United States

Illinois: Dispute Over 80/20 Company Requires Fact-Finding; Cannot be Determined by Summary Judgment

Jul 27, 2015
From KPMG TaxWatch

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The Illinois Tax Tribunal recently denied a taxpayer’s motion for summary judgment in a dispute over whether a certain subsidiary was properly excluded from the Illinois unitary combined group. Under Illinois law, corporations engaged in a unitary business file combined returns. Members of the unitary group that can demonstrate that 80 percent or more of their business activities are outside the U.S. are generally excluded from the combined report.  To qualify for the 80/20 exclusion, a taxpayer must make certain calculations regarding its U.S property and payroll and its worldwide property and payroll.  The subsidiary at issue was an excluded 80/20 company using the taxpayer’s calculations. However, on audit, the Department of Revenue imputed certain of the taxpayer’s domestic property and payroll to the subsidiary, which resulted in the subsidiary losing 80/20 status and thereby its excluded status. Assessments were issued, and the matter eventually went before the relatively-new Tribunal where the taxpayer filed a motion for summary judgment.

The Tribunal noted at the outset that the Department’s assessments are deemed to be prima facie correct and that the taxpayer bears the burden of proving by clear and convincing evidence that the subsidiary qualified as an 80/20 company. However, the Tribunal determined that there were material factual issues in the case, and therefore the case could not be decided on a motion for summary judgment. In particular, the Tribunal noted that the taxpayer had not participated in any discovery and had undertaken no steps to develop an evidentiary record on the issues in the case. The Tribunal did go on to address the taxpayer’s argument that the Department was precluded by law from imputing property and payroll from one company to another. Specifically, the taxpayer argued that the ability to impute property and payroll was limited to cases where there had been a finding of a complete lack of economic substance for one of the companies. Thus, because the subsidiary at issue had economic substance, the taxpayer argued that its payroll and property figures could not be challenged.  The Tribunal rejected this position. In its view, the case relied on by the taxpayer, Zebra Technologies, did not hold that a company must have a complete lack of economic substance before a specific intercompany transaction can be analyzed for its own lack of economic substance.  Rather, the doctrine of "substance over form" is applied to transactions, which does not necessarily mean that a party to a questioned transaction must have no business purpose or lack economic reality before the doctrine can be applied.  In sum, the Tribunal concluded that the taxpayer’s position that the Tribunal must accept its salary and payroll calculations to be correct as a matter of law was untenable. Please contact Brian Kuler at 312-665-5110 with questions on IBM v. Dep’t of Revenue.


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The following information is not intended to be "written advice concerning one or more federal tax matters" subject to the requirements of section 10.37(a)(2) of Treasury Department Circular 230.

The information contained herein is of a general nature and based on authorities that are subject to change. Applicability of the information to specific situations should be determined through consultation with your tax adviser.