Current through Register Vol. 48, No. 12, March 22, 2024
a) For taxable years ending on or after
December 31, 2004, an "investment partnership" is exempt from Illinois income
taxation. (IITA Section 205(b)) The term "investment partnership" means any
entity that is treated as a partnership for federal income tax purposes and
that meets each of the following requirements:
1) No less than 90% of the partnership's cost
of its total assets consists of qualifying investment securities, deposits at
banks or other financial institutions, and office space and equipment
reasonably necessary to carry on its activities as an investment partnership.
(IITA Section 1501(a)(11.5 )(A)(i)) The "asset test" under this subsection
(a)(1) is applied for each taxable year by computing the percentage of the
partnership's cost of its total assets that consists of qualifying investment
securities, deposits at banks or financial institutions, and office space and
equipment as of the beginning of the taxable year and as of the end of each
month of the taxable year, and then computing the average of those percentages;
and
2) No less than 90% of its
gross income consists of interest, dividends, and gains from the sale or
exchange of qualifying investment securities. (IITA Section
1501(a)(11.5)(A)(ii)) The "gross income test" under this subsection (a)(2) is
computed separately for each taxable year on the basis of gross income for the
entire taxable year, determined using the method of accounting used for federal
income tax purposes for the taxable year; and
3) The partnership is not a dealer in
qualifying investment securities. (IITA Section 1501(a)(11.5)(A)(iii))
A) A partnership is a dealer in qualifying
investment securities if it regularly purchases qualifying investment
securities from or sells securities to customers in the ordinary course of a
trade or business or regularly offers to enter into, assume, offset, assign or
otherwise terminate positions in qualifying investment securities with
customers in the ordinary course of a trade or business. (IRC Section
475(c)(1))
B) A partnership that,
at any time during a taxable year, holds or derives gross income from any
qualifying investment security in which it is a dealer shall not qualify as an
investment partnership for that taxable year.
b) "Qualifying investment securities" means
and includes only:
1) Common stock, including
preferred or debt securities convertible into common stock, and preferred
stock. (IITA Section 1501(a)(11.5)(B)(i)) "Stock" means shares in an
association, joint stock company, or insurance company. (IRC Section
7701(a)(7)) "Stock" includes any interest in a publicly traded partnership that
is treated as a corporation under IRC Section 7704.
2) Bonds, debentures, and other debt
securities. (IITA Section 1501(a)(11.5)(B)(ii)) "Debt security" means any note,
bond, debenture or other evidence of indebtedness, or any evidence of an
interest in or right to subscribe to or purchase any of the foregoing. (See 26
CFR 1.864 - 2(c)(2)(i) (2007).)
3)
Foreign and domestic currency deposits secured by federal, state, or local
governmental agencies. (IITA Section 1501(a)(11.5)(B)(iii)) "Currency deposits
secured by federal, state or local government agencies" means any balance in a
demand or time deposit at a bank, savings and loan, or similar financial
institution and that is insured by the Federal Deposit Insurance Corporation or
by a similar deposit insurance agency of a state or local government, including
any balance in an otherwise insured account that is in excess of any insurance
limit. Deposits secured by a foreign government agency, but not by an agency of
the federal or of a state or local government, do not qualify.
4) Mortgage or asset-backed securities
secured by federal, state, or local governmental agencies. (IITA Section
1501(a)(11.5)(B)(iv)) Examples of mortgage-backed securities secured by a
federal agency include securities issued or backed by the Federal Home Loan
Mortgage Corporation, the Federal National Mortgage Association and the
Government National Mortgage Association. Similar securities issued by a
similar agency of a state or local government also qualify. Mortgage or
asset-backed securities secured by a foreign government do not qualify under
this subsection (b)(4).
5)
Repurchase agreements and loan participations. (IITA Section
1501(a)(11.5)(B)(v))
A) A repurchase
agreement is a secured loan in which the loan agreement takes the form of a
purchase by the lender of the collateral with the borrower agreeing to
repurchase the collateral at a future date. See Nebraska Dept. of Revenue v.
Loewenstein, 513 U.S. 123(1994). A repurchase agreement is a qualified
investment security only if the item that is sold subject to repurchase is a
qualified investment security.
B) A
loan participation is an undivided fractional interest in a loan that is
acquired by the participant by means of a sale of such undivided fractional
interest by the lead lender to the participant, in contrast to a loan
syndication, which is a loan made by an agent on behalf of a group of lenders
or syndicate in which the member of the lender group or syndicate is a lender
in the original loan. Generally, the borrower's obligations in a loan
participation run only to the lead lender and not to the participant, and the
participant's interest is generally limited to an undivided fractional interest
in payments of principal or interest under the loan agreement between the lead
lender and the borrower.
6) Foreign currency exchange contracts and
forward and futures contracts on foreign currencies. (IITA Section
1501(a)(11.5)(B)(vi))
7) Stock and
bond index securities and futures contracts and other similar financial
securities and futures contracts on those securities. (IITA Section
1501(a)(11.5)(B)(vii))
8) Options
for the purchase or sale of any of the securities, currencies, contracts, or
financial instruments described in subsections (b)(1) through (7). (IITA
Section 1501(a)(11.5)(B)(viii))
9)
Regulated futures contracts. (IITA Section 1501(a)(11.5)(B)(ix)) A regulated
futures contract is a contract bought, sold or traded on a regulated exchange,
such as the Chicago Board of Trade.
10) Commodities (not described in section
1221(a)(1) of the Internal Revenue Code) or futures, forwards, and options with
respect to such commodities, provided, however, that any item of a physical
commodity to which title is actually acquired in the partnership's capacity as
a dealer in such commodity shall not be a qualifying investment security. (IITA
Section 1501(a)(11.5)(B)(x)) IRC section 1221(a)(1) provides that stock in
trade of the taxpayer or other property of a kind that would properly be
included in the inventory of the taxpayer if on hand at the close of the
taxable year, or property held by the taxpayer primarily for sale to customers
in the ordinary course of the taxpayor's trade or business are not capital
assets.
11) Derivatives. (IITA
Section 1501(a)(11.5)(B)(xi)) A derivative is:
A) An interest rate, currency (of a kind
customarily dealt in on an organized commodity exchange), equity, commodity or
notional principal contract; or
B)
An evidence of an interest, or a derivative financial instrument (including any
option, forward contract, short position and any similar financial instrument),
in any:
i) Commodity;
ii) Currency of a kind customarily dealt in
on an organized commodity exchange;
iii) Share of stock under subsection
(b)(1);
iv) Partnership or
beneficial ownership interest in a widely held or publicly traded partnership
or trust;
v) Note, bond, debenture
or other evidence of indebtedness; or
vi) Notional principal contract.
12) A partnership
interest in another partnership that is an investment partnership. (IITA
Section 1501(a)(11.5)(B)(xii))
c) Items that are not "qualified investment
securities" include:
1) Loans, other than
loan participations and repurchase agreements that are characterized as
loans.
2) Bank deposits that are
not insured by the federal government or by one of the states.
d) Cost of Assets. For purposes of
applying the "cost of assets" test in IITA Section 1501(a)(11.5)(B)(i), the
cost of an asset shall be determined for federal income tax purposes without
regard to depreciation or amortization of the asset, except that the cost of an
asset shall include any accrued interest or discount, and shall be reduced by
any premium amortization, that has been recognized in the computation of
federal taxable income of the partnership and that is included on the
partnership's balance sheet as of the date the cost of assets is
determined.
e) Gross Income. For
purposes of applying the "gross income" test in IITA Section
1501(a)(11.5)(A)(ii):
1) "Gross income" means
income minus costs of sales or basis in an asset sold or traded, but without
reduction for any other expenses or deductions. For purposes of this Section,
gross income does not include any item of income that is excluded from base
income of the partnership, either because it is excluded from federal taxable
income of the partnership or because it is subtracted from taxable income in
computing base income, and gross income does not include income that results
from transactions outside the ordinary course of an partnership's regular
activities. For example, amounts received from the sale of an entity's office
equipment shall be disregarded, whether or not the gain is characterized as
business income.
2) "Interest"
means "compensation for the use or forbearance of money". See Deputy v. du
Pont, 308 U.S. 488, 498(1940). Interest includes the amortization of any
discount at which an obligation is purchased and is net of the amortization of
any premium at which an obligation is purchased. Any amount in excess of the
purchase price received in payment of an obligation purchased at an
arm's-length discount shall be rebuttably presumed to be interest. Interest
includes any amount received upon the sale, exchange or other disposition of an
obligation to the extent that such amount represents the accrual of interest on
the unpaid balance of the obligation since the most recent payment made on that
obligation.
3) "Dividend" means any
item defined as a dividend under IRC section 316 and any other item of income
characterized or treated as a dividend under the Internal Revenue
Code.
4) "Gain from sale or
exchange" of qualifying investment securities is the sum of all gains realized
on the sale or exchange of qualifying investment securities, without reduction
or offset for losses realized on such sales or exchanges.
5) For purposes of the gross income test,
gross income derived from investment in a partnership, subchapter S
corporation, trust or estate shall be characterized as if the taxpayer received
the income directly and, in the case of any item of income reported to the
taxpayer by the partnership, subchapter S corporation, trust or estate for
federal income tax purposes as net of related expenses, include only such net
amount.