United States

Illinois: Department Addresses Illinois Treatment of Federal Tax Attribute Reductions

Oct 26, 2015
From KPMG TaxWatch

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Recently, the Illinois Department of Revenue issued a general information letter (GIL) addressing whether a taxpayer was allowed to adjust its Illinois income to reverse the effect of certain tax attribute reductions required under federal law. Under the Internal Revenue Code, when a taxpayer emerges from bankruptcy and has debt forgiven, the resulting cancellation of debt (COD) income is not subject to federal income tax. However, the taxpayer must reduce certain tax attributes (e.g., NOL’s, tax credits, asset basis, etc.) in the amount of the COD income excluded from taxable income. Due to federal NOL carrybacks, the taxpayer had no available losses to reduce and was therefore required to reduce its basis in certain assets to account for the COD income. For Illinois purposes loss carrybacks are not allowed; thus, the taxpayer had available NOLs, which it reduced to account for the COD income.  After making these adjustments, the taxpayer had a lower federal basis in certain assets than its basis for Illinois tax purposes. As a result of the state basis differences, the taxpayer claimed additional Illinois depreciation, amortization, and other expenses as adjustments to federal taxable income.  The Department of Revenue disallowed the deductions and the taxpayer requested guidance on how to account for the basis differences.

The Department concluded that the basis adjustment was not allowed under Illinois law. The computation of Illinois base income starts with federal taxable income subject to certain specified modifications. The taxpayer’s basis adjustments were not one of the specifically allowed modifications. In the Department’s view, Illinois did not permit a taxpayer to have an asset basis for Illinois income tax purposes that differed from its asset basis for federal income tax purposes. Furthermore, although Illinois requires a taxpayer to reduce NOLs to account for excluded COD income, this reduction is required only if the taxpayer likewise reduced its federal net operating loss carryovers. The taxpayer in this instance had not reduced its federal NOLs and therefore was not required to reduce its Illinois NOLs.  Please contact Brian Kuler at (312) 665-5110 with questions on IT 15-0005 GIL. 

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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.