Illinois Administrative Code
Title 86 - REVENUE
Part 100 - INCOME TAX
Subpart N - ACCOUNTING
Section 100.4500 - Carryovers of Tax Attributes (IITA Section 405)
Current through Register Vol. 48, No. 38, September 20, 2024
a) In general. Except as expressly provided by statute, carryovers of net loss deductions and credits are only allowed to be claimed by the taxpayer that incurred the loss or earned the credit. See, e.g., New Colonial Ice Co. v. Helvering, 292 U.S. 435(1934).
b) Carryovers after corporate acquisitions. IITA Section 405(a) provides that, when a corporation acquires the assets of another corporation in a transaction described in IRC Section 381(a), the acquiring corporation shall succeed to and take into account, as of the close of the day of distribution or transfer, all Article 2 credits and net losses under Section 207 of the corporation from which the assets were acquired. IRC Section 381(a) provides that, after certain specified transactions in which one corporation acquires the assets of another corporation, the acquiring corporation shall succeed to many of the tax attributes of the acquired corporation, including the right to carry forward net operating losses incurred and credits earned by the acquired corporation. Pursuant to IITA Section 405(a), any corporation that succeeds to the federal income tax attributes of another corporation under IRC Section 381(a) automatically succeeds to that corporation's IITA credit and net loss carryforwards.
c) Carryovers after partnership acquisitions. In the case of the acquisition of assets of a partnership by another partnership in a transaction in which the acquiring partnership is considered to be a continuation of the partnership from which the assets were acquired under the provisions of Section 708 of the Internal Revenue Code and any regulations promulgated under that Section, the acquiring partnership shall succeed to and take into account, as of the close of the day of distribution or transfer, all Article 2 credits and net losses under Section 207 of the partnership from which the assets were acquired. (IITA Section 405(b))
d) Limitations on carryovers. IRC Section 382 and the separate return limitation year consolidated return regulations under IRC Section 1502 limit the net loss and credit carryforwards available to certain corporations after a change in ownership. IITA Section 405 expressly provides that no similar limitations apply to the carryforward of Illinois net losses and credits allowed under that Section.
e) Effective date and transition rule. Pursuant to IITA Section 405(c), the provisions of IITA Section 405 apply to all acquisitions occurring in taxable years ending on or after December 31, 1986. However, IITA Section 405(c)(1) provides that, if a taxpayer's Illinois income tax liability for any taxable year, as assessed under Section 903 prior to January 1, 1999, was computed without taking into account all of the Article 2 credits and net losses under Section 207 as allowed by this Section, no refund shall be payable to the taxpayer for that taxable year as the result of allowing any portion of such credits or net losses that were not taken into account in computing the tax assessed prior to January 1, 1999. However, IITA Section 405(c)(2) allows the taxpayer to use such credits and net losses to reduce any unpaid deficiency for those years. Further, IITA Section 405(c)(3) provides that any credit or net loss that, as a result of the operations of these provisions, could not be taken into account either in computing the tax assessed prior to January 1, 1999 for a taxable year or in reducing a deficiency for that taxable year under paragraph (2) of subsection (c), the allowance of such credit or loss in any other taxable year shall not be denied on the grounds that such credit or loss should properly have been claimed in that taxable year under subsection (a) or (b). The effect of these provisions is to preserve the status quo with respect to taxes assessed prior to January 1, 1999, when the Department was asserting that carryforwards were limited pursuant to IRC Section 382, and to permit use of credit and net loss carry forwards against taxes proposed or assessed after that date without regard to any such limitations. The operation of these effective date and transition rules can be illustrated as follows:
Example 1: On December 31, 1994, Corporation X acquired the assets of Target Corporation in a reorganization described in IRC Section 368(a)(1)(C), which is a transaction described in IRC Section 381(a). As of the acquisition date, Target Corporation had net losses under IITA Section 207 of $500 available to carry forward and research and development credits under IITA Section 201(k) of $200 available to carry forward. In its taxable year ending December 31, 1995, Corporation X deducted all $500 of the net losses of Target Corporation and claimed a credit for all $200 of research and development credits of Target Corporation. The Department conducted an audit of Corporation X's 1995 return. At that time, the Department interpreted IITA Section 207 as incorporating the limitations on carryovers contained in IRC Section 382. Consistent with this interpretation of the IITA, the Department determined that Corporation X could deduct no more than $100 per year of the net losses incurred by Target Corporation, and disallowed $400 of the deduction claimed by Corporation X on its 1995 return. For the same reason, the Department also disallowed all $200 of the research and development credits claimed by Corporation X on its 1995 return.
Corporation X paid the resulting deficiency in 1998, and immediately filed a claim for refund of the deficiency. The claim had not been granted as of August 13, 1999, the effective date of Public Act 91-541 that enacted IITA Section 405. No other adjustments to the Illinois income tax liability of Corporation X have occurred since it made the payment in 1998, and the refund claim has not been granted.
Analysis of Example 1: IITA Section 405(c)(1) prohibits Corporation X from receiving a refund of taxes assessed prior to January 1, 1999 as the result of the application of IRC Section 382 limitations to the net losses of Target Corporation or of the denial of the carryforward of the research and development credits of Target Corporation. Thus, even though Corporation X had timely filed a refund claim for the deficiency it paid with respect to 1995, the claim must be denied. However, IITA Section 405(c)(3) permits Corporation X to claim the $400 in losses and $200 in research and development credits disallowed under IITA Section 405(c)(1) in subsequent years, including 1996 and 1997. Again, IITA Section 405(c)(1) would prohibit a refund of any taxes reported on Corporation X's timely-filed returns for 1996 and 1997, because those taxes were assessed when the returns were filed prior to January 1, 1999. Accordingly, Corporation X may claim the $400 net loss and the $200 credit carryforwards for 1998, the first year for which claiming these items would not result in a refund barred under IITA Section 405(c)(1) without regard to IRC Section 382 limitations. Such use is subject to all other statutes of limitations on the use of these items that apply.
Example 2: The facts are the same as in Example 1, except that Corporation X did not file a claim for refund of the 1995 deficiency. Instead, Corporation X acquiesced in the Department's position regarding IRC Section 382 limitations and claimed $100 in net loss deductions in amended returns for 1996 and 1997. No other adjustments to tax of Corporation X have occurred since it made the payment in 1998.
Analysis of Example 2: With respect to the research and development credit earned by Target Corporation, the analysis is the same as in Example 1.
With respect to the net loss carryovers, if the refund claims for 1996 and 1997 have not been granted as of the effective date of Public Law 91-541, the analysis is the same as in Example 1. The claims for 1996 and 1997 must be disallowed pursuant to IITA Section 405(c)(1), but IITA Section 405(c)(3) allows the losses to be claimed for 1998.
If the refund claims were granted prior to the effective date of Public Law 91-541, the $100 net loss deductions claimed in 1996 and 1997 remain valid, and Corporation X may claim the remaining $200 in net losses in 1998, subject to all other limitations on the use of these losses.
Example 3: The facts are the same as in Example 2, except that in 2000, the Internal Revenue Service concludes an audit of Corporation X. Corporation X agrees to the audit determinations. As a result of those determinations, its Illinois net income for 1997 is increased by $150. Pursuant to IITA Section 405(c)(2), Corporation X may use its pre-1995 net loss to offset the $150 increase in its 1997 net income and, pursuant to IITA Section 405(c)(3), the remaining $50 of net losses unused as of the end of 1997 may be used to offset income in 1998.
AGENCY NOTE: IITA Section 405(c)(3) does not reopen any statute of limitations that is otherwise closed. Accordingly, if the taxpayer in Example 1, 2 or 3 above fails to file a refund claim for any year before the statute of limitations for that year expires, the claim cannot be allowed despite the provisions of IITA Section 405(c)(3).