Current through Register Vol. 48, No. 38, September 20, 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.
c) Some of the types of
organizations listed in subsection (a) of this Section are defined by State or
federal statutes. The remaining types of organization are terms frequently used
in other states' laws to refer to entities engaged in the same businesses as
the entities in one or more of the types defined in Illinois or federal law. An
entity defined as a bank or a bank holding company, or that is owned by a bank
or bank holding company, under subsection (e), (f) or (g) of this Section, is a
financial organization regardless of its actual business activities. For any
other entity, notwithstanding the title or characterization of the entity for
purposes of any other law, the entity is a "financial organization" for
purposes of the IITA only if that entity is predominantly engaged in a business
which is identical in all material respects to the characteristic business of
an entity within one or more of the types of organization defined in Illinois
or federal law. In order for an entity's business to be identical in all
material respects to the business of one of the defined types of organization,
the entity must:
1) provide substantially all
of the characteristic services provided by entities in the defined type of
organization; and
2) be subject to
regulation by the Illinois or federal agency (if any) with authority over
entities in the defined type of organization or by the equivalent authority (if
any) established under the laws of the entity's state or country of formation
or of its commercial domicile. However, "sales finance companies", as defined
in subsections (d)(10)(A) and (B) of this Section are not required to be
regulated by any state or federal authority.
d) Application to Defined Types of Financial
Organization. This subsection lists the types of financial organization defined
in Illinois or federal law and describes the characteristic business of each
type as provided in the relevant Illinois or federal statutes. The references
to Illinois State and federal statutes and authorities in this subsection shall
be construed to refer to any predecessor to the current statute or authority,
whenever appropriate.
1) Entities engaged in
the business of a "bank". The term "bank" includes any entity described in
subsection (e) of this Section. In addition, for purposes of categorizing an
entity that does not come within the scope of subsection (e) of this Section,
the term "bank" means an entity predominantly engaged in the business
activities characteristic of an entity which has been issued a charter by the
Commissioner of Banks and Real Estate under
205 ILCS 5/13
or that has been given a certificate of authority to commence banking by the
Comptroller of the Currency under
12 USC
27. The terms "savings bank", "industrial
bank" and "cooperative bank" are sometimes used in the laws of other states to
refer to entities engaged in the same business as a "bank" as defined in
Illinois or federal law. The term "private banker" means an unincorporated
bank, conducted as a partnership of individuals or as an individual
proprietorship. Notwithstanding that an entity does or does not come within the
meaning of any of these terms for any other purpose, the determination of
whether an entity is engaged in the business of a "bank" for purposes of the
IITA shall be made pursuant to the following standards:
A) Characteristic Services. The Illinois and
federal statutes providing for the formation of banks state that the
characteristic activities of banks are accepting deposits, making loans,
discounting evidences of debt, and buying and selling exchange. (See
205 ILCS
5/3;
12 USC
24; and section 581 of the Internal Revenue
Code.) In order to be engaged in a business identical in all material respects
to the business of a "bank," an entity formed under the laws of another state
or of a foreign country as a bank, savings bank, industrial bank, or
cooperative bank must engage in each of these characteristic financial services
of a bank. Thus, for example, an entity that does not accept deposits is not
engaged in the business of a bank. For purposes of applying the 80% of gross
income test in subsection (b) of this Section, examples of gross income from
characteristic services of a bank include:
i)
application and origination fees, points, interest, late payment fees and other
charges received in connection with loans or with commitments to make loans or
provide other credits;
ii) service
charges and early withdrawal or other penalties received in connection with
deposit accounts;
iii) fees and
gains realized from buying and selling exchange, including foreign
currency;
iv) loan servicing fees
and charges received in connection with syndicated loans or loans sold to third
parties; and
v) discounts and gains
realized on the purchase or resale of loans.
Examples of items of income that are not gross income from
the characteristic services of a bank include rental income from real estate;
gains from sale of property obtained in foreclosure or settlement of loans; and
interest and dividends received from, and gains realized on the sale or
exchange of, securities.
B) Regulation. Illinois State banks are
subject to regulation by the Commissioner of Banks and Real Estate (see
205 ILCS
5/48) , while national banks are subject to regulation
by the Comptroller of the Currency (see
12 USC
27(b)(2)) . These entities
qualify as banks under subsection (e) of this Section regardless of their
business activities. In order to qualify as a bank, an entity that is not a
bank within the meaning of subsection (e) of this Section must be regulated by
the authority (if any) equivalent to the Commissioner of Banks and Real Estate
or the Comptroller of the Currency having regulatory jurisdiction within the
entity's state or country of formation or commercial domicile.
2) Entities engaged in the
business of a "trust company". The term "trust company" means a corporation
organized under the laws of the State of Illinois for the purpose of accepting
and executing trusts [205 ILCS
620/1-5.11] , and that has received a certificate of
authority to accept trusts from the Commissioner of Banks and Real Estate under
205 ILCS
620/2-4.
A)
Characteristic Services. A trustee performs services as a fiduciary on behalf
of the trust's beneficiaries. A trustee is entitled to compensation for
expenses incurred on behalf of the trust and to reasonable compensation for
services rendered (see
760 ILCS 5/7) .
Under Illinois law, a trustee may continue an unincorporated business on behalf
of the trust in certain circumstances (see 760 ILCS 5/4.23 and 4.24). A trustee
may act as an advisor or manager of a mutual fund in which trust funds are
invested, without having to reduce or waive its compensation for such services
when provided to a trust (see
760 ILCS
5/5.2) . However, the trustee is not entitled to any
profit from any business it conducts on behalf of a trust or beneficiary, but
only to compensation for services rendered to the trust. Accordingly, the gross
income from characteristic services of a trust company shall include only
trustees' fees or other compensation receivable for services rendered as a
trustee on behalf of trusts. Amounts received for services provided other than
as a trustee, such as fees received as an advisor or manager of a mutual fund
in which trust funds are invested, are not gross income from characteristic
services of a trust company.
B)
Regulation. A trust company conducting business within Illinois is subject to
the Corporate Fiduciary Act [205 ILCS 620]. Some types of regulated entities,
such as national banks, are authorized by law to engage in trust activities
(see
12 USC
92 a). Any entity operating in any other
state must be licensed or subject to regulation by any equivalent authority in
that state.
3) Entities
engaged in the business of a "savings bank". The term "savings bank" means a
taxpayer which is predominantly engaged in the business of an entity that is
either chartered as a federal savings bank under the Home Owners' Loan Act (
12
USC 1462 and
1464(a)
) and whose investments comply with the guidelines of
12 USC
1464(c) or of an entity
which has been issued a certificate of organization by the Commissioner of
Savings and Loan Associations under the Savings Bank Act [205 ILCS
205/3007] and that, as required by
205 ILCS
205/1009, maintains at least 60% of its total assets
in qualifying "domestic savings and loan association" assets described in
section 7701(a)(19) of the Internal Revenue Code. The qualifying assets listed
in Section 7701(a)(19) are cash, federal and municipal obligations, loans
secured by deposits or shares in the lender, residential real estate loans,
educational loans, and related investments. The terms "bank", "savings and loan
association", "building and loan association", "industrial bank" and
"cooperative bank" are sometimes used in the laws of other states to refer to
entities engaged in the same business as a "savings bank" as defined in
Illinois or federal law. Notwithstanding that an entity does or does not come
within the meaning of any of these terms for any other purpose, the
determination of whether the entity is engaged in the business of a "savings
bank" for purposes of the IITA shall be made pursuant to the following
standards:
A) Characteristic Services. The
business of a savings bank consists principally of acquiring the savings of the
public and investing in loans (section 7701(a)(19)(B) of the Internal Revenue
Code). In general, qualifying loans are related to residential real estate. An
entity that does not take deposits from the public and invest the deposited
funds primarily in qualifying loans to the public is not a savings bank for
purposes of the IITA. For purposes of applying the 80% of gross income test in
subsection (b) of this Section, examples of gross income from characteristic
services of a savings bank include:
i)
application and origination fees, points, interest, late payment fees and other
charges received in connection with loans or with commitments to make loans or
provide other credits;
ii) service
charges and early withdrawal or other penalties received in connection with
deposit accounts;
iii) loan
servicing fees and charges received in connection with syndicated loans or
loans sold to third parties; and
iv) discounts and gains realized on the
purchase or resale of loans.
Examples of items of income that are not gross income from
the characteristic services of a savings bank include rental income from real
estate; gains from sale of property obtained in foreclosure or settlement of
loans; interest and dividends received from, and gains realized on the sale or
exchange of, securities.
B) Regulation. No entity is a savings bank
for purposes of the IITA unless it is subject to regulation by the Commissioner
of Banks and Real Estate under the Savings Bank Act [205 ILCS
205/1003] , the Office of Thrift Supervision (
12
USC 1461) , or the appropriate authority of
another state responsible for regulating savings banks.
4) Entities engaged in the business of a
"land bank". The term "land bank" was defined in federal law to mean a
federally chartered association organized to make loans on farm security at low
interest rates as governed by 12 USC, ch. 23 (Farm Credit System). Under the
Agricultural Credit Act of 1987 ( P.L. 100-233), the federal land banks were
merged with the Federal Intermediate Credit Banks which had also been created
under the Farm Credit System. Under current law, the surviving entities are
exempt from state income taxation (see
12 USC
2098) .
A)
Characteristic Services. Congress established the federal land banks as
cooperatives to encourage farmer and rancher ownership and control over a
system of credit for agriculture. The characteristic service of a land bank is
making loans to farmers. Gross income from characteristic services of a land
bank include application and origination fees, points, interest, late payment
fees and other charges received in connection with loans to farmers and
ranchers.
B) Regulation. Federal
land banks are not subject to Illinois taxation. A land bank that was not
created under federal statute must be subject to any regulation by any
authority equivalent to the Farm Credit System regulation as may exist in the
state or country of incorporation or commercial domicile of the land
bank.
5) Entities
engaged in the business of a "safe deposit company". The term "safe deposit
company" means an entity licensed by the Department of Financial Institutions
under the Safety Deposit License Act [240 ILCS 5/22
] to engage in the business of renting or permitting the use of, for
compensation, safety deposit boxes, safes, vaults or other facilities for the
safekeeping of personal property (see
240 ILCS
5/2) . The Safety Deposit License Act does not apply
to banks, savings and loans, credit unions, warehouses, or grain storage
companies (see 240 ILCS 5/3) .
A) Characteristic Services. A safe deposit
company provides facilities for the safekeeping of personal property in safes
or vaults, as compared to warehouses. Gross income from the characteristic
services of a safe deposit company includes rental income or similar charges
for safe deposit boxes.
B)
Regulation. Safe deposit companies doing business in Illinois must be licensed
by the Department of Financial Institutions. An entity operating in any other
state must be licensed or subject to regulation by any equivalent authority in
that state.
6) Entities
engaged in the business of a "savings and loan association". The term "savings
and loan association" means a federal savings and loan association chartered
under the Home Owners' Loan Act of 1933 (
12
USC 1462 and
1464(a)
) whose investments comply with the guidelines of
12 USC
1464(c) or a savings and
loan association organized under the Illinois Savings and Loan Act of 1985
[205 ILCS 105/2-6] and
whose investments comply with the requirements of 205 ILCS 105/5-1 through 5
-16. In particular,
205 ILCS 105/5-3
provides that savings and loan associations must generally make their assets
available to make loans to their members secured by the members' shares or for
residential real estate purchase, construction and related matters under
205 ILCS 105/5-2. The
Internal Revenue Code provides special rules for savings and loan associations,
which are defined in section 7701(a)(19) of the Internal Revenue Code as
depository institutions that invest at least 60% of their assets in cash,
federal and municipal obligations, loans secured by deposits or shares in the
lender, residential real estate loans, educational loans, and related
investments. The terms "bank", "savings bank", "building and loan association"
and "cooperative bank" are sometimes used in the laws of other states or of
other countries to refer to entities engaged in the same business as a "savings
and loan association" as defined in Illinois or federal law. Notwithstanding
that an entity does or does not come within the meaning of any of these terms
for any other purpose, the determination of whether the entity is engaged in
the business of a "savings and loan association" for purposes of the IITA shall
be made pursuant to the following standards:
A) Characteristic Services. The business of a
savings and loan association consists principally of acquiring the savings of
the public and investing in loans (section 7701(a)(19)(B) of the Internal
Revenue Code). An entity that does not take deposits and invest primarily in
qualifying loans is not a savings and loan association for purposes of the
IITA. For purposes of applying the gross income test in subsection (b) of this
Section, examples of gross income from characteristic services of a savings and
loan association include:
i) application and
origination fees, points, interest, late payment fees and other charges
received in connection with loans or with commitments to make loans or provide
other credits;
ii) service charges
and early withdrawal or other penalties received in connection with deposit
accounts;
iii) loan servicing fees
and charges received in connection with syndicated loans or loans sold to third
parties; and
iv) discounts and
gains realized on the purchase or resale of loans.
Examples of items of income that are not gross income from
the characteristic services of a savings and loan association include rental
income from real estate; gains from sale of property obtained in foreclosure or
settlement of loans; interest and dividends received from, and gains realized
on the sale or exchange of, securities.
B) Regulation. No entity is a savings and
loan association for purposes of the IITA unless it is subject to regulation by
the Office of Banks and Real Estate under the Savings Bank Act [205 ILCS 105/7-1] ,
the Office of Thrift Supervision (
12
USC 1462) , or the appropriate authority (if
any) of another state responsible for regulating savings and loan
associations.
7)
Entities engaged in the business of a "credit union". Federal credit unions
that have received a charter under
12 USC
1754 are exempt from state income taxation
(see 12
USC 1768) . Under present law, only
"cooperative, non-profit" credit unions may be incorporated under the Illinois
Credit Union Act or permitted to do business in Illinois (see
205 ILCS 305/1.1
(defining "credit union") and 7 (permitting credit unions chartered in other
states to do business in Illinois)). Under current law, a credit union doing
business in Illinois is most likely exempt from Illinois Income Tax pursuant to
IITA Section 205(a) and
12
USC 501(a) and (c)(14).
12 USC
1753(5) and
205
ILCS 305/2(2)(b) each require an entity applying for permission to organize as
a credit union to define the class of persons entitled to membership.
A) Characteristic Services.
12
USC 1752(a)(1) provides that
a federal credit union is a cooperative association organized for the purpose
of promoting thrift among its members and creating a source of credit for
provident or productive purposes and
12 USC
1757(7) requires a federal
credit union to invest its funds in loans to its members, bank accounts,
government securities and in other credit unions.
205 ILCS 305/1.1
defines "credit union" to mean a cooperative, non-profit association,
incorporated for the purposes of encouraging thrift, creating a source of
credit at a reasonable rate of interest, and providing an opportunity for its
members to use and control their own money in order to improve their economic
and social conditions, and
205 ILCS
305/59 allows credit unions to invest only in loans to
members, bank accounts, government securities and other credit unions. The
characteristic services of a credit union involve taking interest-paying
deposits from its members and making loans to its members. For purposes of
applying the gross income test in subsection (b) of this Section, examples of
gross income from characteristic services of a credit union include:
i) application and origination fees, points,
interest, late payment fees and other charges received in connection with loans
or with commitments to make loans to members; and
ii) service charges and early withdrawal or
other penalties received in connection with deposit accounts.
Examples of items of income that are not gross income from
the characteristic services of a credit union include interest and other income
from loans to non-members; rental income from real estate; gains from sale of
property obtained in foreclosure or settlement of loans; interest and dividends
received from, and gains realized on the sale or exchange of,
securities.
B)
Regulation. In order for an entity to qualify as a credit union, an entity must
be subject to regulation by any appropriate authority in the state of
organization, and the class of persons entitled to membership in the entity
must be defined by law or approved by the appropriate state
authority.
8) Entities
engaged in the business of a "currency exchange". The term "currency exchange"
means an entity licensed by the Director of Financial Institutions under the
Currency Exchange Act [205 ILCS
405/4] for purposes of engaging in the business of,
and providing facilities for, cashing checks, drafts, money orders or any other
evidences of money for a consideration or selling or issuing money orders in
the entity's own name [205 ILCS
405/1] .
A)
Characteristic Services. Currency exchanges cash checks and other evidences of
money for the general public, and may issue money orders. Currency exchanges
are not permitted to accept any form of deposit or bailment of money (see
205 ILCS
405/3) . The gross income from characteristic services
of a currency exchange is the fees or other charges for cashing checks or
issuing money orders. Interest or other income earned from investment of funds
received from the issuance of money orders during the period between the
issuance of a money order and its clearance is not gross income from a
characteristic service of a currency exchange.
B) Regulation. A currency exchange doing
business in Illinois must be licensed by the Director of Financial Institutions
and meet certain bonding requirements to protect its customers. An entity
operating in any other state must be licensed or subject to regulation by any
equivalent authority in that state.
9) Entities engaged in the business of a
"small loan company". The term "small loan company" means an entity licensed by
the Director of Financial Institutions under the Consumer Installment Loan Act
[205 ILCS
670/1] for the purpose of making loans in a principal
amount not exceeding $25,000. Small loan companies are required to disclose the
terms of their loans pursuant to specific statutory requirements or in
conformity with the federal Truth in Lending Act (see
205 ILCS
670/16 (referencing
15 USC
1601)). The predecessor of the Consumer
Installment Loan Act, the Small Loans Act (Ill. Rev. Stat., ch. 74, par. 27
(1933)), was held to apply only to lenders, and not to persons selling goods or
services on a credit or installment basis. (See, e.g., Wernick v. National Bond
and Investment Co., 276 Ill. App. 84 (1934).)
A) Characteristic Services. Small loan
companies are permitted to make loans not exceeding an aggregate principal
amount of $25,000 to any obligor and for terms not exceeding 121 months. A
credit or installment sale of goods or services is not a characteristic service
of a small loan company. Gross income from the provision of the characteristic
services of a small loan company includes loan application and origination
fees, interest, late payment charges and similar amounts realized in connection
with loans not exceeding the principal amount of $25,000 and for terms not
exceeding 121 months. Amounts received or accrued in connection with any loan
for a principal amount in excess of $25,000 or for a term in excess of 121
months are not gross income from the provision of the characteristic services
of a small loan company. Finally, because
205 ILCS
670/21 provides that the Consumer Installment Loan Act
does not apply to persons making loans to business associations or
corporations, or to sole proprietors of businesses for the purpose of carrying
on or acquiring such businesses, amounts received in connection with such
business loans are not gross income from the provision of the characteristic
services of a small loan company.
B) Regulation. A small loan company operating
in Illinois must be licensed by the Director of Financial Institutions. An
entity operating in any other state must be licensed or subject to regulation
by any equivalent authority in that state. In all cases, the entity must comply
with the regulations issued by the Board of Governors of the Federal Reserve
System under the Truth in Lending Act.
10) Entities engaged in the business of a
"sales finance company". The term "sales finance company" has the meaning
provided in subsection (d)(10)(A) or (B):
A)
Under IITA Section 1501(a)(8)(C)(i), the term "sales finance company" means an
entity primarily engaged in one or more of the following businesses: the
business of purchasing customer receivables, the business of making loans upon
the security of customer receivables, the business of making loans for the
express purpose of funding purchases of tangible personal property or services
by the borrower, or the business of finance leasing. For purposes of this
subsection (d)(10)(A), a "customer receivable" means:
i) A retail installment contract or retail
charge agreement within the meaning of the Sales Finance Agency Act
[205 ILCS 660/2] , the
Retail Installment Sales Act [815 ILCS 405/2.6 and 2.7], or the Motor Vehicle
Retail Installment Sales Act [815 ILCS 375/2.5] ;
ii) An installment, charge, or similar
contract or agreement arising from the sale of tangible personal property or
services in a transaction involving a deferred payment price payable in one or
more installments subsequent to the sale;
iii) The outstanding balance of a contract or
agreement described in subsection (d)(10)(A)(i) or (ii) of this Section;
or
iv) A loan, or balance under a
loan, made by a lender for the express purpose of funding purchases of tangible
personal property or services by the borrower.
A customer receivable need not provide for payment of
interest on deferred payments. A sales finance company may purchase a customer
receivable from, or make a loan secured by a customer receivable to, the seller
or lender in the original transaction or from or to a person who purchased the
customer receivable directly or indirectly from that seller or lender.
Example 1: A manufacturer sells a product to a retailer.
Payment is due 7 days after issuing the sales invoice. An account receivable is
recorded when the invoice is issued. The receivable would constitute a customer
receivable.
Example 2: An entity purchases or otherwise acquires customer
receivables or finance leases. The entity sells those customer receivables or
finance leases to a third party and enters into an agreement to service such
receivables or finance leases in exchange for a fee. The purchase, sale and/or
servicing of such receivables or finance leases is a business of a "sales
finance company".
B) Under IITA Section 1501(a)(8)(C)(ii), the
term "sales finance company" also means a corporation meeting each of the
following criteria:
i) The corporation must
be a member of an "affiliated group" within the meaning of section 1504(a) of
the Internal Revenue Code, determined without regard to section 1504(b) of the
Internal Revenue Code;
ii) More
than 50% of the gross income of the corporation for the taxable year must be
interest income derived from qualifying loans. A "qualifying loan" is a loan
made to a member of the corporation's affiliated group that originates customer
receivables or to whom customer receivables originated by a member of the
affiliated group have been transferred, to the extent the average outstanding
balance of loans from that corporation to members of its affiliated group
during the taxable year do not exceed the limitation amount for that
corporation. The "limitation amount" for a corporation is the average
outstanding balances during the taxable year of customer receivables originated
by all members of the affiliated group. If the average outstanding balances of
the loans made by a corporation to members of its affiliated group exceed the
limitation amount, the interest income of that corporation from qualifying
loans shall be equal to its interest income from loans to members of its
affiliated group times a fraction equal to the limitation amount divided by the
average outstanding balances of the loans made by that corporation to members
of its affiliated group;
iii) The
total of all shareholder's equity (including, without limitation, paid-in
capital on common and preferred stock and retained earnings) of the corporation
plus the total of all of its loans, advances, and other obligations payable or
owed to members of its affiliated group may not exceed 20% of the total assets
of the corporation at any time during the tax year; and
iv) More than 50% of all interest-bearing
obligations of the affiliated group payable to persons outside the group
determined in accordance with generally accepted accounting principles must be
obligations of the corporation.
Example 3: In connection with the conduct of its business, A
Corporation either originates customer receivables (as defined in subsection
(d)(10)(A) of this Section), or is transferred customer receivables from one or
more of its affiliates. B Corporation, a wholly-owned subsidiary of A and a
member of its affiliated group, conducts business exclusively in State X, its
commercial domicile. B issues commercial paper and other debt obligations and
uses the proceeds to make loans to A or other members of the affiliated group.
B Corporation derives more than 50% of its gross income from interest on making
"qualifying loans" to A or other members of the affiliated group. Assuming B
also meets the tests in subsections (d)(10)(B)(iii) and (iv) of this Section, B
would constitute a "sales finance company" as defined in IITA Section
1501(a)(8)(C)(ii).
C) Characteristic Services. A "sales finance
company" is defined by its characteristic services in subsections (d)(10)(A)
and (B) of this Section. A company satisfies the primary test of subsection
(d)(10)(A) of this Section if more than 50% of its gross income is from its
characteristic services.
D)
Regulation. There is no requirement that a sales finance company that meets the
definition provided in subsection (d)(10)(A) or (B) of this Section be subject
to license or regulation by any state or federal authority.
11) Entities engaged in the
business of an "investment company". The term "investment company" means an
entity that comes within the meaning of
15 USC
80a-3 and is predominantly engaged in the
business of investing, reinvesting and trading in securities.
A) Characteristic Services. In the Investment
Company Act of 1940,
15 USC
80a-3 defines an investment company as an
entity engaged in the business of investing, reinvesting and trading in
securities. Accordingly, the characteristic services of an investment company
are the raising of capital from investors in order to purchase capital
securities of other entities. Gross income from the characteristic services of
an investment company includes interest, dividends and gains from sales of
securities.
B) Regulation. In order
to be characterized as an investment company under the IITA, an entity doing
business in the United States must be registered as an investment company with
the Securities and Exchange Commission under the Investment Company Act of
1940. Any entity that is not doing business in the United States must be
subject to the equivalent authority (if any) in its country of formation or
commercial domicile.
e) The term "bank" includes the following
entities, regardless of whether the entity is engaged in the characteristic
business of a bank as described in subsection (d)(1) of this Section. An entity
described in this subsection (e) is a bank even if it qualifies as a financial
organization under one of the provisions of subsection (d) of this Section:
1) any entity that is regulated by the
Comptroller of the Currency under the National Bank Act, or by the Federal
Reserve Board, or by the Federal Deposit Insurance Corporation.
A) An "entity regulated by the Comptroller of
the Currency under the National Bank Act" means a national banking association
formed under
12
USC 21.
B) An "entity regulated by the Federal
Reserve Board" means a member of the Federal Reserve System under the
provisions of
12 USC
222 or
12 USC
321.
C) An "entity regulated by the Federal
Deposit Insurance Corporation" means an insured depository institution under
12 USC
1814.
2) any federally or State chartered bank
operating as a credit card bank. A "credit card bank" is the common term for an
entity that comes within the definition of "bank" for purposes of the Bank
Holding Company Act of 1956 (
12
USC 1841(c)(1)) , but that
is excluded from being treated as a bank under
12
USC 1841(c)(2)(F).
f) Entities Engaged in the
Business of a "Bank Holding Company". The term "bank holding company" means an
entity that directly or indirectly owns, controls or has power to vote 25% or
more of any class of voting securities of any bank or of any other bank holding
company (see
12
USC 1841(a)) , and which is
registered with the Board of Governors of the Federal Reserve System under
Section 1844(a) of the Bank Holding Company Act of 1956 (
12 USC
1844(a)) .
g) Special Rule for Persons Owned by a Bank
or Bank Holding Company. The term "financial organization" under the Illinois
Income Tax Act includes any person that is owned by a bank (within the meaning
of subsection (d)(1) of this Section or subsection (e) of this Section) or by a
bank holding company (within the meaning of subsection (f) of this Section).
For purposes of this provision, the term "person" includes only those persons
in which a bank holding company may acquire and hold an interest, directly or
indirectly, under the provisions of the Bank Holding Company Act of 1956 (
12
USC 1841) and Regulation Y promulgated
thereunder by the Board of Governors of the Federal Reserve System ( 12 CFR 225
), and does not include any person that must be disposed of within certain
required time limits under the Bank Holding Company Act of 1956. Under this
provision, an entity that would not otherwise be a "financial organization" is
deemed to be a financial organization for any period during which it is owned
by a bank or bank holding company. For example, prior to the enactment of
Public Law
106-102,
12 USC
1843(c)(8) authorized bank
holding companies to own insurance companies in certain circumstances.
12 USC
1843(c)(8) allows a bank
holding company that owned an insurance company prior to November 12, 1999, to
continue to own that insurance company. An insurance company owned by a bank
holding company is a "financial organization" for purposes of the IITA, even
though the insurance company would not otherwise be a financial organization.
The fact that an entity that is not owned by a bank holding company would be a
financial organization under this provision if it were owned by a bank holding
company, or that the entity in the past may have been owned by a bank holding
company and therefore characterized as a financial organization, is irrelevant
to the determination of whether the entity is a financial
organization.
h) Effective Dates
and Elections. Public Act 89-711 amended the definition of "financial
organization" in IITA Section 1501(a)(8) by adding the definition of "bank" in
IITA Section 1501(a)(8)(B) and the definition of "sales finance company" in
IITA Section 1501(a)(8)(C).
1) Application of
IITA Section 1501(a)(8) to taxable years beginning on or before December 31,
1996. The General Assembly declared in IITA Section 1501(a)(8)(D) that the
definitions of the terms "bank" and "sales finance company" in IITA Section
1501(a)(8)(B) and (C) are declaratory of existing law and apply retroactively
for all tax years beginning on or before December 31, 1996. No other
definitions were changed. Accordingly, except as provided in this subsection
(h), the interpretations of the statutory definitions contained in subsections
(a) through (g) apply retroactively and for all purposes to all taxable
years.
2) For taxable years
beginning on or before December 31, 1996, Public Act 89-711 provides that the
definitions of "bank" and "sales finance company" shall apply to all original
returns; to all amended returns filed within 30 days after the effective date
of the Act; to all math error notices issued by the Department under IITA
Section 903(a); to all Notices of Deficiency issued by the Department under
IITA Section 904(a); to all notices of denial of refund claims issued under
IITA Section 909(e); and to all assessments of erroneous refunds made under
IITA Section 912.
A) Public Act 89-711
imposes no time limit for the filing of an original return applying its
provisions to taxable years beginning on or prior to December 31, 1996.
Accordingly, taxpayers may file original returns claiming financial
organization status under the amended definitions of "bank" and "sales finance
company" at any time, provided that such returns are filed within the
applicable statute of limitations period and meet all other relevant
requirements of the IITA.
B)
Taxpayers required to file amended returns in order to claim financial
organization status for a taxable year beginning on or prior to December 31,
1996, were required to do so on or before March 17, 1997, which was 30 days
after the enactment of Public Act 89-711.
C) In the case of a taxpayer that had claimed
financial organization status on an original or amended return and whose status
as a financial organization was denied by the Department, IITA Section
1501(a)(8)(D) provides that the amended definitions of "bank" and "sales
finance company" apply to the Notice of Deficiency or notice of denial of
refund claim issued by the Department after review of such return.
i) If the Notice of Deficiency or notice of
denial has not become final, a taxpayer with a matter pending before the Office
of Administrative Hearings of the Illinois Department of Revenue for a
particular taxable year may raise as an issue the taxpayer's status as a "bank"
or "sales finance company" by the making of a motion in conformance with the
rules on motion practice as set forth in 86 Ill. Adm. Code
200.185.
ii) If the Notice of Deficiency or notice of
denial has become final, and the taxpayer is not contesting the Department's
action in the courts under the Administrative Review Law [735 ILCS 5 /Art. III]
or the State Officers and Employees Money Disposition Act [30 ILCS 230 ], the
taxpayer must have filed a timely amended return as set forth in subsection
(h)(2)(B) of this Section in order to assert a claim that it qualifies as a
"bank" or "sales finance company" under the amended definitions.
iii) A taxpayer with a matter pending before
the courts of this State for a particular taxable year must request treatment
as a "bank" or "sales finance company" by the making of a motion in conformance
with the rules of the court.
3) Election under IITA Section 1501(a)(8)(E).
IITA Section 1501(a)(8)(E) provides that, for all taxable years beginning on or
before December 31, 1996, a taxpayer that falls within the definition of a
"financial organization" under Section 1501(a)(8)(B) or (C) of the IITA, but
who does not fall within the definition of a "financial organization" under the
Proposed Regulations issued by the Department of Revenue on July 19, 1996 (20
Ill. Reg. 9488) may irrevocably elect to apply the Proposed Regulations for all
of those years as though the Proposed Regulations had been lawfully
promulgated, adopted, and in effect for all of those years.
A) In order to support a claim for refund,
the election must have been filed by March 17, 1997. Procedures for making an
election which would support a claim for refund were published in Emergency
Rule
100.9710
(21 Ill. Reg. 2969).
B) A taxpayer
who has filed an original or amended return for any taxable year beginning on
or before December 31, 1996, as a non-financial organization and that wishes to
elect to be bound by the July 19, 1996, proposed rules solely for the purpose
of preserving its return position, and not for purposes of claiming a refund
for any year, may file an election document meeting the following requirements:
i) The election document must state on the
first page "Financial Organization Election to Apply Proposed Rules Under
Public Act 89-711 - No Refund Claim".
ii) The election document must be filed prior
to the issuance of any Notice of Deficiency or notice of claim denial that is
based in whole or in part on the retroactive application of Public Act 89-711
to treat the taxpayer as a financial organization.
iii) The election document must list all
members of the unitary business group to whom the election applies. The
election shall be binding on all such members, whether or not listed, and the
Department may enforce such election against such members. In addition, no
refund claimed after the effective date of Public Act 89-711 shall be allowed
to the extent such refund results from the application of the July 19, 1996,
proposed rules to any such member.
C) All elections to apply the July 19, 1996,
proposed rules, whether made by amended return or by an election document,
shall be sent to the following address:
Deputy General Counsel - Income Tax
Legal Services Office - Room 5-500
Illinois Department of Revenue
P. O. Box 19014
Springfield, Illinois 62794-9014
D) Effect of election.
i) Effect on "banks" as defined in IITA
Section 1501(a)(8)(B). Public Act 89-711 expanded the definition of the term
"bank" to include entities described in subsection (e) of this Section, without
regard to the actual business activities of the entity. A taxpayer governed by
an election under this subsection (h) must be engaged in the business of a
"bank" as described in subsection (d)(1) of this Section in order to be
characterized as a bank. For example, under IITA Section 1501(a)(8)(B), a
"credit card bank" is characterized as a "bank" even though a credit card bank
is prohibited from accepting deposits from the public. A credit card bank
governed by an election under this subsection (h) therefore cannot be a "bank"
under subsection (d)(1) of this Section. Note, however, that a credit card bank
governed by such an election may qualify as a financial organization under some
other provision of this Section; in particular, a credit card bank may be
engaged in the business of a sales finance company as defined in subsection
(i)(3)(D)(ii) of this Section.
ii)
Effect on "sales finance companies" as defined in IITA Section 1501(a)(8)(C).
Public Act 89-711 expanded the definition of "sales finance company" to include
entities that buy, or make loans secured by, installment agreements or charge
agreements of corporations and businesses and to include entities which are
primarily engaged in the business of a sales finance company. An entity
governed by an election under this subsection (h) will be a sales finance
company only if: it is engaged in the business of buying, or making loans
secured by, installment agreements and charge agreements arising from retail
purchases for personal, family or household use; more than 80% of its gross
income is derived from transactions characteristic of a financial organization;
and it meets the other requirements of subsection (d)(10) of this
Section.
iii) An election made
under Section 1501(a)(8)(E) applies only to taxable years beginning on or
before December 31, 1996. For all subsequent taxable years, the provisions of
Section 1501(a)(8) as amended in Public Act 89-711 and interpreted in
subsections (a) through (h) of this Section shall apply.
iv) Section 1501(a)(8)(E) provides that the
election applies to those members of the taxpayer's unitary business group who
are ordinarily required to apportion business income under the same subsection
of Section 304 of the IITA. An election made by one or more such members is
binding on all such members, whether or not they expressly joined in the
election, and the Department may enforce such election either directly or by
offsetting any refund payable to the taxpayer as the result of the election by
any underpayment of any other taxpayer to whom such election also applies to
the extent such underpayment results from the making of the election.
i) Effective
January 1, 2000, Public Act 91-535 amended the definition of the term "sales
finance company" in IITA Section 1501(a)(8)(C). The General Assembly declared
the definition of the term "sales finance company" in Public Act 91-535 to be
declaratory of existing law. Accordingly, except as provided in this subsection
(i), the interpretation of the term "sales finance company" shall apply
retroactively and for all purposes to all taxable years.
1) The definition of "sales finance company"
provided by Public Act 91-535 shall apply to all original returns; to all
amended returns; to all math error notices issued by the Department under IITA
Section 904(a); to all Notices of Denial of refund claims issued under IITA
Section 909(e); and to all notices of erroneous refunds made under IITA Section
912.
A) Public act 91-535 imposes no time
limit for the filing of an original or amended return applying its provisions
to a particular taxable year. Accordingly, taxpayers may file original or
amended returns claiming financial organization status under the amended
definition of "sales finance company" at any time, provided that such returns
are filed within the applicable statute of limitations period and meet all
other relevant requirements of the IITA.
B) In the case of a taxpayer that had claimed
financial organization status on an original or amended return and whose status
as a financial organization was denied by the Department:
i) If the Notice of Deficiency or Notice of
Denial has not become final, a taxpayer with a matter pending before the Office
of Administrative Hearings of the Illinois Department of Revenue for a
particular taxable year may raise as an issue the taxpayer's status as a "sales
finance company" by making of a motion in conformance with the rules on motion
practice as set forth in Section
100.185
of this Part.
ii) If the Notice of
Deficiency or Notice of Denial has become final, and the taxpayer is not
contesting the Department's action in the courts under the Administrative
Review Law [735 ILCS 5/Art. III] or the State Officers and Employees Money
Disposition Act [30 ILCS 230], the taxpayer must have filed a timely amended
return as set forth in subsection (h)(2)(B) of this Section in order to assert
a claim that it qualifies as a "sales finance company" under the amended
definition.
iii) A taxpayer with a
matter pending before the courts of this State for a particular taxable year
must request treatment as a "sales finance company" by the making of a motion
in conformance with the rules of the court.
