to any payment received from the
sale of rights to certain future Earn-Out payments pursuant to a contingent payment
agreement.
Except as provided herein, this ruling shall bind the Department for the taxable year
ending December 31, 20##. 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 facts as recited and incorporated in this
ruling are correct and complete. This ruling shall bind the Department for the taxable
year specified above and is revoked and will cease to bind the Department 10 years
after the date of this ruling under the provisions of 2 Ill. Adm. Code Section 1200.110(d)
and (e), or earlier if there is a pertinent change in statutory law, case law, rules, or in the
facts recited in this ruling.
Sincerely,

Jennifer Uhles
Associate Counsel (Income Tax)