Illinois Administrative Code › Title 86 - REVENUE › Part 100 - INCOME TAX › Subpart EE - DEFINITIONS › Section 100.9710 - Financial Organizations (IITA Section 1501)

Current through Register Vol. 48, No. 28, July 12, 2024
a) General Definition. The term "financial
				organization" is defined in IITA Section 1501(a)(8)(A) to mean any bank, bank
				holding company, trust company, savings bank, industrial bank, land bank, safe
				deposit company, private banker, savings and loan association, building and
				loan association, credit union, currency exchange, cooperative bank, small loan
				company, sales finance company, investment company, or any person which is
				owned by a bank or bank holding company. For the purpose of this Section a
				"person" will include only those persons which a bank holding company may
				acquire and hold an interest in, directly or indirectly, under the provisions
				of the Bank Holding Company Act of 1956 (
				12
				USC 1841 ), except where interests in any
				person must be disposed of within certain required time limits under the Bank
				Holding Company Act of 1956. This definition constitutes an exclusive and
				exhaustive list of the types of organization that are "financial organizations"
				under the Illinois Income Tax Act.
b) Entities Engaged in Financial Organization
				Activities and Other Activities. For purposes of this Section, an entity that
				is classified as a "bank" under subsection (e) of this Section; as a "bank
				holding company" under subsection (f) of this Section; or as a person owned by
				a bank or bank holding company under subsection (g) of this Section, is a
				"financial organization" regardless of whether the entity is predominantly
				engaged in the business activities characteristic of a financial organization.
				In order for any other entity to be characterized as a "financial organization"
				in any tax year, the entity must be predominantly engaged in the business
				activities of a financial organization during the year. For this purpose, an
				entity engaged in business activities of a financial organization, as well as
				other business activities in the same tax year, is predominantly engaged in the
				business activities of a financial organization during that year only if more
				than 80% (50% in the case of a sales finance company under subsection (d)(10)
				of this Section) of the entity's gross income, averaged over a period of three
				years, which includes the current tax year and the immediately preceding two
				tax years, is derived from the business activities characteristic of one or
				more of the categories of financial organization defined in this Section for
				which the entity otherwise qualifies. For purposes of this subsection, gross
				income shall include only amounts that are received in the ordinary course of
				the entity's regular business activities and that are included in net income
				under the Illinois Income Tax Act. For purposes of determining whether an
				entity is predominantly engaged in the business activities of a financial
				organization when an entity is formed in a current tax year or in its
				immediately preceding tax year, only the years for which the entity is in
				existence will be used in determining whether the entity meets the 80% test (or
				50% test in the case of a sales finance company under subsection (d)(10) of
				this Section).
1) Income which results from
				transactions outside the ordinary course of an entity's regular business
				activities is not taken into account for the purposes of the gross income test.
				For example, amounts received from the sale of an entity's headquarters shall
				be disregarded, whether or not the gain is characterized as business
				income.
2) The classification of an
				entity as a "financial organization" under the IITA is relevant to how the
				business income of the entity shall be apportioned to Illinois under IITA
				Section 304(c). The treatment of items of income that are not included in
				apportionable business income is not affected by such classification, and such
				items are therefore disregarded for purposes of the gross income test. For
				example, interest received on United States Treasury obligations is excluded
				from Illinois base income, and accordingly is disregarded for purposes of
				determining whether the business income of an entity should be apportioned
				using the financial organization formula. Similarly, dividends received by a
				corporation shall be disregarded to the extent the dividends are deducted from
				federal taxable income under section 243 of the Internal Revenue Code or are
				subtracted in the computation of Illinois base income under IITA Section
				203(b)(2)(O).
3) In the case of a
				sale or disposition of any asset (whether tangible or intangible, and whether
				the asset is part of the taxpayer's stock in trade) that occurs in the ordinary
				course of an entity's regular business activities, only the net gain shall be
				taken into account for purposes of the gross income test. Thus, for example,
				gross income from the sale of inventory is equal to its gross receipts minus
				the cost of goods sold; while gross income from the sale of stock is equal to
				the sales price minus any brokerage commission and minus the taxpayer's basis
				in the stock. If gross income from a transaction is negative, the loss shall
				not be considered for purposes of the gross income test.
4) Leasing Activities. For purposes of the
				IITA and the Internal Revenue Code, a "finance lease" is treated as an
				extension of credit, rather than as a true lease. In a finance lease, the
				lessor is treated as a creditor, and the lessee is treated as the owner of the
				leased asset entitled to any deduction for depreciation allowed under section
				167 of the Internal Revenue Code. For purposes of this Section, a finance lease
				shall be treated as a loan or other extension of credit, rather than as a
				lease, regardless of how the transaction is characterized for any other
				purpose, including the purposes of any regulatory agency to which the lessor is
				subject.
5) In applying the gross
				income test to an entity engaged in the businesses of more than one of the
				types of organization defined in subsection (d) of this Section, "gross income
				from financial services" shall include gross income derived from all services
				characteristic of any specific defined type of organization for which the
				entity qualifies. For example:
A) Selling and
				exchanging currency is a characteristic service only of banks. Accordingly,
				"gross income from financial services" of an entity which qualifies as a bank
				under subsection (d)(1) of this Section, and as a safe deposit company under
				subsection (d)(6) of this Section, includes both income from trading in foreign
				currency and safe deposit box rentals. However, "gross income from financial
				services" of an entity which qualifies as a safe deposit company, but not as a
				bank, does not include income from trading in foreign currency.
B) A taxpayer that meets all other
				qualifications of a sales finance company and also of a small loan company, and
				that derives 40% of its gross income from transactions characteristic of a
				sales finance company and 35% of its gross income from transactions
				characteristic of a small loan company is not a financial organization because
				it does not meet either the 50% test for sales finance companies nor the 80%
				test applicable to other types of financial organization. If, however, the
				taxpayer derives 45% of its gross income from transactions characteristic of a
				sales finance company and 36% of its gross income from transactions
				characteristic of a small loan company, it would not be a sales finance company
				because it does not meet the 50% test, but it would be a financial organization
				under the 80% test.
6)
				IITA Section 1501(a)(8)(D) provides that an entity that is a "financial
				organization" that engages in any transaction with an affiliate shall be a
				"financial organization" for all purposes of the Act. Accordingly, in applying
				the gross income test, an entity's transactions with a person to which it is
				related (including transactions with a member of the entity's unitary business
				group which are eliminated in combination under Section
				100.3320(d)
				of this Part) shall be treated in the same manner as transactions between the
				entity and an unrelated person, subject in all cases to the authority of the
				Department under IITA Section 404 to make such adjustments as are necessary to
				properly reflect each party's Illinois business activities.