Illinois ~ Corporate Income Tax: Subsidiary Could Not Carry Back Loss of Parent Company

A subsidiary company (taxpayer) was not permitted to carry back a net capital loss suffered by its parent company to offset a capital gain that was only reported by the taxpayer for purposes of Illinois corporate income tax. The taxpayer protested the partial denial of its refund and proposed a revised methodology to determine the share of the net capital loss that could be used to offset the taxpayer’s gain during that period. The taxpayer relied on the combined apportionment method, which consisted of attributing a share of the net capital loss to each member of the unitary group based on each member’s sales or gross receipts.

This argument was rejected because the Illinois statute at issue contains no language authorizing, or even addressing, the allocation of capital losses to members of a unitary business group for purposes of determining net capital loss carrybacks.

Instead, the Illinois Department of Revenue allocated the net capital loss to the members of the unitary business group by multiplying the total net capital loss by a fraction, the numerator of which was each individual member’s own separate net capital loss and the denominator of which was the unitary group’s total net capital loss.

The court noted that this methodology, which was consistent with a separate company accounting, followed the allocation prescribed by Illinois statutes, as well as Treasury Regulations.

The taxpayer protested and maintained that the use of the separate company accounting method to allocate the net capital losses was unconstitutional because it denied the taxpayer the appropriate carryback amount of those net capital losses and, as a result, imposed a tax on the taxpayer’s net capital gains that was “out of all appropriate proportion” to the business transacted by the taxpayer in Illinois.

Finally the court stated that the use of the separate company accounting to allocate an item of a taxpayer’s base income was not necessarily disproportionate to the business that the taxpayer transacted in Illinois simply because the combined apportionment method to allocate a taxpayer’s income was not unconstitutional.

In fact, the taxpayer was not questioning the DOR’s apportionment of its base income, but only of the unitary group’s net capital losses, which was a pre-apportionment element of the taxpayer’s base income. Accordingly, the taxpayer failed to meet its burden to prove that the DOR’s method of allocating the portion of the group’s net capital loss to be carried back to offset the subsidiary’s net capital gains was unconstitutional and the refund was properly denied.

AT&T Teleholdings, Inc. v. Department of Revenue, Appellate Court of Illinois, First District, No. 1-11-0493, September 28, 2012 , ¶402-557


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