Illinois Administrative Code › Title 86 - REVENUE › Part 100 - INCOME TAX › Subpart J - GENERAL RULES OF ALLOCATION AND APPORTIONMENT OF BASE INCOME › Section 100.3010 - Business and Nonbusiness Income (IITA Section 301)

Current through Register Vol. 48, No. 28, July 12, 2024
a) In general. For purposes of administration
				of Article 3 of the Illinois Income Tax Act:
1) For transactions and activities occurring
				prior to July 30, 2004 (the effective date of Public Act 93-0840), business
				income is income arising from transactions and activity in the regular course
				of a trade or business and includes income from tangible and intangible
				property constituting integral parts of a person's regular trade or business
				operations. (See IITA Section 1501(a)(1), prior to amendment by Public Act
				93-0840.) The classification of income by the labels occasionally used, such as
				manufacturing income, sales income, interest, dividends, rents, royalties,
				gains, and operating income, is of no aid in determining whether income is
				business or nonbusiness income. Income of any type or class and from any source
				is business income if it arises from transactions and activity occurring in the
				regular course of trade or business operations. Accordingly, the critical
				element in determining whether income is "business income" or "nonbusiness
				income" is the identification of the transactions and activity that are the
				elements of a particular trade or business. In general, all transactions and
				activity that are dependent upon or contribute to the operations of the
				economic enterprise as a whole will be transactions and activity arising in the
				regular course of a trade or business.
2) For transactions or activities occurring
				on or after July 30, 2004, business income is all income that may be treated as
				apportionable business income under the Constitution of the United States. (See
				IITA Section 1501(a)(1), after amendment by Public Act 93-0840.) By adopting
				this definition, the General Assembly overruled the decisions in the following
				cases:
A) Blessing/White, Inc. v. Zehnder,
				329 Ill. App. 3d 714 (Third Div. 2002) and American States Insurance Co. v.
				Hamer, 352 Ill. App. 3d 521 (First Div. 2004), which held that the gain on a
				sale of an entire line of business was nonbusiness income. This "liquidating
				sale" exclusion from business income was based on the courts' construction of
				the statutory definition of business income prior to the enactment of Public
				Act 93-0840, and not on any principle of the Constitution of the United
				States.
B) Hercules, Inc. v.
				Zehnder, 324 Ill. App. 3d 329 (First Div. 2001), which held that gain realized
				on the sale of the taxpayer's stock in a subsidiary corporation that it had
				received in exchange for the contribution of assets used in its business was
				not business income. The taxpayer's basis in its stock was determined by its
				basis in the assets exchanged, so that the gain realized on the sale was
				attributable, at least in part, to its use of those assets in its business
				before the exchange. Accordingly, the investment that produced the gain had an
				operational function related to that business, and is subject to apportionment
				under Allied-Signal v. Director, 504 US 768 (1992). In addition, the court's
				holding that the taxpayer was not engaged in a unitary business with the
				subsidiary was based in part on the fact that the taxpayer did not meet the
				statutory "common ownership" requirement in IITA Section 1501(a)(27), which
				provides that a corporation must be owned more than 50% in order to be engaged
				in a unitary business. There is no such requirement in the Constitution of the
				United States, and a unitary business may exist with less than 50% common
				ownership. See In re Panhandle Eastern Pipe Line Co., 39 P.3d 21 (Ks. 2002) and
				True v. Heitkamp, 470 NW2d 582 (N.D. 1991). Accordingly, a taxpayer may be
				engaged in a unitary business with a subsidiary in which it holds only a
				minority interest, so that the gain or loss realized on the sale of its stock
				in the subsidiary is subject to apportionment under Allied-Signal v. Director,
				504 US 768 (1992).
3)
				For all taxable years:
A) Business income is
				net of the deductions allocable thereto and does not include compensation or
				the deductions allocable thereto (IITA Section 1501(a)(1)).
B) Nonbusiness income means all income other
				than business income or compensation (IITA Section 1501(a)(13)).
C) A person's income is business income
				unless clearly classifiable as nonbusiness income.