Since 1994, Illinois has imposed its corporate income tax on a unitary basis. A unitary business is generally defined as an affiliated group of corporations linked by direct or indirect control of more than 50 percent of the outstanding voting stock of each company whose business activities are integrated with, dependent on and contribute to each other. However, the corporate income tax provisions also included the so-called “noncombination rule,” which restricted combined filing groups to only include those unitary group members that are required to use the same apportionment factor methodology.
As such, except in the case of certain holding companies, entities required to use an industry-specific apportionment methodology, e.g., insurers, financial organizations and transportation services companies, weren’t eligible to file combined returns with other unitary group members that weren’t using the same apportionment methodology. For apportionment purposes, a standard C corporation uses single sales factor apportionment based on total taxable gross receipts, while entities required to use special apportionment use an apportionment ratio solely based on their core business receipts.
The noncombination rule provided for under 35 Illinois Compiled Statutes Section 5/1501(a)(27)(B) was eliminated effective January 1, 2017, as part of the tax reform contained in Illinois Senate Bill 9, Laws 2017. Thus, all members of a unitary group are now required to be included in a unitary corporate income tax return regardless of what apportionment methodology they’re required to use.
Unfortunately, the tax reform bill didn’t include revisions to any industry-specific apportionment factor methodologies, and the Illinois Department of Revenue (Department) failed to timely provide any relevant guidance prior to the extended due date for the 2017 corporate income tax return regarding how to combine unitary group members required to use dissimilar apportionment methodologies. The Department did privately release a draft proposed regulation in September 2017 and indicated that the actual proposed regulations would be issued shortly. The draft’s procedure would have required entities using special industry-specific apportionment methodologies to gross up their total gross receipts to match their special apportionment factor percentage.
As this procedure has the potential to create tax distortion, industry comments weren’t favorable. The Department did eventually release the proposed regulation, Illinois Admin. Code Title 86 §100.3600, on November 9, 2018; however, it was unchanged from the draft proposed regulation previously issued. When the Department released its corporate income tax return forms for the 2017 tax year, it included a new “Subgroup Schedule,” which was designed for use in the apportionment gross-up process for entities using special industry-specific apportionment methodologies that matched the procedure provided for in the draft proposed regulation.
The Illinois tax reform bill created issues that were compounded by poor timing and a lack of clear guidance from the Department, leaving unitary groups containing members required to use special industry-specific apportionment methodologies with uncertain filing positions, especially for tax year 2017. While both the draft proposed regulation and Subgroup Schedule require the gross-up of the special apportionment factors, these documents carry dubious precedential weight. Further, although Illinois statutes specify that forms and instructions carry the authoritative weight of regulations, in this case, the Subgroup Schedule was released without any true public forum normally associated with the issuance of regulations. In addition, the Subgroup Schedule instructions are less than clear. As noted above, the actual proposed regulation wasn’t released until November 2018 and is still not final.
As the dust hasn’t yet settled on this matter, unitary groups containing members required to use special industry-specific apportionment methodologies should review their 2017 Illinois corporate tax return filings and any associated notices that may have been issued, as well as consider the effect of the proposed regulation and Subgroup Schedule on their 2018 tax returns.
For further guidance on Illinois unitary filing requirements and/or assistance with completing the Subgroup Schedule, contact Michael or your trusted BKD advisor.