My client's irrevocable trust was formed in Illinois, but the trustees and beneficiary have since moved out of state, and now both Illinois and the other state claim the trust as a resident -- can the trust still claim Illinois's credit for taxes paid to other states even though it's a dual resident?

Plain-English summary

An accountant asked the Department about an irrevocable Electing Small Business Trust (ESBT) that was formed in Illinois by Illinois-resident trustees and, until 2022, had an Illinois-resident beneficiary. Trust assets and the trust's business affairs continued to be located and managed in Illinois. In 2021 the trustees moved out of state, and in 2022 the beneficiary moved to a second state that (like California, which the taxpayer used as an example) taxes trusts as residents based on the beneficiary's residence. That created a situation where both Illinois and the second state considered the ESBT a resident trust for the same tax year. The taxpayer asked the Department to confirm that Illinois would still allow its credit for taxes paid to other states even though the trust was a resident of two states at once, and submitted two numeric illustrations to walk through the math.

The trust is an Illinois resident. Under IITA Section 1501(a)(20)(D), an irrevocable trust is an Illinois resident if its grantor was domiciled in Illinois when the trust became irrevocable. The Department distinguished Lewis Linn v. Department of Revenue, a case where an Illinois appellate court held that taxing a trust as an Illinois resident based solely on the grantor's domicile violated due process because the trust had no other Illinois contacts (no Illinois trustees, beneficiaries, trust assets, or business activity). Here, unlike in Lewis Linn, the ESBT's assets and business affairs remained located and managed in Illinois, so there were sufficient Illinois contacts to satisfy due process. The ESBT is therefore an Illinois resident trust required to file an Illinois return.

Dual residency doesn't block the credit. The Department noted that its own regulations (86 Ill. Adm. Code 100.3020(i)) already recognize that a trust can be a resident of two different states at the same time for state income tax purposes. Illinois's credit for tax paid to another state (IITA Section 601(b)(3)) exists specifically to reduce the double taxation that results from this kind of overlap, and nothing about being dual-resident disqualifies a trust from claiming it. As long as the ESBT is an Illinois resident that paid tax to another state on income also taxed by Illinois in the same year, it may be eligible for the credit against Illinois income and replacement tax.

The credit is capped by a statutory limitation formula. The credit isn't a dollar-for-dollar offset of whatever was paid elsewhere. Under IITA Section 601(b)(3), the credit cannot exceed the amount that bears the same ratio to the Illinois tax otherwise due as the taxpayer's base income that would be apportioned to other states (applying Illinois's own Article 3 apportionment rules) bears to the taxpayer's total base income. Practically, this is calculated on Schedule CR (Credit for Tax Paid to Other States) of Form IL-1041: Line 51 computes the limitation ratio, Line 52 totals the actual income tax paid to other states (net of credits allowed in those states), and the lesser of the two figures becomes the allowed credit.

The taxpayer's two illustrations got different results. The Department confirmed the first illustration -- where the ESBT claimed a $10K credit against its $64.5K Illinois liability for tax paid to one state, then separately claimed credits for taxes paid to Illinois and that state against a second state's tax -- was consistent with how Illinois allows the credit. But it flagged that the second illustration, which assumed a $60K aggregate credit against Illinois tax for amounts paid to two other states, did not correctly apply the required limitation calculation under Section 601(b)(3) -- the Illinois tax otherwise due must first be multiplied by the limitation ratio, and that result compared against actual taxes paid elsewhere, with the lesser amount controlling.

What this means for you

Trustees and estate planners with multi-state trusts

A trust formed in Illinois doesn't stop being an Illinois resident just because its trustees or beneficiaries later move away -- if the grantor was domiciled in Illinois when the trust became irrevocable, and the trust retains other meaningful Illinois contacts (assets located here, business affairs managed here), it likely remains an Illinois resident trust regardless of where the trustees or beneficiaries currently live.

Trusts facing dual-residency taxation

If your trust is taxed as a resident by both Illinois and another state in the same year, that overlap doesn't cost you the Illinois credit for taxes paid to other states -- Illinois's regulations specifically contemplate dual-resident trusts and Section 601(b)(3) is designed to relieve exactly this kind of double taxation.

Accountants computing the credit

Don't just net the credit against Illinois tax dollar-for-dollar. Run the Schedule CR limitation calculation (Line 51 ratio times Illinois tax otherwise due, compared to Line 52's actual other-state tax paid) for each state separately, and use the lesser amount for each. The Department's letter specifically calls out that skipping this step (as in the taxpayer's second illustration) produces an incorrect result.

Common questions

Q: Does an Illinois-formed trust stop being an Illinois resident when the trustees and beneficiary move out of state?
A: Not necessarily. Residency turns on where the grantor was domiciled when the trust became irrevocable, plus whether the trust has other meaningful Illinois contacts (like trust assets and business affairs located and managed in Illinois). Moving trustees and beneficiaries elsewhere doesn't automatically end Illinois residency.

Q: Can a trust be a "resident" of two different states at the same time?
A: Yes -- 86 Ill. Adm. Code 100.3020(i) expressly recognizes this possibility, and it's exactly the situation this credit is meant to address.

Q: Does being a dual-resident trust disqualify a trust from Illinois's credit for taxes paid to other states?
A: No. The Department confirmed the credit remains available to an Illinois resident trust that pays tax to another state on income also taxed by Illinois, even when the trust is also a resident of that other state.

Q: Is the credit for taxes paid to other states a straightforward dollar-for-dollar offset?
A: No -- it's capped under IITA Section 601(b)(3) by a limitation ratio (comparing income apportionable to other states under Illinois's own rules to total base income), calculated on Schedule CR of Form IL-1041. The allowed credit is the lesser of the limitation amount or the actual tax paid to the other state.

Citations and references

Statutes, regulations, and cases:

• 35 ILCS 5/1501(a)(20)(D) (resident trust definition)
• 35 ILCS 5/502(a)(2) (resident trust filing requirement)
• 35 ILCS 5/201(a), (c) (income and replacement tax on residents)
• 35 ILCS 5/601(b)(3) (credit for tax paid to other states; limitation formula)
• 35 ILCS 5/203 (Illinois base income)
• 86 Ill. Adm. Code 100.2197 (credit for tax paid to other states)
• 86 Ill. Adm. Code 100.3020(i) (dual-state trust residency)
• Lewis Linn v. Department of Revenue, 2013 IL App (4th) 121055
• California Rev. & Tax Code Sec. 17742(a), 18006(b) (cited by the taxpayer describing the other state's rules)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2024.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2024/IT24-0004-GIL.pdf

Original ruling text

IT 24-0004-GIL 04/29/2024 CREDITS – FOREIGN TAX
General Information Letter: Guidance provided on the Illinois foreign tax credit
under IITA Section 601(b)(3) for a dual-resident electing small business trust.
(This is a GIL.)
April 29, 2024
NAME
TITLE
FACILITY
ADDRESS
E-MAIL
Re: Illinois Income Tax – Electing Small Business Trust Residency and Foreign Tax
Credit Questions
Dear NAME:
This is in response to your email received on October 2, 2023, in which you request
information regarding credit for taxes paid under Illinois law for an Electing Small
Business Trust (“ESBT”) when the ESBT is deemed a resident in two states. The
nature of your request and the information you have provided require that we respond
with a General Information Letter (“GIL”), which 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 Section 1200.120(b) and (c), which may be found on
the Department’s website at www.tax.illinois.gov.
Your letter states as follows:
I like to have some type of opinion on the issue when sending over a question, but
I never dabble in trusts at all. My colleague has a question regarding the residency
of a trust and credit for taxes paid to other states when trust is deemed resident in
two states.
The taxpayer is an Electing Small Business Trust (“ESBT”) shareholder in various
S corporations. The ESBT is irrevocable, was formed in Illinois by Illinois resident
trustees, and the only beneficiary was an Illinois resident until 2022. In 2021, the
trustees changed residency to STATE1. In 2022, the ESBT beneficiary changed
residency to STATE2. The ESBT has filed as an Illinois resident since formation.
We believe that both STATE2 and Illinois intend to tax the ESBT as a resident in
2022.
STATE2 Rules:
In STATE2, the entire income of a trust is taxable by STATE2 if the beneficiary is
a STATE2 resident. (CA Sec. 17742(a), Rev. & Tax Code). STATE2 provides
resident trusts with a credit for taxes paid to other states. In addition, resident
beneficiaries of trusts that are shareholders of S corporations are allowed a credit

for taxes paid to others states on double-taxed income (CA Sec. 18006(b), Rev. &
Tax. Code).
Illinois Rules:
In Illinois, irrevocable trusts are treated as Illinois residents if the grantor was
domiciled in Illinois at the time the trust became irrevocable. (35 ILCS
5/1501(a)(20)(D)). Illinois provides a credit for taxes paid to another state which is
equal to the lesser of 1) total amount of taxes paid to other states on Illinois base
income for the year; or 2) the product of Illinois income tax liability multiplied by a
fraction representing income sourced to other states over Illinois taxable income.
(35 ILCS 5/601(b)(3) & 86 ILAC 100.2197).
STATE2 tax rate on ESBT’s is graduated, up to 12.3%. Illinois’ tax rate on ESBT’s
is 4.95% plus 1.5%, or 6.45%.
Our Questions for Comment:
Our questions for an ESBT that is taxed as a resident in both Illinois and STATE2:
1)

Please confirm that Illinois provides the credit for taxes paid to
other states, even though the ESBT is a resident in both Illinois and
STATE2.

2)

If the ESBT claims the STATE2 other state tax credit for taxes paid
to Illinois, please confirm that Illinois will still allow the credit for
taxes paid to other states.

3)

First illustration, please assume that ESBT’s taxable income is
$1M, and ESBT is taxable on S corporation income in STATE1.
Assume that ESBT pays $10K taxes in STATE1– and that $10K is
the lesser credit in Illinois. ESBT will owe $64.5K of taxes to Illinois
as a resident. ESBT will be claim a $10K credit for taxes paid to
other states, and will owe $54.5K on the Illinois form IL-1041.
Assume that ESBT owes $123K to STATE2 (assumes flat tax rate
to simplify). ESBT will be able to claim $10K credit for STATE1 and
$54.5K credit for Illinois. Please confirm that if taxpayer claims both
resident credits (Illinois and STATE2) for taxes paid to other states,
Illinois will honor the credit for taxes paid to STATE1.

4)

Second illustration, please assume that ESBT’s taxable income is
$1M, and ESBT is taxable on S corporation income in STATE1.
Assume that ESBT pays $10K taxes in STATE1 – and that $10K is
allowed as a credit in STATE2. ESBT will be claim a $10K credit for
taxes paid to other states. Now, assume that STATE2 tax rate is a
flat 6%, and ESBT owes $60K of taxes to STATE2 as a resident.
ESBT claims the $10K, to reduce the STATE2 tax liability to $50K.
Further, assume that ESBT will owe $64.5K taxes to Illinois as a
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resident, before credits. ESBT will claim the Illinois resident tax
credit for taxes paid to STATE1 and STATE2 = $60K, and owe
$4.5K of net taxes to Illinois. Please confirm that if taxpayer claims
both resident credits (Illinois and STATE2) for taxes paid to other
states, Illinois will honor the credit for taxes paid to STATE2 and
STATE1.
5)

Given the two different outcomes for ESBT, is there any precedent
of ordering between STATE2 and Illinois for the resident credit for
taxes paid? Or as long as ESBT claims only net taxes paid to other
states – and doesn’t double-count, ESBT can claim both, as
described in 3) or 4) above.

You also submitted an email to the Department on February 6, 2024, which includes the
following additional information pertinent to your inquiry:

how

1)

Trustee residence is STATE3 beginning 1/1/2022. Formerly Illinois.

2)

Beneficiary residence is STATE2 beginning 1/1/2022. Formerly
Illinois.

3)

Location of trust assets is Illinois. Bank accounts and ownership
shares are managed in Illinois.

4)

Business location of trust is Illinois. Affairs are managed in Illinois.

5)

STATE2 applies residency to trust based on beneficiary residence,
resulting in potential that trust is resident in STATE2 and Illinois.

We want to see if Illinois addresses dual-resident trusts, and therefore
to apply the resident credit for taxes paid to another state.
RULING

Pursuant to Section 1501(a)(20)(D) of the Illinois Income Tax Act (“IITA”) [35 ILCS
5/1501(a)(20)(D)], the term “resident” for Illinois income tax purposes includes an
irrevocable trust, the grantor of which was domiciled in Illinois at the time such trust
became irrevocable. A trust is considered irrevocable to the extent that the grantor is
not treated as the owner thereof under Internal Revenue Code Sections 671 through

678. As a resident, the irrevocable trust is required to file an Illinois tax return if the trust
     is required to file a federal tax return [see IITA Section 502(a)(2)], and the trust is liable
     for income and replacement tax imposed under IITA Sections 201(a) and (c) on the
     privilege of earning or receiving income as a resident of Illinois.
     In Lewis Linn v. Department of Revenue, 2013 IL App (4th) 121055, the plaintiff argued
     that requiring a trust to file returns and pay income tax as an Illinois resident based
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solely upon the residence of the grantor violated due process where the trustee,
beneficiaries and protector were all located out of state. The Illinois Appellate Court
found that the trust lacked sufficient contacts with Illinois to satisfy the Due Process
Clause of the U.S. Constitution, because none of the following factors existed to give
Illinois personal jurisdiction over the trust:
•
•
•
•
•

The provisions of the trust instrument
The residence of the trustees
The residence of the beneficiaries
The location of trust assets
The location where the business of the trust is conducted

You have represented that the ESBT is irrevocable, was formed in Illinois by Illinois
resident trustees, and has filed as an Illinois resident since formation. In addition, you
indicated the location of trust assets is Illinois and the business location of the trust is
Illinois. The Lewis Linn case does not apply to the situation that you have described
because there are sufficient contacts between the ESBT and the State of Illinois to
satisfy the Due Process Clause of the U.S. Constitution given the location of trust
assets in Illinois and the business location of the trust is Illinois. In Lewis Linn, the court
distinguished that the focus on the due process analysis was on the tax year in
question, so historic events had no influence on determining the residency of the trust.
Therefore, pursuant to IITA Section 1501(a)(20)(D), the ESBT you describe is an Illinois
resident and is required to file an Illinois income tax return under IITA Section 502(a)(2).
86 Ill. Adm. Code Section 100.3020(i) specifically recognizes that a person may be a
“resident” of two different states for state income tax purposes. The IITA provides a
credit for Illinois residents for the amount of tax paid to another state on income which is
also subject to tax in Illinois during the same taxable year. The credit reduces the
impact of the double taxation that occurs in this situation. Section 601(b)(3) of the IITA
[35 ILCS 5/601(b)(3)] provides, in pertinent part:
(3) Foreign tax. The aggregate amount of tax which is imposed upon or
measured by income and which is paid by a resident for a taxable year to
another state or states on income which is also subject to the tax imposed by
subsections 201(a) and (b) of this Act shall be credited against the tax imposed
by subsections 201(a) and (b) otherwise due under this Act for such taxable year
As a resident of Illinois for a given state income tax year during which the ESBT was
also classified as a resident of STATE2 and claims a credit for taxes paid to Illinois, as
you represent, the ESBT may be eligible for the foreign tax credit (i.e., Illinois Credit for
Tax Paid to Other States) against Illinois income and replacement tax, provided the
ESBT meets the applicable definitions in 86 Ill. Adm. Code Section 100.2197.
Section 601(b)(3) of the IITA also provides:

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For taxable years ending on or after December 31, 2009, the credit provided
under this paragraph for tax paid to other states shall not exceed that amount
which bears the same ratio to the tax imposed by subsections 201(a) and (b)
otherwise due under this Act as the amount of the taxpayer’s base income that
would be allocated or apportioned to other states if all other states had adopted
the provisions in Article 3 of this Act bears to the taxpayer’s total base income
subject to tax by this State for the taxable year.
The above limits the amount of tax paid to other states that may otherwise qualify
for the credit. That limitation is determined by multiplying the amount of Illinois income
tax otherwise imposed for the taxable year by a fraction, the numerator of which is the
amount of the taxpayer’s base income that would be allocated or apportioned outside of
Illinois assuming that all other states adopted Illinois’ allocation and apportionment rules
as set forth in Article 3 of the IITA, and the denominator of which is the taxpayer’s total
base income for the taxable year. Under this provision, only income that would have
been taxable by other states applying Illinois law is included in the numerator of the
fraction. As a result, the amount of Illinois foreign tax credit cannot exceed an amount
equal to the income tax levied on the taxpayer’s Illinois base income (as defined in
Section 203 of the IITA) multiplied by the ratio of the income subject to double taxation
over the taxpayer’s Illinois base income.
In response to both illustrations, Illinois will allow credit for taxes paid to other states on
Illinois base income. A taxpayer will figure the amount of credit in Step 5 of the
Schedule CR (Credit for Tax Paid to Other States) for Form IL-1041 Fiduciary Income
and Replacement Tax Return. As provided in the Line 52 instructions, the taxpayer
should enter the total amount of income tax paid to all other states minus all credits
allowed, including a credit for taxes paid to Illinois or another state, except credits for
payments the taxpayer actually made to other states or payments made on behalf of the
taxpayer (see also 86 Ill. Adm. Code Section 100.2197(c)(2)). Taxes paid to other
states should only be included if the income tax paid in the other state was for the same
income included in Illinois base income for the same taxable year, as reported on Line
26 of the Form IL-1041. If the ESBT paid income taxes to Indiana and California, then
the taxpayer can claim the total amount paid less any credits allowed in each state on
Line 52 of the Schedule CR to figure the foreign tax credit allowed in Illinois.
However, your second illustration does not accurately provide for the limitation
calculation as required in IITA Section 601(b)(3). The total amount of Illinois income
and replacement tax owed would be multiplied by the limitation ratio as calculated on
Line 51 of the Schedule CR. This result would be compared with the income tax paid to
other states as calculated on Line 52, and the lesser amount would then be used to
determine the amount of income and replacement tax credit for income tax paid to
another state.
As stated above, this is a GIL. A GIL does not constitute a statement of Department
policy that applies, interprets or prescribes the tax laws, and it is not binding on the
Department. If you require additional information, please visit the Department’s website
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at www.tax.illinois.gov or contact the Department’s Taxpayer Assistance Division at
(800) 732-8866.
Sincerely,
Jennifer Uhles
Associate Counsel (Income Tax)

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