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Illinois Grants Alternative Apportionment for Future Contingent Payments

Tax Development Oct 25, 2022

Illinois Grants Alternative Apportionment for Future Contingent Payments

In a recent private letter ruling,1 the Illinois Department of Revenue (“Department”) granted a taxpayer’s request to use the apportionment formula from the year of sale for the future contingent payments to be received from that sale to a third party. The taxpayer was a privately held biopharmaceutical company operating as a limited liability company treated as a partnership for federal and Illinois personal property replacement income tax purposes. When a subsidiary of the taxpayer, Holding Co., divested itself of the intellectual property associated with most of its approved pharmaceutical products, a private letter ruling was requested and approved to allow Holding Co. to use an alternative apportionment factor based on the year of the sale for subsequent years’ contingent earn out payments, milestone payments, and interest as determined by the purchase and sales agreement. The request was granted by the Department at that time.

Several years after that sale, Holding Co. sold the rights to receive the earn out payments and milestone payments to an unrelated third party and requested similar treatment for the proceeds. Using a standard apportionment factor would have resulted in zero apportionment to Illinois for future payments. At this time, Holding Co would only receive interest payments and/or receipts from the sale of the rights to receive contingent payments from the original sale of intellectual property.

The Department granted the request to use the apportionment factor from the year of the original sale of intangibles for future contingent payments. Under the “incidental or occasional sale” provision, the proceeds would be eliminated from the sales apportionment factor. The sale of the earn out rights is an isolated transaction not made in the ordinary course of business and should be removed from the equation. The alternative formula treatment should again be granted to fairly represent Holding Co.’s business activity in Illinois. 

1 Illinois Department of Revenue, Private Letter Ruling IT-22-0003-PLR, August 2, 2022.


Mark L. Nachbar

Mary Bernard

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