I petitioned Illinois to use separate accounting instead of the standard apportionment formula, but I didn't file the petition until after my return was due -- can the Department still consider it?

Plain-English summary

A multi-state partnership that started out owning a single Illinois-adjacent office building, then grew into a diversified operation with rental real estate across several states, a business-lending line, and (eventually) a large out-of-state operating business, petitioned Illinois in September 2024 to use "separate accounting" instead of the standard single-sales-factor apportionment formula. The taxpayer argued that as its non-Illinois operations grew, the standard formula began attributing more income to Illinois than its modest Illinois rental activity actually generated -- in some years producing an apportionment result the taxpayer said exceeded 100% of its unitary income (violating "internal consistency") and didn't reflect where its income was actually earned (violating "external consistency"), in tension with the Due Process and Commerce Clauses.

The Department denied the petition, but entirely on procedural timing grounds -- it never reached whether separate accounting was actually the fairer method. Under 86 Ill. Adm. Code 100.3390(e), a petition for alternative apportionment is timely only if it is filed (1) more than 120 days before the due date (including extensions) of the return for the tax year at issue, (2) as an attachment to an amended return, or (3) as part of a protest or Illinois Independent Tax Tribunal proceeding tied to an audit. The Department found that this petition, filed September 16, 2024, was not filed more than 120 days before the relevant return's due date, so it failed the first (and only applicable, at this stage) timely-filing path under 100.3390(e)(1).

Because the petition was untimely, the substantive apportionment analysis in the letter was never resolved. The Department's letter recites the taxpayer's full factual argument -- the growth pattern, the year-by-year apportionment percentages, the internal/external consistency concerns -- but the "RULING" section pivots directly to the timeliness defect rather than evaluating whether the standard formula was actually distorted or whether separate accounting would fairly represent the taxpayer's Illinois activity. The petition "cannot be granted at this time" solely because it came in too late for the 120-day pre-filing route.

The Department told the taxpayer how to try again. To obtain permission to use an alternative apportionment method for the tax year at issue, the taxpayer must first file its Illinois return using the statutorily prescribed (standard) apportionment formula, and then pursue the petition through one of the later-stage timely-filing options: attaching a petition to an amended return under 100.3390(e)(2), or raising it as part of a protest or Tax Tribunal case tied to an audit under 100.3390(e)(3) (available only if the taxpayer had already asked the auditor in writing to use alternative apportionment and been denied, or if the audit disallowed an alternative method the taxpayer had used on its return).

What this means for you

Anyone considering an alternative-apportionment petition

File early. The 120-day pre-return-due-date deadline in 86 Ill. Adm. Code 100.3390(e)(1) is a hard gate -- the Department will not evaluate the substance of your unfairness argument, no matter how strong, if the petition itself is late. Calendar the 120-day window from your return's due date (including extensions) as soon as you know you may need alternative apportionment.

Taxpayers who missed the 120-day window

You still have two more paths, but only after filing under the standard formula: (1) attach a petition to an amended return under 100.3390(e)(2), or (2) raise it in a protest or Tax Tribunal proceeding tied to an audit under 100.3390(e)(3) -- but the latter requires that you already asked the auditor in writing to permit alternative apportionment and were denied, or that the audit itself disallowed an alternative method you had used.

Multi-state real estate and diversified holding entities

Growth into new, unrelated business lines outside Illinois (here, business lending and a later large operating business) is exactly the kind of change that can make a previously fine apportionment formula look distorted over time -- build in a periodic review of your apportionment method as your business mix shifts, so that if a petition becomes necessary you have time to meet the 120-day deadline rather than filing reactively.

Common questions

Q: Why was this alternative-apportionment petition denied?
A: Purely for being filed too late -- it was not submitted more than 120 days before the due date of the return for the tax year at issue, as 86 Ill. Adm. Code 100.3390(e)(1) requires. The Department did not evaluate whether separate accounting would actually have been a fairer method.

Q: Does this letter tell us whether the taxpayer's apportionment argument (internal/external consistency, distorted results) was correct?
A: No. The Department recited the taxpayer's factual argument but never ruled on its merits because the timeliness defect was dispositive; the substantive fairness question was left unresolved.

Q: What are the filing-timing options for an alternative apportionment petition under Illinois rules?
A: Three routes under 86 Ill. Adm. Code 100.3390(e): (1) more than 120 days before the return's due date (including extensions); (2) as an attachment to an amended return, if no earlier petition was filed or a prior petition was rejected; or (3) as part of a protest or Illinois Independent Tax Tribunal case tied to an audit, if the taxpayer had already asked the auditor in writing for alternative apportionment and was denied, or the audit disallowed an alternative method the taxpayer used.

Q: What must the taxpayer do now for the tax year covered by this petition?
A: File its Illinois income tax return for that year using the standard statutory apportionment formula, and then pursue an alternative apportionment petition, if still desired, through the amended-return route (100.3390(e)(2)) or the protest/Tax Tribunal route (100.3390(e)(3)).

Citations and references

Statutes, regulations, and prior guidance:

• 35 ILCS 5/304(a) (business income apportionment; single sales factor)
• 35 ILCS 5/304(a)(3)(A) (definition of the sales factor)
• 35 ILCS 5/304(f) (alternative apportionment petition; Director's authority)
• 86 Ill. Adm. Code 100.3390 (procedural requirements for alternative apportionment petitions)
• 86 Ill. Adm. Code 100.3390(e) (timely filing requirements)
• 86 Ill. Adm. Code 100.3390(e)(1) (120-day pre-return-due-date filing route)
• 86 Ill. Adm. Code 100.3390(e)(2) (amended-return filing route)
• 86 Ill. Adm. Code 100.3390(e)(3) (protest/Tax Tribunal filing route tied to an audit)

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/IT24-0009-GIL.pdf

Original ruling text

IT 24-0009 GIL 9/25/2024 ALTERNATIVE APPORTIONMENT
Petition for alternative apportionment not filed timely with the Department.
September 25, 2024
NAME
TITLE
COMPANY1
ADDRESS
Re:

Petition for Alternative Apportionment
COMPANY2
FEIN: ##-#######
Tax Year Ended: MM/DD/YEAR

Dear NAME:
This is in response to your petition to use an alternative method of allocation or
apportionment which was received by the Department on September 16, 2024. The
nature of your request and the information you have provided require that we respond
with a General Information Letter, 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 tax.illinois.gov. For the reasons discussed below, your petition cannot be
granted at this time.
Your petition for the YEAR tax year ended states as follows:
Request
The taxpayer would like to request the use of separate accounting as an
alternative apportionment method to report Illinois taxable income/loss on Illinois
Partnership Tax Return (Form IL-1065) for tax period MM/DD/YEAR and after for
COMPANY2 (taxpayer). Pursuant to 86ILAC100.3390(a)(l) the use of separate
accounting will more clearly reflect the taxable income/loss attributable to Illinois.
Background
COMPANY2 was formed in STATE MM/DD/YEAR. At this time the taxpayer
owned one office building in CITY, STATE. The next year (YEAR) the taxpayer
purchased ### additional office buildings including one in STATE2. As time went
by the taxpayer grew and expanded the rental activities to other states. In YEAR
the taxpayer owned ##-## total office buildings in STATE, STATE2, STATE3,
and STATE4. The taxpayer’s primary line of business has been rental real estate
until YEAR. In MONTH of YEAR the taxpayer purchased a hotel in STATE2 to
once again expand their business with rental real estate remaining the primary
activity.

The first (and only) building purchased in Illinois was on MM/DD/YEAR located at
ADDRESS.
In YEAR, the taxpayer began engaging in business loans for another revenue
stream. At this time the taxpayer owned ##-## office buildings in STATE,
STATE2, STATE4, STATE5, and STATE6; a BUSINESS1 business in STATE;
and a hotel in STATE2.
In MONTH of YEAR the taxpayer acquired a large BUSINESS2 business in
STATE2. This business has been producing a significant amount of income in
STATE2 and has considerably increased the taxpayer’s gross revenue and
taxable income. In YEAR the taxpayer acquired a new BUSINESS2 business in
STATE which also produces a significant amount of gross revenue and taxable
income.
The taxpayer sold their hotel in STATE2 in YEAR and had a significant gain from
this sale. Current business operations include owning and leasing ##-## office
buildings in various states, a BUSINESS1 business in STATE, and BUSINESS2
ventures in STATE2 and STATE.
Illinois Standard Apportionment Law
Illinois uses the single sales factor apportionment formula as provided in
86ILAC 100.3500(b)(2). This method calculates percentage of sales in Illinois by
taking total sales in Illinois (numerator) over total sales everywhere
(denominator). The calculated percentage is used to multiply the Federal taxable
income/loss adjusted for Illinois applicable items to get Illinois taxable
income/loss.
YEAR Sales Formula results:
•
•
•
•
•

In YEAR gross receipts in Illinois were $$,$$$,$$$ from the rental of real
estate located in Illinois
Total receipts from all activities everywhere were $$$,$$$,$$$
This results in an apportionment factor of %%%
The federal taxable income for YEAR for all activities was $$$$,$$$,$$$
STATE5 taxable income was $$$,$$$ (YEAR)

YEAR2 Sales Formula results:
•
•
•
•
•

In YEAR2 gross receipts in Illinois were $$$$,$$$,$$$ from the rental of
real estate located in Illinois.
Total receipts from all activities everywhere were $$$$,$$$,$$$
This results in an apportionment factor of %%%
The federal taxable income for YEAR2 for all activities was $$$$,$$$,$$$
Illinois taxable income was $$$,$$$ (YEAR)

YEAR3 ESTIMATED Sales Formula results:
The following YEAR3 amounts below are all estimates based on financial
records, but the tax returns have yet to be filed. The taxpayer filed federal and
state extensions.
•
•
•
•
•

In YEAR3 gross receipts in Illinois estimated $$,$$$,$$$ from the rental of
real estate located in Illinois
Total receipts from all activities everywhere estimated $$$,$$$,$$$
This results in an apportionment factor of %%%
The federal taxable income for YEAR3 for all activities estimated
$$$,$$$,$$$
Illinois taxable income estimated to be $$$,$$$ (YEAR)

The taxpayer has used the standard apportionment method since the initial
purchase of an Illinois property in YEAR until YEAR.
Fair Apportionment Under Due Process and Commerce Clause, U.S.
Constitution The U.S. Supreme Court has held that a state must apply its tax on
interstate commerce by fairly determining the apportionment or allocation formula
and not discriminate against interstate commerce. An apportionment formula is
fair if under both the Due Process Clause and Commerce Clause it satisfies the
standards of both the internal and external consistency. Internal consistency
requires that if the formula were applied to every jurisdiction, it would result in no
more than 100% of the taxpayer’s unitary income being subject to tax. External
consistency requires the apportionment factor or factors must actually reflect the
reasonable sense of how income is generated within the state.
Most states have adopted statutes imposing a standard apportionment
methodology applicable to taxpayers that file a corporate income tax return,
unless the taxpayer operates in a specialized industry (e.g., airlines), in which
case a specialized apportionment methodology may be applicable. Because the
standard apportionment methodology may not accurately reflect how income is
attributable to a specific state for all taxpayers, state apportionment statutes
typically provide that a taxpayer may request, or a taxing authority may require,
the use of an apportionment methodology deviating from the statutory
methodology, or an “alternate methodology”.
Illinois Alternative Apportionment Law
Illinois provides that, if the allocation and apportionment provisions of IITA
Section 304(a) through (e) do not fairly represent the extent of the person’s
business activity in this state, or do not fairly represent the market for the
person’s goods, services or other sources of business income, the person may
petition the Director and request an alternative apportionment formula. The
taxpayer respectfully requests the Illinois Director to grant permission to use the
separate accounting method under 86ILAC100.3390(a)(l). The facts and
circumstances of our request to follow.

Facts
The initial Illinois income tax return was filed for COMPANY2 in YEAR. The
taxpayer purchased # office building in Illinois in YEAR and at the time owned

-### total office buildings in various states. The apportionment percent in the

initial year was %%% with an overall federal taxable loss. As the taxpayer has
diversified its operations and expanded into ACTIVITIES activities outside of
Illinois the Illinois apportionment factor has become skewed and no longer a fair
representation of the Illinois activities. Under the standard single sales factor, the
taxpayer is subject to tax on more than 100% of its income/loss in violation of the
internal consistency requirement.
Further, it does not meet the external consistency requirement as the single
sales factor Illinois taxable loss is greater or equal to total Illinois sales. It distorts
the Illinois source income as it does not allow for any of the Illinois business
expenses or deductions as a consequence of apportioning all the income from
the out of state activities of ACTIVITIES in STATE2, STATE3, and other states
outside of Illinois. The taxpayer has a separate general ledger for each
property/business venture and is able to track the income/losses attributable to
each property in each separate state.
Supports and Analysis
The taxpayer is providing support with this letter to demonstrate how the single
sales factor apportionment method is not a fair representation for the business
activity in Illinois.
The taxpayer’s gross receipts in Illinois have increased slightly over the past
three years but the income apportioned to the state has increased and the
federal taxable
income has almost doubled. The first set of supports and analysis are listed in
the bullet points below.
•
•
•
•
•
•

Gross income comparison for tax years YEAR, YEAR and YEAR.
The gross income for all three years are categorized into different
types of businesses and different states.
In YEAR and YEAR, the total gross income everywhere increased
from $$$.$ million to $$$.$ million.
The large increase was due to the BUSINESS2 sales in STATE2 when
comparing YEAR and YEAR. In YEAR, the BUSINESS2 sales was
$$$.$ million and YEAR was $$$.$ million.
In YEAR, total gross income is estimated to be $$$ million.
Federal taxable income in YEAR was $$$ million and YEAR was
$$$ million. This increase is due to the ACTIVITIES in STATE2. In
YEAR it is estimated to be $$$ million.

The second set of support and analysis are listed in the bullet points below.

•
•

Included are income statements for the property located in Illinois for
taxable years YEAR, YEAR and YEAR. The income statements
accurately report the taxable loss for the Illinois rental properties.
For YEAR, YEAR and YEAR, if separate accounting method was
used, Illinois would have had taxable losses of $($$$,$$$), $($$$,$$$)
and $($$$,$$$) respectively. The use of separate accounting
accurately and fairly represents the taxpayer’s business activity in
Illinois.

Conclusion
COMPANY2 is primarily a rental real estate entity with properties located in #
states. This has been its main source of income from YEAR - YEAR. In YEAR
the ACTIVITIES venture acquired in STATE2 significantly increased overall
income and profits. We believe the income earned from the BUSINESS activity
has skewed Illinois taxable income when the single sales factor apportionment
methodology is utilized. Due to the taxpayer effectively reporting profit and loss
by each rental property located in each separate state and by separately
reporting the BUSINESS2 income from STATE2, ACTIVITIES activities from
STATE3, and each line of business by states, the taxpayer can more accurately
report the income/loss in Illinois using the separate accounting method.
Based on the facts, analysis and explanation presented the single sales factor
apportionment is not a fair and accurate method that represents COMPANY2’s
activity in Illinois. The single sales factor method does not accurately apportion
the income to the state where the taxpayer’s income­producing activities occur,
i.e., accurately report the Illinois rental income from the properties located in
Illinois. It results in the taxpayer paying tax in a state where there is not taxable
income and appears to violate the Commerce Clause and Due Process Clause.
Therefore, the taxpayer requests the use of an alternate apportionment
methodology, the use of separate accounting method, to calculate Illinois taxable
income/loss, Form IL-1065 for years ending MM/DD/YEAR.
To conclude, the taxpayer respectfully requests the Illinois Director to grant
permission to use the separate accounting method under 86ILAC100.3390(a)(l).
I confirm that these statements are made under the penalties of perjury and to
the best of my knowledge and belief are true, correct, and complete.
RULING
Section 304(a) of the Illinois Income Tax Act (“IITA”; 35 ILCS 5/304) 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. For taxable years ending on and after December 31, 1998, except
in the case of an insurance company, financial organization, transportation company, or

federally regulated exchange, the apportionment factor is equal to the sales factor. IITA
Section 304(a)(3)(A) defines the “sales factor” as a fraction, the numerator of which is
the total sales of the person in Illinois during the taxable year, and the denominator of
which is the total sales of the person everywhere during the taxable year.
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 or
in this State; or
(4) The employment of any other method to effectuate an equitable allocation
and apportionment of the person's business income.
Taxpayers who wish to use an alternative method of apportionment under IITA Section
304(f) are required to file a petition complying with the requirements of 86 Ill. Adm. Code
Section 100.3390.
86 Ill. Adm. Code Section 100.3390(e) describes timely filed petitions:
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 that 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
petition is filed:
1)

120 days prior to the due date of the tax return (including
extensions) for which permission to use an alternative method is
sought. A taxpayer who does not petition more than 120 days prior
to the due date of the original return must file the return and pay tax

according to the statutorily approved allocation or apportionment
method. If the petition is approved, the Department shall grant
permission to use an alternative apportionment method in the form
of a private letter ruling issued under 2 Ill. Adm. Code 1200.110.
2)

as an attachment to a return amending an original return which was
filed using the statutory allocation and apportionment rules. A
taxpayer who has not filed a petition for alternative apportionment
under subsection (e)(1), or whose subsection (e)(1) petition has
been rejected, may thereafter file a petition with an amended
return. The explanations section of the amended return should
state that the amended return includes a petition for alternative
apportionment that should be referred to the Legal Services
Bureau/Income Tax, and a copy of the amended return should be
mailed to the Legal Services Bureau/Income Tax, at the address in
subsection (d). If the amended return results in a claim for
refund, the Department will consider the petition, along with any
other issues raised in the claim for refund, pursuant to the
procedures set forth at Section 100.9400.

3)

as part of a protest, an action filed under the State Officers and
Employees Money Disposition Act [30 ILCS 230] or a petition to the
Illinois Independent Tax Tribunal regarding a notice of deficiency
issued as a result of the audit of the taxpayer’s return and
supporting books and records; provided that the audit adjustments
being protested result in the need for the petition for alternative
apportionment. Alternative apportionment may not be raised in a
protest, a court filing or a petition to the Illinois Independent Tax
Tribunal regarding a notice of deficiency unless the taxpayer has
requested in writing that the auditor allow the use of alternative
apportionment and the request was denied, or the audit disallows
an alternative method of apportionment used by the taxpayer on its
return. The disallowance of the use of alternative apportionment in
an audit may be reviewed by the Informal Conference Board.

Your petition for alternative apportionment is not timely under 86 Ill. Adm. Code Section
100.3390(e)(1) as it was not filed more than 120 days prior to the due date of the tax
return for the year at issue. Accordingly, to obtain permission to use an alternative
apportionment formula for tax year ended YEAR, taxpayer COMPANY2 must file its
Illinois income tax return for that tax year using the statutorily prescribed apportionment
formula and then follow the petition procedures set forth in 86 Ill. Adm. Code Section
100.3390(e)(2) or (e)(3).
Therefore, your petition for alternative apportionment for tax year ended YEAR, cannot
be granted. If you still believe that your petition should be granted, please supplement

the petition in accordance with the provisions of 86 Ill. Adm. Code Section 100.3390,
and we will reconsider your request.
As stated above, this is a General Information Letter. A General Information Letter does
not constitute a statement of Department policy that applies, interprets or prescribes the
tax laws, and it is not binding on the Department.
Sincerely,
Jennifer Uhles
Associate Counsel (Income Tax)