Illinois Appellate Court Explains Allocation Of Capital Losses Carried Back By Unitary Group Members

The Illinois Appellate Court has upheld the Illinois Department of Revenue's partial denial of a taxpayer's claim for a refund based on the carryback of a capital loss.1 The Court ruled that when determining the proper method of allocating net capital losses of a unitary group filing a combined return, for purposes of carrying back the losses to a year in which the membership of the unitary group was different than the loss year, the amount of capital loss attributable to a member for purposes of the carryback was properly determined by allocating the loss to individual members of the unitary group. This allocation was made by multiplying the total net capital loss of the group by a fraction, the numerator of which was each member's own net capital loss and the denominator of which was the unitary group's total net capital loss. In so ruling, the Court rejected the taxpayer's contention that pursuant to the Illinois statutory treatment of a unitary group filing a combined return as one taxpayer, the capital loss should be allocated among members of the unitary group based on the proportion of each member's gross receipts to the sum of all members' gross receipts.

Background

The case arose from the aftermath of a stock acquisition of Ameritech Corporation (Ameritech) by SBC Teleholdings, Inc. (SBC) in 1999. For federal income tax purposes, the tax year ending December 31, 1999 was a short tax year triggered by the acquisition, requiring a federal consolidated return comprised of SBC and Ameritech's businesses. However, Illinois is not an automatic "instant unity" state and for the short tax year ending December 31, 1999 following the acquisition, SBC determined that Ameritech and SBC were not unitary. Therefore, the SBC unitary group and the Ameritech unitary group filed on a separate basis for the tax year ending December 31, 2009 even though the two groups were a portion of the same federal consolidated group. On January 1, 2000, for Illinois corporation income tax purposes, the former Ameritech group achieved the requisite level of integration to become a part of the SBC unitary business group and began to file combined unitary reports with SBC.

The taxpayer, Ameritech,2 filed an amended return for the short taxable year in 1999 following the acquisition to carry back a net capital loss incurred in 2002 to offset a significant amount of capital gain reported from the sale of Ameritech's overlapping wireless assets following the stock acquisition. The parties agreed that the taxpayer could carry back the loss, but disagreed with respect to the appropriate methodology used to determine how much of the 2002 loss was attributable to the various members of the 2002 unitary group and, hence, available for those members to carry back to 1999.

The Illinois Department of Revenue subsequently audited the...