Our family partnership holds Illinois farmland as its only asset -- can the one-time capital gain from selling that farmland be excluded from the Illinois Personal Property Replacement Tax as nonbusiness income and reported on my personal return instead of the partnership's?

Plain-English summary

A taxpayer inherited an Illinois farm and, on a lawyer's advice, set up a family partnership (owned mostly by the taxpayer, with a trust for his son holding the remainder) purely for inheritance and liability-protection purposes. The partnership held an Illinois LLC whose sole asset was the farmland; the partnership itself had no employees, meetings, phone number, or address in Illinois. When the LLC sold the farm, it generated a large one-time capital gain (on top of ordinary rental income the taxpayer conceded was properly subject to Illinois's Personal Property Replacement Tax, or PPRT). Believing the farm should have been distributed to the partners before the sale (which didn't happen due to what he described as bad advice), the taxpayer asked the Department to let him exclude the capital gain from the partnership's PPRT and instead report it on his own personal Illinois return, where PPRT doesn't apply.

The property's Illinois location decides the outcome, regardless of classification. Illinois income for nonresident partnerships is either "business income" (apportioned under IITA § 304) or "nonbusiness income" (allocated under IITA § 303) -- income is presumed to be business income unless clearly classifiable otherwise. But for a gain on the sale of REAL PROPERTY specifically, both paths lead to the same place: nonbusiness real-property gains are allocated to Illinois if the property is located in Illinois (§ 303(b)), and business-income sourcing rules likewise assign real-property sale proceeds to Illinois if the property is located here (§ 304(a)(3)(C-5)(i)). Because the farm was Illinois real property, the Department concluded the gain is assigned to Illinois on the partnership's own IL-1065 "regardless of whether the gain on the sale of real property is classified as business or nonbusiness income" -- making the taxpayer's whole nonbusiness-income argument beside the point.

The partnership's separate existence has to be respected. The Department also refused to let the taxpayer report the gain on his own personal return instead of the partnership's, even though the farm arguably should have been distributed to the partners before the sale. Citing the classic federal entity-respect doctrine from Moline Properties, Inc. v. Commissioner (1943), the Department reasoned that establishing the partnership structure most likely provided some benefit to the partners (here, liability protection and estate planning) -- and having chosen that structure, its separate existence must be respected for tax purposes too. The gain remains the partnership's gain, taxed to the partnership under PPRT, not reassigned to an individual partner after the fact.

What the Department didn't decide. The Department declined to advise on whether amending the federal Form 1065 (to reclassify the gain from ordinary income to capital gain on the federal return) would help -- that question was outside its scope, though the real-property-location rule would apply regardless of that federal reclassification.

What this means for you

Family partnerships holding Illinois real estate for estate-planning reasons

A partnership formed purely for liability protection or inheritance planning, with no active Illinois business operations, does NOT escape Illinois tax on a real-property sale -- if the property itself is located in Illinois, the gain is Illinois-source whether it's business or nonbusiness income, and it belongs to the partnership, not to an individual partner reporting it personally.

Taxpayers who regret not distributing an asset to partners before a sale

Illinois will not retroactively treat a sale as if the asset had already been distributed to the partners -- the entity that actually held and sold the property is the one taxed on the gain.

Accountants and estate planners advising on real-estate-holding partnerships

When the underlying asset is real property, don't spend time arguing business-vs-nonbusiness classification for Illinois-sourcing purposes -- the location-based sourcing rule for real property (both § 303(b) and § 304(a)(3)(C-5)(i)) reaches the same Illinois-source result either way. Plan distributions BEFORE a sale if avoiding entity-level PPRT is the goal.

Common questions

Q: Can a nonbusiness capital gain on real property escape Illinois tax if the partnership has no other Illinois business activity?
A: Not if the property itself is located in Illinois -- Illinois's nonbusiness-income allocation rule for real property (§ 303(b)) reaches the gain regardless of the partnership's lack of other Illinois activity.

Q: Does classifying the gain as "nonbusiness income" instead of "business income" change whether Illinois can tax it?
A: Not for real property -- both the nonbusiness allocation rule and the business apportionment rule assign a real-property sale gain to Illinois if the property is located here, so the classification fight doesn't change the outcome.

Q: Can I report my partnership's gain on my own personal return since the property should have been distributed to me first?
A: No -- the Department will not disregard a partnership's separate existence just because a distribution that should have happened didn't. The partnership's gain stays the partnership's gain.

Q: Will amending my federal Form 1065 to reclassify the gain help avoid Illinois PPRT?
A: The Department declined to advise on the federal amendment question, but the outcome under Illinois's real-property-location sourcing rule would not depend on how the gain is classified on the federal return.

Citations and references

Statutes, regulations, and cases:

• 26 U.S.C. § 7701(a)(2); 35 ILCS 5/1501(a)(16) (partnership definitions)
• 86 Ill. Adm. Code 100.9700(d)(1) (federal classification controls)
• 35 ILCS 5/1501(a)(1), (13) (business vs. nonbusiness income)
• 86 Ill. Adm. Code 100.3010(a)(3)(C) (presumption of business income)
• 35 ILCS 5/301(c)(1); 303(b); 304(a)(3)(C-5)(i); 305(a), (b) (allocation/apportionment and pass-through character)
• Moline Properties, Inc. v. Commissioner, 319 U.S. 436 (1943)

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/it25-0005-gil.pdf

Original ruling text

IT 25-0005-GIL

7/28/2025

PARTNERSHIPS

The gain from the sale of Illinois real property as the sole partnership asset is
allocated to this State under Section 303 or Section 304 of the Illinois Income Tax
Act. (This is a GIL.)
July 28, 2025
NAME
ADDRESS
EMAIL
Re:
Illinois Income Tax – Capital Gains on Sale of Illinois Real Property as Partnership
Asset
Dear NAME:
This letter is in response to your letter dated June 14, 2025, in which you requested
information regarding the treatment of capital gains on the sale of Illinois real property as a
partnership asset. The Department issues two types of letter rulings. Private Letter Rulings
(“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 who is the subject of the request for ruling and only
to the extent the facts recited in the PLR are correct and complete. Persons seeking PLRs
must comply with the procedures for PLRs found in the Department’s regulations at 2 Ill.
Adm. Code 1200.110. The purpose of a General Information Letter (“GIL”) is to direct
taxpayers to Department regulations or other sources of information regarding the topic
about which they have inquired. A GIL is not a statement of Department policy and is not
binding on the Department. See 2 Ill. Adm. Code 1200.120(b) and (c). You may access our
website at https://tax.illinois.gov/ to review regulations, letter rulings and other types of
information relevant to your inquiry.
The nature of your inquiry and the information you have provided require that we respond
with a GIL. In your letter you have stated and made inquiry as follows:
First let me state that I am writing this on my own, as NAME, Tax Payer. I am
not a lawyer or accountant. I already spend plenty of money on lawyers and
accountants and they did not advise me correctly. They should have advised
me to distribute the assets to the two partners before selling the family farm
and avoid PPRT. They did not.
I am in this mess because of lack of proper advice.

NAME
Page 2
July 28, 2025
I inherited 100% of a farm from my mother in YEAR A lawyer advised me to set
up a partnership which consist of %%% PARTNERSHIP which is owned %%%
by me and %%% which is a trust set up for my son.
The sole purpose of the partnership was in case of my death, the assets would
pass to my heirs.
The partnership does not do business in Illinois; does not have employees;
does not have meetings in Illinois; does not have a telephone number and
does not even have an address in Illinois. It does not conduct business in
Illinois. It is a structure for inheritance taxes.
The last time I was even in Illinois was over 5 years ago (note: I will be there
end of DATE).
Background
Based my research, the Personal Property Replacement Tax (PPRT) in Illinois,
enacted in 1970, was introduced as a mechanism to replace revenue lost from
the abolition of the personal property tax on businesses, as mandated by the
Illinois Constitution. Its primary purpose was to impose a tax on corporations,
partnerships, and other entities for the privilege of conducting business
operations within the state, thereby generating funds to support local
governments and municipalities. The tax targets entities actively engaged in
commercial activities, with the intent to capture income derived from
business conducted in Illinois.
In contrast, my organizational structure was established exclusively for
liability protection and to manage inheritance tax obligations, designed to
facilitate the orderly transfer of assets to heirs in accordance with estate
planning objectives.
This structure was not created to conduct business operations, generate
revenue, or engage in commercial activities within Illinois. Its sole function
pertains to the administration of inheritance-related matters, which is distinct
from the business-oriented activities the PPRT was intended to tax. Applying
the PPRT to my structure misconstrues its purpose and imposes a tax liability
that does not align with the original legislative intent of the PPRT, as my entity
does not benefit from the privilege of doing business in the state.
Consequently, subjecting my structure to the PPRT represents an
inappropriate application of the tax, given its non-business,
inheritance­focused purpose.

NAME
Page 3
July 28, 2025
Request
I am requesting a private letter ruling (PLR) pursuant to 2 Ill. Admin. Code 1200
regarding the application of the Personal Property Replacement Tax (PPRT) to
a one-time capital gain reported on the YEAR Illinois Form IL-1065 for a
partnership with FEIN ###. This request follows correspondence with NAME2,
Revenue Tax Specialist I, who advised that further clarification on this matter
requires a formal letter ruling process. I seek binding guidance on whether the
capital gain can be excluded from the PPRT as nonbusiness income and
reported on the personal return of the partnership’s primary owner, prior to
incurring the cost of amending the federal return.
Background and Factual Scenario
The partnership, established for inheritance tax planning and liability
protection purposes rather than business operations, owns an Illinois LLC
that held real estate as its sole asset. The assets of the LLC, specifically the

-acre farm, should have been distributed to the partners of PARTNERSHIP

Limited prior to the sale, but I was not correctly advised, leading to the sale
being conducted within the LLC structure. There are two partners, TRUST
(%%%) which my son is the beneficiary and PARTNERSHIP (%%%) which is
%%% owned by me. The structure was set up by an attorney for Federal
inheritance tax purposes over ### years ago. The farm has been in my family
for over ### years. I inherited 100% of it in YEAR.
In YEAR, the LLC sold the real estate, generating a significant one-time capital
gain. The LLC also earned rental income from leasing the property prior to the
sale and this income is subject to PPRT. The partnership received a 1099-S for
the sale, and the original federal return (Form 1065) was filed by my nonIllinois-based accountant, who was unfamiliar with Illinois PPRT tax
requirements. The capital gain was incorrectly reported on Line 9 (Other
Income) of the Federal Schedule K, treating it as ordinary business income,
which contributed to its initial inclusion in the PPRT calculation on the IL1065.
I am considering amending the federal return (Form 1065X) to reclassify the
capital gain from Line 9 to Line 9a (Net Long-Term Capital Gain), reflecting its
status as a capital gain rather than business income, to align the federal
reporting with the Illinois filing. However, I seek your guidance on the
feasibility of this approach before incurring the expense of preparing and filing
the amended federal return. I propose to exclude the capital gain from the

NAME
Page 4
July 28, 2025
PPRT as nonbusiness income and report it on my personal Illinois return (IL1040), where the PPRT does not apply, while the rental and ordinary business
income will remain on the IL-1065, subject to the PPRT.
Request for Ruling
I respectfully request a private letter ruling on the following:
Whether a one-time capital gain from the sale of real estate, held by an LLC
within a partnership established for inheritance tax planning and liability
protection (not business operations), can be excluded from the PPRT on the
IL-1065 as nonbusiness income under 35 ILCS 5/201(c), and instead reported
on the personal return of the partnership’s primary owner, particularly given
that the assets should have been distributed to the partners prior to the sale
but were not due to incorrect advice, and prior to amending the federal return.
Whether the proposed reclassification of the capital gain from Line 9 to Line
9a on a potential amended federal return (Form 1065X) would support its
exclusion from the PPRT on the IL-1065, given the 1099-S issued to the
partnership and the failure to distribute the asset prior to sale.
What additional documentation or steps are required to support this
exclusion, considering the partnership’s nonbusiness purpose, the potential
federal return amendment, and the incorrect advice that prevented asset
distribution.
Legal Basis for the Request
My research suggests the following legal support for excluding the capital
gain:
Legislative Intent: The PPRT was enacted to replace the Personal Property Tax,
which applied to tangible personal property, not real estate or capital gains.
General Telephone Co. v. Johnson (103 Ill. 2d 363, 1984) and Kraft, Inc. v.
Edgar (138 Ill. App. 3d 550, 1985) emphasize that the PPRT should align with
this purpose.
Nonbusiness Income: Under 35 ILCS 5/1501(a)(1), nonbusiness income
includes gains not arising from regular business activities. Zeigler v.
Department of Revenue (158 Ill. App. 3d 543, 1987) holds that the PPRT
applies only to income with a nexus to business activities, which a one-time

NAME
Page 5
July 28, 2025
sale may lack, especially if the asset should have been distributed to the
partners.
Entity Purpose: People ex rel. Scott v. Chicago Thoroughbred Enterprises, Inc.
(56 Ill. 2d 210, 1973) indicates that an entity’s purpose can affect tax
treatment, supporting exclusion if the partnership’s intent was not
business­related and the sale resulted from an improper structure.
Statutory Interpretation: 35 ILCS 5/201(c) taxes the “privilege of earning or
receiving income,” which may not apply to a one-time capital gain from real
estate, particularly if the partnership’s role was misconstrued due to incorrect
advice.
Additional Information
1.

The partnership has no employees, no business meetings, and no
operational activities beyond holding the LLC and collecting rental
income, reinforcing its nonbusiness nature.

2. My next door neighbor, using a single-member LLC owned directly, avoided
   PPRT on a similar sale by reporting the gain personally, suggesting a
   potential inequity in the partnership structure’s tax treatment. He sold the
   exact same sized piece (### Acres) to the exact same buyer for the exact
   same price but with zero PPRT.
   I am awaiting your guidance on the feasibility of amending the federal return
   and would like advice on interim filing options for the IL-1065 (e.g., filing with
   the full PPRT and amending later, or filing with the exclusion pending federal
   approval).
   Request for Process
   Please advise on the procedure for submitting this PLR request, including any
   required forms (e.g., Form IL-1065-X or a specific PLR application), fees, and
   the timeline for a response. I am prepared to provide the draft IL-1065, original
   Federal Schedule K, and supporting documentation upon request once I
   determine the need to proceed with the federal amendment. Due to my
   location in COUNTRY (### hours ahead of Illinois), I am available for a call at
   your earliest convenience and can be reached at PHONE1 or EMAIL. I am in
   USA DATE RANGE and can be reached at PHONE2.
   Thank you for your consideration of this request.

NAME
Page 6
July 28, 2025
Your submission includes the following additional information pertinent to your request:

1. Acre Farm was COMPANY1 located in TOWN1, COUNTY1 Illinois

   
   (PIN ###; ###)
2. There are two other corn/soy farm properties I inherited from my mother:
   a) COMPANY2 in TOWN2, COUNTY2, Illinois (PIN ###)
   b) COMPANY3 in TOWN3, COUNTY3, Illinois (PIN ### and ###)
   DEPARTMENT’S RESPONSE
   Internal Revenue Code (“IRC”) section 7701(a)(2) provides the term “partnership” to include
   a syndicate, group, pool, joint venture, or other unincorporated organization, through or by
   means of which any business, financial operation, or venture is carried on, and which is not
   a trust, estate, or a corporation. The term “partner” includes a member in such a syndicate,
   group, pool, joint venture, or organization.
   This definition is essentially identical to Section 1501(a)(16) of the Illinois Income Tax Act
   (“IITA”, 35 ILCS 5/1501) which defines “partnership” and “partner” as follows:
   The term “partnership” includes a syndicate, group, pool, joint venture or
   other unincorporated organization, through or by means of which any
   business, financial operation, or venture is carried on, and which is not, within
   the meaning of this Act, a trust or estate or a corporation; and the term
   “partner” includes a member in such syndicate, group, pool, joint venture or
   organization. The term “partnership” includes any entity, including a limited
   liability company formed under the Illinois Limited Liability Company Act,
   classified as a partnership for federal income tax purposes. The term
   “partnership” does not include a syndicate, group, pool, joint venture, or other
   unincorporated organization established for the sole purpose of playing the
   Illinois State Lottery.
   86 Ill. Admin. Code 100.9700(d)(1) provides that every entity treated as a partnership for
   federal income tax purposes is a partnership for purposes of the IITA, and no entity that is
   not treated as a partnership for federal income tax purposes is a partnership for purposes of
   the IITA. For example, if an entity elects to be treated as a partnership for federal income tax
   purposes under 26 CFR 301.7701(a), then it is a partnership for purposes of the IITA.
   IITA Section 1501(a)(1) defines “business income” as follows:

NAME
Page 7
July 28, 2025
The term “business income” means all income that may be treated as
apportionable business income under the Constitution of the United States.
Business income is net of the deductions allocable thereto. Such term does
not include compensation or the deductions allocable thereto. For each
taxable year beginning on or after January 1, 2003, a taxpayer may elect to
treat all income other than compensation as business income. This election
shall be made in accordance with rules adopted by the Department and, once
made, shall be irrevocable.
Business income is explained in greater detail in the Illinois Administrative Code, including
how the definition has evolved over the years. A person’s income is business income unless
clearly classifiable as nonbusiness income (86 Ill. Adm. Code 100.3010(a)(3)(C)).
IITA Section 1501(a)(13) defines “nonbusiness income” as follows:
The term “nonbusiness income” means all income other than business
income or compensation.
IITA Section 301(c)(1) provides that any item of income or deduction which was taken into
account in the computation of base income for the taxable year by any person other than a
resident and which is referred to in Section 302, 303 or 304 (relating to compensation,
nonbusiness income and business income, respectively) shall be allocated to this State
only to the extent provided by such section. Your letter indicates the partnership was
formed upon the death of your mother and invested in Illinois real property. As such, the
allocation rules pertaining only to real property will be addressed in this response.
IITA Section 303 governs the allocation of nonbusiness income of persons other than
residents. Section 303(b) outlines when capital gains and losses are allocable to this State.
For real property, capital gains and losses are allocable to this State if the property is located
in this State.
IITA Section 304 governs the allocation and apportionment of business income of persons
other than residents. In general, pursuant to Section 304(a), the business income of a
person other than a resident shall be allocated to this State if such a person’s business
income is derived solely from this State. For tax years ending on or after December 31,
1998, Section 304(h) provides if a person other than a resident derives business income
from this State and one or more other states, then the apportionment factor shall be equal
to the sales factor. For taxable years ending on or after December 31, 2008, Section
304(a)(3)(C-5)(i) provides that sales from the sale or lease of real property are in this State
if the property is located in this State.

NAME
Page 8
July 28, 2025
The gain on the sale of a partnership asset must first be classified as either business
income or nonbusiness income. If the gain is business income, nonresidents must include
the gain in income apportioned under IITA Section 304. Business income of a partnership
flows through to nonresident partners as business income in accordance with IITA Section
305(a). If the gain on the sale of a partnership asset is not business income as defined in
IITA Section 1501(a)(1), then it is nonbusiness income pursuant to IITA Section 1501(a)(13).
If the gain is nonbusiness income, nonresidents must include the gain in income allocated
under IITA Section 303. Nonbusiness income of a partnership is taxed to the partner as if
that partner had received the income directly, rather than through the entity, as provided in
IITA Section 305(b).
You indicated on your YEAR federal Form 1065 the partnership’s principal business activity
is ACTIVITY, and the principal product is PRODUCT. In this matter, regardless of whether the
gain on the sale of real property is classified as business or nonbusiness income, the gain
will be assigned to Illinois on Form IL-1065 as this partnership asset is located in Illinois.
Therefore, the Department will not accept an amended Illinois partnership tax return
reflecting a decrease in the amount of the Personal Property Replacement Tax reported on
an original return relating to the gain on the sale of Illinois real property held as the sole
partnership asset. In addition, the Department will not accept an amended Illinois Form IL1040 individual tax return filed by or on behalf of the partnership’s primary owner to report
this gain. The partnership cannot ignore its own structure and treat the gain as that of the
partnership’s primary owner. (See Moline Properties, Inc. v. Commissioner, 319 US 436
(1943)) The establishment of the partnership structure most likely resulted in some benefit
to the partners. The gain is the partnership’s gain and is subject to Illinois Personal Property
Replacement Tax.
The Department cannot advise on the question of whether you should file an amended
federal tax return.
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. If you require additional information, please
visit the Department’s website at https://tax.illinois.gov/ or contact the Department’s
Taxpayer Assistance Division at 800-732-8866.
Sincerely,
Jennifer Uhles
Associate Counsel (Income Tax)

NAME
Page 9
July 28, 2025
JU:se