My partnership owns rental real estate, a lending business, and oil and gas ventures across several states, and Illinois's single-sales-factor formula makes our Illinois apportionment badly out of proportion to our actual Illinois activity -- can we use separate accounting instead?

Plain-English summary

A partnership that started out owning a single office building, then grew into a multi-state operation with rental real estate in several states, a business-lending operation, and (later) sizable oil and gas ventures, petitioned Illinois to let it use "separate accounting" instead of the standard single-sales-factor apportionment formula. Its argument: after the oil and gas business took off, the standard formula was pulling in far more income to Illinois than its actual, comparatively small Illinois rental activity justified -- in some years the calculation implied Illinois taxable income exceeding the partnership's total Illinois sales, which the taxpayer said flunked both the "internal consistency" test (no more than 100% of unitary income should be taxed if every state used the same formula) and the "external consistency" test (the formula should reflect where income is actually generated).

The Department denied the petition, but not on the merits of the underlying unfairness claim. Under IITA Section 304(f) and 86 Ill. Adm. Code 100.3390(c), a taxpayer seeking alternative apportionment carries a demanding burden: proving by "clear and cogent evidence" that the standard formula taxes extraterritorial values and produces a result "out of all proportion" to the taxpayer's actual Illinois business, AND that the taxpayer's proposed alternative would fairly and accurately apportion income instead. The Department found the petition fell short on both fronts -- it lacked apportionment data for the specific tax year the petition covered (even though data for other years was included), and the taxpayer's evidence amounted to little more than showing that separate accounting reached a different number, which the regulation explicitly says isn't enough by itself ("[a]n alternative apportionment method may not be invoked ... merely because it reaches a different apportionment percentage").

The more useful part of the letter is what it flagged as a possible alternate path that doesn't need any petition at all. The Department noted that the taxpayer's own framing -- treating the real estate, lending, and oil-and-gas activities as functionally separate operations -- lines up with a completely different, no-petition-required rule: 86 Ill. Adm. Code 100.3010(b)(1), which requires a taxpayer that genuinely runs more than one separate "trade or business" to apportion each business's income separately, using the in-state and out-of-state factors relevant to that specific business. The regulation's own example (a corporation with independently managed aerospace, tobacco, and film divisions) illustrates the kind of operational separation that qualifies. If this taxpayer's businesses meet that separate-business test, the Department said, the result "will likely produce either the result you are seeking in your petition or a result that you will not consider to be grossly distorted" -- and no alternative-apportionment petition is needed to get there.

The Department was careful not to prejudge that question. The letter explicitly does NOT decide whether the taxpayer's activities actually qualify as separate trades or businesses under 86 Ill. Adm. Code 100.3010(b)(3) -- that's a determination the taxpayer has to make itself by applying the regulation's own rules. If, instead, the businesses turn out to be a single unitary enterprise, all the income must be combined and apportioned together under the standard IITA Section 304(a) formula, and the taxpayer would be back to needing a properly supported alternative-apportionment petition (with actual current-year apportionment and market data) to get relief.

What this means for you

Multi-industry or multi-line-of-business taxpayers with lopsided state exposure

Before filing an alternative-apportionment petition, check whether your different business lines might already qualify as separate "trades or businesses" under 86 Ill. Adm. Code 100.3010(b) -- if they do, you can apportion each one separately using its own factors without petitioning anyone, which may fix a distorted result faster and with less evidentiary burden than an alternative-apportionment fight.

Anyone planning to petition for alternative apportionment

Include complete apportionment data for the SPECIFIC tax year(s) your petition covers, not just prior years, and go beyond showing that your proposed method yields a different number -- you must affirmatively prove the standard formula produces a grossly distorted, out-of-proportion result AND that your alternative method fairly reflects your actual Illinois activity.

Real estate and diversified holding entities

Growth into unrelated business lines (here, oil and gas) can distort a formula that worked fine when the entity was a single-purpose real estate holder -- revisit your apportionment method as your business mix changes, rather than waiting until the distortion becomes severe.

Common questions

Q: Why was this alternative-apportionment petition denied?
A: The taxpayer didn't meet the "clear and cogent evidence" burden required by 86 Ill. Adm. Code 100.3390(c) -- it omitted apportionment data for the actual tax year at issue and mainly showed that separate accounting produced a different number, which the regulation says isn't enough on its own.

Q: Does a taxpayer running several genuinely separate businesses need to petition for alternative apportionment to apportion each one separately?
A: No. Under 86 Ill. Adm. Code 100.3010(b)(1), if a taxpayer has more than one true "trade or business," each one's income is apportioned separately using its own relevant factors -- automatically, without any petition.

Q: How does the Department decide whether activities are "separate trades or businesses" versus one unitary business?
A: By applying the rules in 86 Ill. Adm. Code 100.3010(b)(3); this GIL didn't make that determination for the taxpayer's specific facts, and if the activities turn out to be unitary, all the income must be combined and apportioned as a single business under IITA Section 304(a).

Q: What must a taxpayer prove to win an alternative-apportionment petition?
A: By clear and cogent evidence, that the standard statutory formula taxes extraterritorial values and operates unreasonably and arbitrarily to attribute an out-of-proportion share of income to Illinois, AND that the taxpayer's proposed alternative method fairly and accurately apportions income to Illinois instead.

Citations and references

Statutes, regulations, and prior guidance:

• 35 ILCS 5/304(a) (business income apportionment; single sales factor)
• 35 ILCS 5/304(f) (alternative apportionment petition; Director's authority)
• 86 Ill. Adm. Code 100.3390(c) (burden of proof for alternative apportionment)
• 86 Ill. Adm. Code 100.3390(e)(1) (120-day petition filing deadline)
• 86 Ill. Adm. Code 100.3010(b)(1)-(3) (separate trades or businesses apportioned separately; no petition required)
• IT 17-0006-GIL (cited Department precedent on separate-business apportionment)

Source

• Landing page: https://taxarchive.illinois.gov/research/legal/letter-rulings/income-tax/2025.html
• Original PDF: https://tax.illinois.gov/content/dam/soi/en/web/taxarchive/research/legal/letter-rulings/income-tax/2025/it25-0002-gil.pdf

Original ruling text

IT 25-0002-GIL

03/17/2025

ALTERNATIVE APPORTIONMENT

Apportionment of separate businesses under 86 Ill. Adm. Code Section
100.3010(b) does not require petition for alternative apportionment. (This is
a GIL.)
March 17, 2025
NAME
COMPANY1
ADDRESS1
EMAIL
Re:

Petition for Alternative Apportionment
COMPANY2
FEIN: #########
Tax Year Ended: YEAR1

Dear NAME:
This is in response to your February 7, 2025, petition on behalf of COMPANY2 to use
an alternative method of allocation or apportionment effective for tax year ending
YEAR1 and subsequent tax years. 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 https://tax.illinois.gov/. For
the reasons discussed below, your petition cannot be granted.
Your petition for the YEAR1tax 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 YEAR1and after
for COMPANY2 (taxpayer). Pursuant to 86ILAC100.3390(a)(1) the use of
separate accounting will more clearly reflect the taxable income/loss
attributable to Illinois.
Background
COMPANY2 was formed in STATE1 DATE1 At this time the taxpayer owned
one office building in CITY1, STATE1. The next year (YEAR2) the taxpayer
purchased NUMBER1additional office buildings including one in STATE2. As
time went by the taxpayer grew and expanded the rental activities to other
states. In YEAR3 the taxpayer owned NUMBER2 total office buildings in
STATE1, STATE2, STATE3, and STATE4. The taxpayer’s primary line of
business has been rental real estate until YEAR4. In YEAR4 the taxpayer

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purchased a hotel in STATE2 with rental real estate remaining the primary
activity.
The first (and only) building purchased in Illinois was on DATE2 located at
ADDRESS2 in CITY2.
In YEAR5, the taxpayer started a separate trade or business of providing
business loans. At this time the taxpayer owned NUMBER3 office buildings in
STATE1, STATE2, STATE4, Illinois, and STATE5; a lending business in STATE1;
and a hotel in STATE2.
In YEAR6 the taxpayer acquired a large oil and gas 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 YEAR7 the taxpayer acquired a new oil and gas business in
STATE1 which also produces a significant amount of gross revenue and
taxable income.
The taxpayer sold their hotel in STATE2 in YEAR7 and has a significant gain
from this sale. Current business operations include owning and leasing
NUMBER4 office buildings in various states, a lending business in STATE1,
and oil and gas ventures in STATE2 and STATE1.
Illinois Standard Apportionment Law
Illinois uses the single sales factor apportionment formulas as provided in
86ILAC100.3500(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.
YEAR6 Sales Formula results:
-

In YEAR6 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 for Illinois of %%%
The federal taxable income for YEAR6for all activities was $$$
Illinois taxable income was $$$ (YEAR6)

YEAR8 Sales Formula results:

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March 17, 2025
-

In YEAR8 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 for Illinois of %%%
The federal taxable income for YEAR8 for all activities was $$$
Illinois taxable income was $$$ (YEAR8)

YEAR7 Sales Formula results:

In YEAR7 gross receipts in Illinois were $$$ from the rental of real
estate located in Illinois
Total receipts from all activities everywhere estimated $$$
This results in an apportionment factor for Illinois of %%%
The federal taxable income for YEAR7 for all activities was $$$
(excluding the Excess Business Interest – Other Deduction)
Illinois taxable income using the standard apportionment was $$$
(YEAR7)

The taxpayer has used the standard apportionment method since the initial
purchase of an Illinois property in YEARS
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 under both the Due Process Clause and Commerce Clause if it satisfies
the standards of both the internal and external consistency tests.
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 in 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

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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)(1). The facts
and circumstances of our request to follow.
Facts
The initial Illinois income tax return was filed for COMPANY2 in YEAR4. The
taxpayer purchased one office building in Illinois in YEAR4 and at the time
owned NUMBER5 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 oil and gas and
financing 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 oil and gas productions and
financing in STATE2, STATE1, 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.
Support 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.

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The taxpayer’s gross receipts in Illinois have increased slightly over the past
YEARS but the income apportioned to the state has increased. The first set of
support and analysis are listed in the bullet points below.
•
•
•
•
•

Gross income comparison for tax years YEARS.
The gross income for all YEARS is categorized into different types of
businesses and different states.
In YEARS, the total gross income everywhere increased from $$$ to
$$$. In YEAR7 total gross income increased to $$$.
The large increase was due to the oil and gas sales in STATE2 when
comparing YEARS, the oil and gas sales was $$$ and YEAR8 was $$$.
Federal taxable income in YEAR6 was $$$ and YEAR8 was $$$. This
increase is due to the oil and gas operations in STATE2. In YEAR7,
federal taxable income was $$$.

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 YEARS. The income statements accurately report the
taxable loss for the Illinois rental property.
For YEARS, 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.
Separate accounting was used on the YEAR7 Form IL-1065 to report
the taxable loss $($$$). The return has not yet been amended.

Conclusion
COMPANY2 is primarily a rental real estate entity with properties located in
NUMBER6 states. This has been its main source of income from YEARS. In
YEAR6 the oil and gas venture acquired in STATE2 significantly increased
overall income and profits. The income earned from the oil and gas 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 oil and gas income from STATE2,
financing activities from STATE1, 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

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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 YEAR1
To conclude, the taxpayer respectfully requests the Illinois Director to grant
permission to use the separate accounting method under
86ILAC100.3390(a)(1).
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) 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.
IITA Section 304(f) 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 to all or any part of the person’s business
activity, if reasonable:
(1) Separate accounting;

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(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.
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(c) provides:
A departure from the required apportionment method is allowed only where
such methods do not accurately and fairly reflect business activity in Illinois.
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 of going forward with the evidence
and proving by clear and cogent evidence that the statutory formula results
in the taxation of extraterritorial values and operates unreasonably and
arbitrarily in attributing to Illinois a percentage of income which is out of all
proportion to the business transacted in this State. 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.
In applying IITA Section 304(a), 86 Ill. Adm. Code Sections 100.3010(b)(1) and (2)
provide that when a taxpayer conducts two or more separate businesses, the
business income of each such business must be separately apportioned:
A person may have more than one “trade or business”. In such cases, it is
necessary to determine the business income attributable to each separate
trade or business. In the case of a person other than a resident, the income
of each business is then apportioned by a formula that takes into
consideration the instate and outstate factors relating to the trade or
business the income of which is being apportioned.
Example: The person is a corporation with three operating divisions. One
division is engaged in manufacturing aerospace items for the federal
government. Another division is engaged in growing tobacco products. The

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third division produces and distributes motion pictures for theaters and
television. Each division operates independently; there is no strong central
management. Each division operates in this State as well as in other states.
In this case, it is fair to conclude that the corporation is engaged in three
separate “trades or businesses”. Accordingly, the amount of business
income attributable to the corporation’s trade or business activities in this
State is determined by applying an apportionment formula to the business
income of each business.
Your petition for alternative apportionment appears to be based on the position that
the rental properties, the financing activities, and the oil and gas business are
separate trades or businesses. Assuming that position is correct, then 86 Ill. Adm.
Code Section 100.3010(b)(1) provides for the business income of each such trade
or business to be apportioned separately. It is not necessary to file a petition for
alternative apportionment in order to apply the provisions of 86 Ill. Adm. Code
Section 100.3010(b)(1). (See also IT 17-0006-GIL.) This will likely produce either the
result you are seeking in your petition or a result that you will not consider to be
grossly distorted.
This letter does not constitute a determination that the separate activities described
in your petition in fact constitute separate businesses. You must make that
determination applying the rules set forth in 86 Ill. Adm. Code Section 100.3010(b)(3).
If in applying those rules you determine that the operations constitute a single unitary
business, then the income from each property must be combined and apportioned
applying IITA Section 304(a) to the activities as a single business. In order to obtain
an alternative apportionment ruling, you must satisfy the burden of proof set forth in
86 Ill. Adm. Code Section 100.3390(c).
Alternatively, if the businesses are unitary, you have not presented evidence
sufficient to allow the Department to grant your request. In order to make a
determination under IITA Section 304(f) as to whether or not the apportionment
provisions of subsections (a) through (e) and of subsection (h) reflect the market for
the person’s goods, services, or other sources of business income, it is necessary
that the taxpayer first determine its apportionment under such sections. If the
apportionment under such sections does not fairly reflect the taxpayer’s market,
then an alternative apportionment method may be permitted. Your request does not
indicate whether the taxpayer has determined its apportionment under IITA Section
304 for the tax year ended YEAR1. Your request contains no information relative to
the market for the taxpayer’s goods and services, nor does it contain information by
which a determination can be made as to whether the apportionment resulting under
IITA Section 304 fails to fairly reflect that market. Your request contains no evidence
that the statutory apportionment formula for tax year ended YEAR1 does not fairly

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represent the extent of the taxpayer’s business activities in Illinois or that the
proposed alternative method of separate accounting does produce a reasonable
result. Further, your petition includes sales formula information for tax years ended
YEARS, reflecting a consistent Illinois apportionment factor with total gross income
increasing for each tax year, but your petition fails to include sales formula
information for tax year ended YEAR1.
The facts stated in your petition are not sufficient to satisfy the burden set forth in 86
Ill. Adm. Code Section 100.3390(c). 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. Because
your request merely states that separate accounting for the taxpayer’s Illinois
income more accurately reflects its Illinois activity, your petition for alternative
apportionment does not meet the regulatory requirement and cannot be granted at
this time.
Accordingly, your petition for alternative apportionment for tax year ended YEAR1
cannot be granted. However, if you have additional information related to this
request that was not previously submitted, you may supplement your petition and
the Department will reconsider your request.
Please note that 86 Ill. Adm. Code Section 100.3390(e)(1) requires a petition to be
filed at least 120 days prior to the due date (including extensions) for the first return
for which permission is sought to use the alternative apportionment method. In
addition, each Private Letter Ruling request submitted to the Department for
consideration must include certain information outlined in 2 Ill. Adm. Code Section
1200.110.
As stated above, this is a General Information Letter. A General Information Letter
does not constitute a statement of policy that applies, interprets or prescribes the
tax laws, and it is not binding on the Department.
Sincerely,

Jennifer Uhles
Associate Counsel
JU:se