Publications
09.30.11
Illinois Disregards Taxpayer’s Matching Principle Argument when Denying Alternative Apportionment
Under Illinois law, a taxpayer may petition for an alternative allocation or apportionment method if the statutorily-mandated apportionment formula does not fairly represent the extent of the taxpayer’s business activity in Illinois. The party seeking alternative apportionment has the burden of proving by clear and cogent evidence that the statutory formula results in the taxation of extraterritorial values and operates unreasonably and arbitrarily. This past June, the Illinois Department of Revenue (“Department”) issued General Information Letter No. IT 11-0010-GIL which addressed an anonymous taxpayer’s request for an alternative apportionment method.
Taxpayer is engaged in the business of investing, reinvesting, and trading in securities. Taxpayer invests substantially all its assets in a portfolio of operating limited partnerships. Both the taxpayer and the Department agreed that taxpayer’s place of business is Illinois. Taxpayer, as a financial organization, multiplies its apportionable income by a fraction, the numerator of which is the taxpayer’s gross receipts from sources in Illinois or attributable to the State’s marketplace. “Gross Receipts” means gross income, including net taxable gain on disposition of assets, derived from transactions and activities in the regular course of business. Such amounts are attributable to Illinois if properly assigned to a fixed place of business in Illinois.
When taxpayer sold its interests in the operating limited partnerships, any income received by the taxpayer that is attributable to unrealized receivables is treated as ordinary income, not as capital gains. Internal Revenue Code (“IRC”) section 751 prevents partners from converting partnership ordinary income into capital gain income through a timely sale of partnership interest. This provision includes depreciation recapture. Taxpayer pointed out that throughout the duration of its ownership in the partnerships, ordinary income and loss derived by the partnerships was apportioned by the partnership based on the partnership’s apportionment formula. However, when the taxpayer sold its interest in the partnerships and the IRC recapture rules applied, all of the gain was sourced to Illinois since it is the taxpayer’s definite place of business.
Taxpayer argued that an alternative apportionment formula is necessary because Illinois would receive 100% of gain on the sale of the partnerships when, according to the taxpayer, much of the income is unrelated to Illinois. The taxpayer argued that numerous states were deprived of ordinary income due to the partnership’s depreciation deduction, and would now miss out on the recapture income. This argument is based on the “matching” principle, which states that income related to previously deductible ordinary expenses should be sourced applying the same method used to apply correlative deductions originally taken.
The Department disagreed with the taxpayer and stated that there is nothing inherently distortive or unfair in sourcing gross receipts from sales of partnership interests based on the activity of the partner in managing its investment in the partnership. Taxpayer wanted the Department to consider the apportionment factors of the partnership, but the Department insisted that apportioning income according to the activities of the taxpayer was not unfair. The Department also stated that Illinois’ alternative apportionment rules have not historically served to remedy mismatched apportionment of income and related deductions, which can occur frequently and in multiple contexts.
A taxpayer with membership interests in a partnership should always analyze how the gain will be treated after the sale. The treatment of income after the sale may greatly differ from the pre-sale treatment.
Rhode Island - New Sales Tax Law Changes
Effective October 1, 2011, Rhode Island will impose sales and use tax at a rate of 7% on the following transactions:
• Non-prescription drugs (i.e. over-the-counter drugs);
• Pre-written computer software delivered electronically, or by “load and leave”, including applications (“Apps”) for Smartphones and similar devices;
• The furnishing of certain package tours and scenic and sightseeing transportation; and
• Marijuana for medical use.
In addition, starting on October 1, 2011, insurance proceeds from the loss or destruction of a motor vehicle will no longer be allowed to reduce the sales tax base if another replacement vehicle is purchased by the motorist. Currently, if a motorist uses the insurance proceeds to buy an automobile, the portion of the purchase price attributable to the insurance proceeds is exempt from Rhode Island sales tax.
Rhode Island businesses and consumers should pay close attention to the new sales tax law changes to avoid tax potential tax liabilities.
Colorado Offers Tax Amnesty Program
Colorado has instituted a tax amnesty program effective from October 1, 2011 through November 15, 2011. The amnesty program allows taxpayers to pay the taxes listed immediately below without penalties for late filing and late payment, and with reduced interest charges. The taxes included in the amnesty program include, but are not limited to: personal, corporate, partnership and fiduciary income taxes; Colorado sales and use taxes as well as county or city taxes; gasoline and special fuel taxes; cigarette and tobacco taxes; severance taxes; and many county and city level taxes.
The City and County of Denver also has a tax amnesty program from October 1, 2011 to December 30, 2011 for sales tax, retailer’s and consumer’s use taxes, and business and employee occupational privilege taxes for tax periods ending on or before June 30, 2011. All other city and county taxes are not eligible for the amnesty program. The program allows the repayment back taxes with reduced interest charges by half while avoiding penalties and criminal sanctions.
Companies with potential outstanding tax liabilities in Colorado should consider entering into a voluntary disclosure agreement considering the waiver of penalties and the reduction of interest charges.
Should you have any questions, please contact Mike Fletcher at mfletcher@argy.com or 703-770-0533.
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