Could the company use a historical average of Illinois sales percentages to apportion gain from the sale of its business?

Plain-English summary

The company asked Illinois to apply a historical average of its Illinois sales percentages to gain from selling its business, instead of using the sales factor for the tax year at issue. The Department could not grant the alternative-apportionment petition on the information supplied.

The Department pointed to an existing rule that may address the sale receipts. If the sale accompanied a partial or complete withdrawal from the Illinois market, 86 Ill. Adm. Code 100.3380(c)(2) excludes receipts from the asset sale, including goodwill, from both the numerator and denominator of the sales factor. The Department said that rule likely applies on the submitted facts and does not require a petition for alternative apportionment. It did not decide the condition conclusively.

Even after assuming that exclusion, the petition did not show how the statutory method failed to reflect the market for the company’s goods or services. It also did not show the goodwill amount or other asset amounts, and did not prove that the proposed historical average fairly reflected the Illinois market. The Department said a different percentage alone cannot justify alternative apportionment. The company may submit additional information for reconsideration.

What this means for you

For a business sale, first assess whether the existing sales-factor rule for asset sales connected with withdrawal from the Illinois market applies. A separate alternative-apportionment petition needs evidence addressing both the alleged distortion under the statutory method and the fairness of the proposed method.

Common questions

Did the Department approve the historical average?

No. It said the petition could not be granted on the information submitted.

Did it decide the asset-sale receipts must be excluded from the sales factor?

No. It said the exclusion likely applies if the sale was connected with partial or complete withdrawal from the Illinois market.

Is a different apportionment percentage enough?

No. The Department quoted the regulation’s requirement for clear and convincing evidence that the statutory formula is unreasonable and that the alternative fairly and accurately apportions income to Illinois.

Source basis

• The Department said the rule “likely applies to exclude from taxpayer’s sales factor the gross receipts derived from the sale of substantially all of its assets, including its goodwill.”
• It said the petition “contains no information relative to the market for the taxpayer’s goods or services.”
• Its conclusion was: “Accordingly, your petition for alternative apportionment for tax year ended YEAR cannot be granted.”

Source

• Illinois 2026 income tax letter index
• Official IT 26-0012-GIL PDF

Original ruling text

IT 26-0012-GIL

09/04/2026

ALTERNATIVE APPORTIONMENT

A petition to use an alternative method of apportionment cannot be granted without a showing that the statutory method fails to reflect the market for the taxpayer’s goods, services or other sources of business income and a showing that the requested alternative better reflects that market. (This is a GIL.) September 4, 2026 NAME TITLE COMPANY1 ADDRESS EMAIL Re:

Petition for Alternative Apportionment
COMPANY2
FEIN: NUMBER
Tax Year Ended: YEAR

Dear NAME:
This letter is in response to your petition dated April 2, 2026, on behalf of COMPANY2 to use an alternative method of allocation or apportionment effective for tax year ended YEAR. 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. 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. For the reasons discussed below, your petition cannot be granted based on the information provided. Your petition for tax year ended YEAR states as follows:

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PETITION:
Apportionment is the method by which states divide a multistate taxpayer’s income for taxation among states where the taxpayer has nexus or is doing business. Generally, states use a one- to three-factor formula that measures a company’s property, payroll, and sales. However, as discussed below, taxpayers may request an alternative method if they believe standard apportionment is not equitable in their situation. We believe the state’s statutory apportionment methodology does not accurately represent a company’s presence in the state and have identified a reasonable and acceptable alternative method of apportionment and we believe we have satisfied the burden of proof necessary to use the alternative method hereinafter described. Our situation is one in which the business can demonstrate consideration, acceptance and entitlement to an alternative apportionment method involve expanding operation and a substantial gain realized from the sale of assets and business interests. The below first summarizes the constitutional and statutory rules on apportionment, then discusses how to qualify for an alternative apportionment method in a state and, finally, describes some circumstances in which alternative apportionment may be available. Constitutional and statutory rules for apportionment. Constitutional restraints on apportionment: Article I, Section 8, Clause 3 of the U.S. Constitution, referred to as the Commerce Clause, gives Congress singular power over interstate commerce. The U.S. Supreme Court has interpreted the clause as prohibiting states from imposing tax rules that place an undue burden on interstate commerce (see Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), and Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159 (1983)). To avoid undue burden, the taxation of multistate business must meet the following requirements:
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There must be a sufficient connection between the taxpayer and the state imposing the tax, generally referred to as nexus; The state cannot tax more than its fair share of the income of the taxpayer, generally referred to as fair apportionment; The state cannot treat out-of-state taxpayers differently than in-state taxpayers (i.e., the tax cannot discriminate); and

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•

The tax must be fairly related to the services provided to the taxpayer by the state (see Brady, 430 U.S. 274).

Statutory apportionment methods: In 1957, the National Conference of Commissioners on Uniform State Laws, in an effort to create uniformity in multistate taxation and relieve pressure on Congress to intervene, created the Uniform Division of Income for Tax Purposes Act (UDITPA) to assist states in taxing multistate taxpayers. Under UDITPA, income is classified as either business or nonbusiness. Business income is defined as income received from the ordinary course of a taxpayer’s trade or business. Nonbusiness income is defined as income not resulting from a taxpayer’s ordinary trade or course of business. Business income is apportioned to the states where a taxpayer conducts business, using one or more of the following factors:
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Property. The ratio of a taxpayer’s property in the taxing state compared to the taxpayer’s property everywhere; Payroll. The ratio of a taxpayer’s payroll in the taxing state compared to the taxpayer’s payroll everywhere; and Sales. The ratio of a taxpayer’s sales in the taxing state compared to the taxpayer’s sales everywhere.

Traditionally, states employed an equally weighted formula, calculating a taxpayer’s property, payroll, and sales factors and then adding the resulting ratios to determine the percentage of the taxpayer’s income apportioned/subject to tax, within the state. Nonbusiness income was, and still is, generally allocated to a specific state depending on the nature of the income and the activity that created it. Nonbusiness income allocation is extremely important to many taxpayers. The allocation of this income should be examined closely, and many strategies can be employed to accurately and efficiently source a taxpayer’s nonbusiness income. However, this item focuses mainly on the apportionment of business income received by a multistate taxpayer. In the 1990s and accelerating since then, businesses have relied less on physical locations, and commerce has exploded through use of the internet and other non-brick-and-mortar means to reach customers in other states and countries. Due to these changes in the commerce formula, states determined that the traditional three-factor apportionment under UDITPA no longer fairly and accurately represented their taxpayers’ activities. As a result,

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states began weighing the sales factor of their apportionment formula more heavily; the result was a larger burden being placed on out-of-state businesses with sales but no physical presence within a state. At the same time, the tax burden on in-state businesses, which are often owned and operated by individuals living in the state (and part of the voter base for legislators making these decisions), was reduced. Approximately two-thirds of the states that impose an income-based tax use a single sales factor to apportion income to their state. The equally weighted three-factor formula is used by only a handful of states, with the remainder of jurisdictions applying different weights to the sales factor in determining the amount of income assignable to the state. What happens when apportionment is no longer fair? Alternative apportionment ground rules for challenging statutory apportionment methods: States have continually and frequently adopted different apportionment methodologies; though they are required to abide by the constitutional requirements that their tax be applied fairly and represent the taxpayer’s presence in the state, the movement to a single sales factor clearly is intended to export the state income tax burden to out-of-state taxpayers as much as possible. In fact, the entire impact of various states’ modifications to their apportionment regimes has generally increased the burden on out-of-state taxpayers. In its effort to more fairly apply its incomebased tax to an ever-changing tax base, when does a state go too far in taxing any specific taxpayer, and what can taxpayers do if they are unfairly taxed? The answers to those questions are often found in each state’s alternative apportionment rules and application. Almost every state provides that if a state’s allocation and apportionment provisions do not fairly represent the extent of the taxpayer’s business activity in the state, the taxpayer may petition for, or the tax administrator may require (in respect of all or any part of the taxpayer’s business activity, if reasonable), the following alternative apportionment methods:
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Separate accounting;
The exclusion of any one or more of the factors;
The inclusion of one or more additional factors that will fairly represent the taxpayer’s business activity in the state; or The employment of any other method to effectuate an equitable allocation and apportionment of the taxpayer’s income.

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How does a taxpayer successfully challenge unfair taxation? As states continually adjust their apportionment factors to affect out-of-state businesses, it becomes more likely that those rules will create an unfair result for these taxpayers. Consequently, there has been an increase in the number of challenges to statutory apportionment and, lately, in the success of these challenges. We understand there is a burden when requesting alternative apportionment with states requiring taxpayers to show, by clear and convincing evidence, the following:
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That the statutory apportionment method subjects an unfair amount of a taxpayer’s income to the state’s income tax; and That the taxpayer’s alternative method is reasonable.

Taxpayers can also succeed in asserting alternative apportionment on the grounds that the state’s method produces a grossly distortive result and thereby violates the Commerce Clause. We believe in the presentation of the below and the attached we have been successful in meeting their burden of proof on one or both of the issues required to assert that they qualify for alternative apportionment; recently states have conceded to certain alternative apportionment arguments, and taxpayers have found frequent successes in obtaining alternative apportionment. Two examples of these successes are found in court cases in Michigan and New York. In Vectren Infrastructure Services Corp., 981 N.W.2d 116 (Mich. Ct. App. 2021), the issue involved Michigan’s ability to tax gain on the asset sale of a multistate business when much of the value of the gain (i.e., goodwill) was attributed to business activities outside Michigan occurring over many years before the sale. In this case, the Michigan Court of Appeals determined that application of the statutory formula to the circumstances of this case would result in the imposition of a tax in violation of the Commerce Clause. In British Land v. Tax Appeals Tribunal, 85 N.Y.2d 139 (1995), the issue was whether application of the statutory apportionment formula resulted in an unfair allocation of value from the taxpayer’s business activities outside New York (and before British Land became a New York taxpayer), by apportioning to the state a substantial portion of gain on the sale of real property in Maryland. New York’s highest court held that the taxpayer demonstrated that, in the circumstances here, the statutory formula attributed income to New

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York State that was out of all proportion to the taxpayer’s activities in the state (British Land, 85 N.Y.2d at 149). As demonstrated in Vectren and British Land, the key to succeeding in asserting entitlement to alternative apportionment is to provide the state with documentation and support for both prongs of the alternative apportionment statutory requirements. We believe we have clearly established the unfairness of the state’s statutory apportionment formula and have proved that the proposed alternative method is reasonable. As you know alternative apportionment may apply in a number of factual situations especially when taxpayer can illustrate, document and prove that a taxing state’s statutory formula is unfair and that a reasonable alternative method applies. Taxpayers frequently receive income from multiple sources in the ordinary course of their business. Occasionally, this income can be classified as nonbusiness, based on statutory or other controlling law in a jurisdiction. As a result, the income may not be subject to the statutory method of apportionment for business income and can be excluded from either the tax base or apportionment. While many states have similar definitions of business income, specific items such as interest, gain on the sale or use of intangible property, and goodwill can result in vastly different results for apportionment purposes. By evaluating statutory exclusions from the tax base or the treatment of allocable nonbusiness income can often avoid the burdens of proof required for application of alternative apportionment statutes and more importantly provide an apportionment methodology that better allocates income to allow states to comply with Constitutional taxation rules, guidelines and procedures. At present we believe the expansion of the business and its filing footprint or change in in-state activity has resulted in an overreach of taxation of the return as initially prepared. When a taxpayer dramatically increases its business activities it frequently results in distortions of state statutory apportionment methods as a result a taxpayer may have a vastly different state filing footprint than that of previous years, resulting in a change in apportionment that may not reflect the taxpayer’s operations as a whole. For example, if a buyer has a 2% apportionment factor in State A and acquires Target 11 months into the tax year. Buyer’s 12-month taxable income,

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excluding Target’s income, is $9 million. Target has an apportionment factor in State A of 25% and post-acquisition state taxable income of $1 million. The blended apportionment rate in State A post-acquisition is 10%. Buyer’s combined post-acquisition state taxable income is $10 million, and the State A combined apportioned taxable income would be $1 million, using the blended apportionment factor. But on a separate business basis, Buyer’s State A apportioned income would have been $430,000. The result is a more than doubling of taxable income due to the addition of one month of increased activity. This creates a strong argument for unconstitutional gross distortion and qualifying as unfair under a state’s alternative apportionment statute. Once the apportionment is established as unfair, the taxpayer must establish a reasonable alternative methodology and, most importantly, support its position with the state. One method available in some states is using a “split factor” for the tax year: apportioning pre-acquisition income with the taxpayer’s pre-acquisition factor and apportioning post-acquisition income applying the new factor. This would result in substantially less income being apportioned to the state for the first 11 months of the tax year while giving the state more income in the one month post-acquisition. This alternative method can be even more viable when available to an acquiring entity that does not have nexus with a state and is required to file and apportion its income to a new state following an acquisition or the growth and expansion of a business. Using a split factor here would result in the taxpayer’s income being excluded from state tax where otherwise using the state statutory allocation would overstate income to a state due to broad application of a statutory apportionment that does not reflect the business reality. Apportioning the gain from the sale of assets or business: When a taxpayer sells a significant portion of its business or assets, a large amount of gain is typically recognized. This gain should be classified properly through purchase price allocation; for federal and state income tax planning purposes, this allocation can be one of the most important elements of a sale. One asset that often generates a substantial amount of gain but is not historically an asset of the selling entity is goodwill. Most states consider gain on goodwill from the sale of a business or assets as apportioned business income. However, the apportionment of a taxpayer’s goodwill often can be unfairly apportioned to the “operating states.” We have examined closely how the value in the sold business or assets was created

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and compared this allocation of value to the company’s true operations. Once the goodwill has been properly considered, a case can often be made for the application of a state’s alternative apportionment rules. For example assume that Company A, headquartered in Michigan and with historic operations only in the Northeastern states for the past 35 years, acquires Company B in Arizona, which has a high apportionment rate in Arizona and other Western states. One year after the acquisition, Company A sells a large part of its historic operations operating in the Northeastern states to a third party. A large amount of the goodwill from the sale of these assets likely would be subject to tax in Western states due to the recent acquisition of Company B when applying the statutory apportionment formulas. Distortion and unfairness is established as taxpayer illustrates Company A built the value of the sold assets over a multi-year period in which it had no connection to any particular Western state. This is similar to the argument successfully asserted in the Vectren case. Once unfairness is demonstrated, we believe the taxpayer presents a reasonable alternative that it can show fairly taxes the income of the taxpayer in the state as detailed below. Methods that can be considered include split apportionment, discussed above. Additionally, the taxpayer, similar to the Vectren case, could argue that historical apportionment factors should be leveraged using an average of factors over a given period. Alternatively, taxpayers could apply a “supply chain” approach, where they demonstrate that the drivers of the value of the assets sold were located outside the taxing jurisdiction. This analysis would result in the creation of an apportionment formula applicable to the goodwill or other applicable income from the sale. We believe we are able to demonstrate that the statutory apportionment method is unfair to the taxpayer and that the proposed alternative method is reasonable. We believe the specific details and facts referenced a sound, factual and more reasonable approach to an alternative method for allocation of the sale of the business (i.e., goodwill and intangibles) that is otherwise would be utilized using the state statutory apportionment method. Goodwill refers to the good name of faith and trust of customers that an organization gains after given outstanding level of products and services consistently, resulting in an increase in the valuation of the business. This is an intangible asset. This asset is the extra value of the acquired business, over and above the actual fair price of it. It can be generated due to a steady increase in the number of customers, very good level of customer

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satisfaction, low competition, name and fame of the brand and faith of the customers towards the brand, good employee satisfaction within the organization, etc. All the above adds up to the concept of goodwill, which is not easily measurable. As a result of it, the value of the business increases largely though the creation of goodwill in the business generated over time. The management benefits from it through greater share of the market and more opportunity for growth and expansion. Goodwill creation refers to the intangible asset that arises when a company acquires another business for more than the fair value of its identifiable net assets, reflecting the acquired company’s reputation, customer relationships, and brand value. Goodwill is an intangible asset that represents the excess value of a business over its tangible assets and liabilities. It is often associated with the following factors:
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Brand Recognition: A well-known brand can attract
customers and generate sales, contributing to goodwill. Customer Loyalty: Established relationships with customers can lead to repeat business and referrals, enhancing a company’s value. Employee Relations: A positive workplace culture and skilled workforce can also add to goodwill, as they contribute to operational efficiency and customer satisfaction.

Goodwill is typically created during business acquisitions is an Acquisition Premium. When a company purchases another company, it often pays a premium over the fair market value of the acquired company’s identifiable assets and liabilities. This premium is recorded as goodwill and recognized as a capital gain when the business is sold. Valuation of Intangible Assets: During the acquisition process, the buyer assesses the value of intangible assets such as brand reputation, customer relationships, and proprietary technology, which contribute to the overall goodwill. Goodwill can also be created through the ongoing operations of a business, where effective marketing, customer service, and product quality enhance the company’s reputation over time. Goodwill creates a positive reputation and trust within the community and is earned over time as a business grows and expands. A Series “F” reorganization is defined in Internal Revenue Code Section 368(a)(1)(F) as mere change of identity of one corporation. A Series “F”

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reorganization is a tax free reorganization that allows a corporation to change its identity, form or place of organization without triggering immediate tax consequences. The structure is utilized by businesses who are looking to maintain the same tax attributes as the original entity. The entity in the reorganization is treated as the same taxpayer as the original entity. COMPANY3 EIN NUMBER2 was originally incorporated in STATE1 on DATE1. COMPANY3 in accordance with IRS Code Section 368(a)(1)(F) effected a Series “F” reorganization (a tax free reorganization) as a mere change of identity keeping the same tax attributes as the original entry with the new business identity being COMPANY2 EIN # NUMBER1. Since the original incorporation date of DATE1 and forward the company’s headquarters was initially established and has remained in STATE1. From that date forward the company has steadily grown and through DATE2 (when the business was sold) the company had legally registered and doing business in NUMBER4 states. From DATE1 forward the company developed over time brand recognition generating customers and sales, established business relations with customers leading to repeat business and referrals, a positive workplace culture, a skilled workforce contributing to operational efficiency and goodwill. Based upon all the above factors it is believed that the state’s statutory apportionment methods have resulted in an unfair and unjust payment of tax which overstates tax liabilities had an otherwise more fair and alternative method of allocation been utilized when calculating the state taxes owned on the company’s state return. However, due to time restraints the initial return YEAR state income tax return was filed and paid with the state utilizing the existing apportionments statutorily used by the state. However, the state’s statutory apportionments have resulted in the company paying an unfair amount of the taxpayer’s income and resulting tax being assessed and paid to the state. This has resulted in the state’s allocation method producing a grossly distortive result and thereby violates the Commerce Clause. As noted above, Article I, Section 8, Clause 3 of the U.S. Constitution gives Congress power over interstate commerce and the U.S. Supreme Court has interpreted the clause as prohibiting states from imposing tax rules that place an undue burden on interstate commerce (see Complete Auto Transit, Inc. v. Brady, 430 U.S. 274 (1977), and Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159 (1983)).

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I believe there is an alternative method of allocation that better reflects the actual income to the state and that the proposed alternative apportionment is successful in meeting their burden of proof of the issues required to assert that they qualify for alternative apportionment. As noted above the company initially incorporated in STATE1 on DATE1 and since then has legally registered and began doing business in NUMBER5 additional states over the preceding years. The company has only recently registered to do business in Illinois on DATE3 or approximately NUMBER6 months prior to the business being sold and which resulted in the $AMOUNT1 of sale of intangibles/capital gain resulting from the sale of the business on DATE2 as initially reflected on the original return. On the attached Amended & Requested Apportionment I have recapped sales for each year of the business since its incorporation both firm wide and in Illinois. As the company only began doing business in the state recently there are no state sales listed in the state for years prior to legally registering in the state. Goodwill is the result of years of efforts in all NUMBER4 states the company had operations developing a brand, generating client relationships and repeat business, customer loyalty and efficient operations and workforce. Therefore a preponderance of the goodwill as presently reflected in the state statutory allocation methodology unduly weights current year revenue rather than the ongoing work required over years of operations and a multitude of states. This resulted in the company being assessed and having paid with the original state return filed an undue amount having been paid. For in accordance with the U.S. Constitutional restraints on apportionment: Article 1, Section 8, Clause 3 of the U.S. Constitution, referred to as the Commerce Clause, gives Congress singular power over interstate commerce. Furthermore the U.S. Supreme Court has interpreted the clause as prohibiting states from imposing tax rules that place an undue burden on interstate commerce. Therefore, I have attached an alternative and fair apportionment method of the allocation of the $AMOUNT1 capital gain on the sale of intangibles that occurred on DATE2 when the business was sold. As goodwill is earned over time where the company has done business since its inception the goodwill/sale of intangibles/capital gain was earned every year and indeed in every state the company has ever done business. An apportionment method that best reflects this is to state sales by year (whether registered in that state or not) to firm wide sales where the goodwill was created one customer and indeed one transaction at a time. Accordingly the

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attached amended and requested apportionment calculates the average of the percent of state sales by year to the company as a whole where the goodwill itself was truly created. Please note the alternative apportionment proposed does not affect the allocation of ordinary income and interest income with those continuing to be determined by state statutory apportionment formulas. To potentially expedite the proposed apportionment process I have attached the YEAR state amended return should the alternative apportionment method proposed be accepted. I believe the proposed apportionment is a sound and reasoned allocation of the goodwill/sale of intangibles/capital gain resulting in a calculation which results in a just and fair tax being paid to the state and in conformance with the U.S. Constitution, Statutes and Supreme Court rulings noted above. Please accept the State Amended & Requested Alternative Apportionment as detailed/determined and then process the amended return attached for your convenience and processing as supplied reflecting the requested apportionment. I appreciate your attention to this matter. Please contact me with any questions/inquiries. DEPARTMENT 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. In applying IITA Section 304(a), 86 Ill. Adm. Code 100.3380(c)(2) provides the following special rule: When gross receipts arise from an incidental or occasional sale of assets used in the regular course of the person’s trade or business, those gross receipts shall be excluded from the sales factor. For example, gross receipts from the sale of a factory or

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plant shall be excluded. Gross receipts from an incidental or occasional sale of stock in a subsidiary shall also be excluded. Exclusion of these gross receipts from the sales factor is appropriate for several reasons, more than one of which may apply to a particular sale, including: A) incidental or occasional sales are not made in the market for the person’s goods, services or other ordinary sources of business income; B) to the extent that gains realized on the sale of assets used in a taxpayer’s business are comprised of recapture of depreciation deductions, the economic income of the taxpayer was understated in the years in which those deductions were taken. The recapture gains that reflect a correction of that understatement should be allocated using a method approximating the factors that were used in apportioning the deductions. If the business otherwise remains unchanged, including the gross receipts from the sale in the sales factor numerator of the state in which the assets were located would allocate a disproportionate amount of the recapture gains to that state compared to how the deductions being recaptured were allocated; C) to the extent the gain on the sale is attributable to goodwill or similar intangibles representing the value of customer relationships, including the gross receipts from the sale in the sales factor shall not reflect the market for the taxpayer’s goods, services or other ordinary sources of business income to the extent the sourcing of the receipts from that sale differs from the sales factor computed without regard to that sale; and D) in the case of sales of assets that are made in connection with a partial or complete withdrawal from the market in the state in which the assets are located, including the gross receipts from those sales in the sales factor would increase the business

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income apportioned to that state when the taxpayer’s market in that state has decreased. The term “sales” is defined under IITA Section 1501(a)(21) to mean all gross receipts of the taxpayer not allocated under IITA Sections 301, 302, and 303. For purposes of the sales factor of the apportionment formula for each trade or business of the person, 86 Ill. Adm. Code 100.3370(a)(1) defines “sales” to mean “all gross receipts derived by the person from transactions and activity in the regular course of his or her trade or business.” If a taxpayer’s sales are not specifically governed by paragraphs (B), (B-1), (B-2), (B5), and (B-7) of IITA Section 304(a)(3), then items of income from intangible property are sourced to Illinois pursuant to IITA Section 304(C-5)(iii). Section 304(f) of the IITA provides: If the allocation and apportionment provisions of subsections (a) through (e) and of subsection (h) do not, for taxable years ending before December 31, 2008, fairly represent the extent of a person’s business activity in this State, or, for taxable years ending on or after December 31, 2008, fairly represent the market for the person’s goods, services, or other sources of business income, the person may petition for, or the Director may, without a petition, permit or require, in respect of all or any part of the person’s business activity, if reasonable: 1) Separate accounting; 2) The exclusion of any one or more factors; 3) The inclusion of one or more additional factors which will fairly represent the person’s business activities or market in this State; or 4) The employment of any other method to effectuate an equitable allocation and apportionment of the person’s business income. 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 100.3390. 86 Ill. Adm. Code 100.3390(c) outlines the burden of proof for a taxpayer petitioning for an alternative method of apportionment:

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Burden of Proof. A departure from the required apportionment method is allowed only when those methods do not accurately and fairly reflect business activity in Illinois (for taxable years ending before December 31, 2008) or market in Illinois (for taxable years ending on or after December 31, 2008). An alternative apportionment method may not be invoked, either by the Director or by a taxpayer, merely because it reaches a different apportionment percentage than the required statutory formula. However, if the application of the statutory formula will lead to a grossly distorted result in a particular case, a fair and accurate alternative method is appropriate. The party (the Director or the taxpayer) seeking to utilize an alternative apportionment method has the burden of going forward with the evidence and proving by clear and convincing evidence that the statutory formula results in the taxation of extraterritorial values or operates unreasonably and arbitrarily in attributing to Illinois a percentage of income that is out of all proportion to the business transacted in this State (for taxable years ending before December 31, 2008) or the market for the taxpayer’s goods, services or other sources of business income in this State (for taxable years ending on or after December 31, 2008). In addition, the party seeking to use an alternative apportionment formula must go forward with the evidence and prove that the proposed alternative apportionment method fairly and accurately apportions income to Illinois based upon business activity in this State (for taxable years ending before December 31, 2008) or the market for the taxpayer’s goods, services or other sources of business income in this State (for taxable years ending on or after December 31, 2008). Your petition indicates COMPANY2 was sold on DATE2. If this sale was in connection with a partial or complete withdrawal from the Illinois market, then as provided in 86 Ill. Adm. Code 100.3380(c)(2), the gross receipts from the sale of these assets, including the amount attributable to goodwill, shall be excluded from both the numerator and denominator of the sales factor to prevent distortion that would otherwise occur where assets which are generally used to conduct a business are removed from the business by sale to a third-party purchaser. The gross receipts from such a sale do not reflect the market for the taxpayer’s ordinary sources of business income, which is the income generated by the use of those assets in generating sales to customers, as opposed to a sale of those assets to a noncustomer. Based on the information contained in your petition, 86 Ill. Adm. Code 100.3380(c)(2) likely applies to exclude from taxpayer’s sales factor the gross receipts derived from the sale of substantially all of its assets, including its goodwill. It is not

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necessary to file a petition for alternative apportionment in order to apply the provisions of 86 Ill. Adm. Code 100.3380(c)(2). Because the gross receipts are excluded, the sales factor is based on the taxpayer’s ordinary YEAR sales. 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. Assuming you have analyzed and applied the provisions of 86 Ill. Adm. Code 100.3380(c)(2) to exclude the gross receipts from the sale of these assets from both the numerator and denominator of the sales factor, the facts stated in your petition are not sufficient to satisfy the burden set forth in 86 Ill. Adm. Code 100.3390(c). As indicated above, for taxable years ending on or after December 31, 2008, alternative apportionment under IITA Section 304(f) is appropriate in cases where the allocation and apportionment provisions under IITA Sections 304(a) through (e) and of subsection (h) do not fairly represent the market for the taxpayer’s goods, services, or other sources of business income. In this case, your petition does not meet the regulatory requirement and cannot be granted at this time. Your petition contains no information relative to the market for the taxpayer’s goods or 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. It is unclear from your petition which sourcing rule results in distortion of the apportionment factor to justify an alternative apportionment methodology. The $AMOUNT1 gain remains part of the taxpayer’s apportionable business income unless some separate basis for allocation or nonbusiness treatment applies to the gain. Your petition for alternative apportionment is based on the assertion that the statutory apportionment method has resulted in an unfair and unjust payment of tax to the State, and an alternative formula reaches a different apportionment percentage than the required statutory formula. An alternative apportionment method may not be invoked, either by the Department or by a taxpayer, merely because it reaches a different apportionment percentage than the required statutory formula. In addition, your petition fails to show with clear and convincing evidence that both the statutory formula is unreasonable, and the proposed alternative method fairly and accurately apportions income to Illinois. You propose that instead of using the apportionment percentage for the YEAR taxable year, the taxpayer be permitted to apply a historical average percentage of sales in Illinois to the entire YEAR capital gain, yet your petition fails to indicate the amount of goodwill attributed to this sale, and the amounts attributed to other assets, with the relative percentage of this goodwill to the taxpayer’s entire gain. You indicate the use of a historical average of sales in Illinois more accurately reflects the amount of goodwill that was earned by the taxpayer as a whole over the entire time the taxpayer has done business and recognizes all locations where the goodwill was created. However, it is the income for the taxpayer’s YEAR taxable year that is being apportioned and taxed. It is not clear why equal weight would be given to years in which the taxpayer had no Illinois market at all. Unless there is evidence that the goodwill being sold was actually developed through Illinois activity during YEARS, the proposed NUMBER3-year

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average appears arbitrary and imputes Illinois market activity to periods in which the taxpayer did not have an Illinois market. The fact that taxable income is greater in a taxable year under the statutory method and results in a sales factor that increases from the previous year due to an isolated or extraordinary transaction does not by itself constitute evidence of a grossly distortive result or unfair representation of the taxpayer’s market in this State. Accordingly, your petition for alternative apportionment for tax year ended YEAR 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. Each Private Letter Ruling request submitted to the Department for consideration must include certain information outlined in 2 Ill. Adm. Code 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

Printed by the authority of the state of Illinois.
Electronic Only - One Copy
Issued 09/04/2026; Redacted 09/24/2026