2002 Practitioners' Questions & Answers

IITA Section 201(g) allows a Jobs Tax Credit equal to $500 for each eligible employee hired during the year to work in an enterprise zone or foreign trade zone. To be eligible for the credit, the employer must hire at least 5 eligible employees during the year to work in the zone and must also increase its total employment in the zone by at least 5 full-time employees over its total employment at the end of 1985 or at the end of the tax year for which it most recently was allowed a Jobs Tax Credit, whichever is later. To be eligible, an employee must be certified by the Department of Commerce and Community Affairs as "eligible for services" under the Job Training Partnership Act and must be hired to work full-time (that is, 30 or more hours per week). The credit is allowed against the regular income tax liability of the taxpayer and may be carried forward for 5 years.

The "Equivalency Chart" for 2001 tax returns (which was prepared according to the Department's policies prior to adoption of regulation Section 100.2197 and does not reflect that regulation).

A chart that complies with the regulation is being prepared. Because the Department does not have access to other states' tax forms before they are published, it will likely be impossible to complete the Equivalency Chart prior to the new year.

If a bank participates with another bank in an initial loan made to a company located in Illinois, would both banks include the interest in their Illinois numerator if the interest is received in Illinois?

If a bank participates in a loan to an Illinois company (i.e., purchases a portion of the loan from the bank that originated the loan), is the interest the bank subsequently receives on its portion of the loan considered investment interest, not included its Illinois numerator?

Note: The examples are not reproduced here. They show that, when bonus depreciation exceeds the "cap" on depreciation expense allowed for luxury automobiles, the taxpayer is only allowed to deduct bonus deprecation in an amount equal to the cap for federal income tax purposes. No regular depreciation deduction is allowed. Accordingly, under Public Act 92-603, all federal depreciation allowed is added back, and the subtraction modification of 42.9% of regular depreciation is zero in the year the asset is placed in service. The $3,060 deduction proposed in the question is the cap on luxury automobile depreciation under old law, as compared to the $7,660 cap allowed under Public Law 107-147.

It should be pointed out that, while the taxpayer in the example receives no subtraction modification in the year the luxury car is placed in service, in subsequent years it is likely that it will receive a greater subtraction modification than would be allowed under the intent of the General Assembly presumed in the question. For example, if regular depreciation in subsequent years exceeds the $7,660 luxury automobile cap, the taxpayer will be allowed a subtraction modification of $3,286 (42.9% of $7,660), so that total depreciation would be $10,946 for the year. This is more than 3 times the $3,060 in depreciation that was allowed before Public Law 107-147 was enacted. Even considering the time value of money, the taxpayer in this example is much better off two years after placing the automobile in service under Public Act 92-603 than it would be under the proposal implied in this question.

Supreme Court held that computer software was not tangible personal property. First National Bank of Spring v. Department of Revenue, 85 Ill. 2d 84, 421 N.E. 2d 175 (1981) ("FNB Springfield"). The case involved an effort by the DOR to apply Use Tax to the bank's acquisition of business software. In its decision, the court made no distinction whatsoever between canned and custom software. However, it is very clear from the facts that are stated in the opinion that the software in question would in current usage be regarded as "canned software." In this connection, the opinion points out that after receiving the software from its suppliers the taxpayer bank made "necessary modifications... to the programs to accommodate the bank's particular needs."

In 1989 and 1990, the General Assembly enacted amendments to the various Illinois sales tax statutes which had the effect of reversing the FNB Springfield decision. Those amendments generally imposed the sales taxes on "computer software," which was defined to include canned software and to exclude custom software. One of the new statutory provisions in the ROT Act specifically declared that:

For purposes of this Act, computer software shall be considered to be tangible personal property. (Emphasis added)

No similar legislation defining computer software or declaring it to be tangible personal property has ever been enacted for Illinois income tax purposes. Yet, both before and after the sales tax amendments, the DOR has suggested that a sale of canned software would constitute a sale of tangible personal property for income tax purposes (1994 Practitioners' Meeting; PLR's 91-233, 90-086, 90-007, 89-221, 88-160 etc.).

Whether or not software is tangible personal property can be relevant for Illinois income tax purposes, for example in determining under PL 86-272 whether an out of state taxpayer soliciting sales in Illinois has an obligation to file an Illinois return or in determining whether an Illinois taxpayer soliciting sales outside the state is entitled to apportion income on its Illinois return.

We, therefore, hold that the sale of computer software in the instant transaction is, in substance, the transfer of intangible personal property and, as such, is not taxable under the Illinois Use Tax Act. (emphasis added)

The court's decision was based on a question of fact, not of law. In reaching its conclusion, the court relied on cases which held that no taxable sale of tangible personal property occurred when the property was transferred as an incident to the providing of a service. In the same paragraph in which it stated its conclusion, it cited the case of Ingersoll Milling Machine Co. v. Dept. of Revenue, 405 Ill. 267 (1950), which held that the sale of a custom-made machine was not the sale of tangible personal property. It used the analyses in those cases to distinguish cases holding that books, magazines, and so forth are tangible personal property, even though their value is not in the "physical manifestation" of the ideas portrayed. We do not believe that the Court would hold that the sale of mass-produced canned software on the market today is more like the sale of a service than it is like the sale of a book, any more than it would hold that the sale of mass-produced machinery is the sale of an intangible on the basis of the Ingersoll Milling Machine case.

Assuming that the sales tax returns had been filed on time, what is the Statute of Limitations for such taxes?

When does the statute start running?

"Will the Department initiate any type of subordination/release of lien program to maximize collection and come into conformity with security laws so as to minimize a taxpayer's loss of economic value?

a) the question is shown by example: client had two Illinois liens filed against him. The liens were filed years apart and ended up straddling an IRS lien in excess of $200,000. The first in time was the Department's lien for $3,000. The third lien---the second IDOR lien filed after the IRS---was for $25,000. The IRS agreed to release its over $200,000 lien upon payment of $18,000, the equity the taxpayer had in the real estate that was in foreclosure. However, the Department required not only the first lien justifiably being paid in full but also said that it would not clear the second lien behind the IRS for anything less than the full amount of the Department's lien despite the IRS lien being ahead of its position and there not being any equity in the property. If this property were lost in foreclosure, the taxpayer would not have any monies to pay any portion of the first IDOR lien let alone the second thereby minimizing collection for the Department. Would it be better for the Department to have the board of review, similar to the IRS, release liens if it maximizes collection potential?"

The Collections Bureau tries to avoid forcing foreclosure. If the property for which a specific property release is sought is headed for foreclosure, the Collections Bureau asks for the amount of the filing foreclosure fee.

In situations in which a specific property release appears to be in the best interest of the state, the Collections Bureau looks to the following documentation to determine if a specific property release will be issued:

appraisal of property
purchase contract
title policy
settlement statement (HUD-1)

Based on this criteria, the Collections Bureau has processed 15 to 20 specific property releases in the past six months.

(As you know, a specific property release only releases the Department's lien as to the specific property involved and does not release the lien as to any other property owned by the debtor.)

We agree that section 105/3-85 provides that the Manufacturer's Purchase Credits can not be used to satisfy penalties or interest for failure to pay the tax when due. In the case of audits by the Department, the penalties and interest have already been assessed and paid through the completion date of the audit. Section 735/3-2 provides for the payment of interest on any overpayment tax.

Delays have occurred on audits resulting from the Department's inability to determine how they were going to handle the issue. Recently audits were suspended to determine if interest was going to be paid. Audits are now being processed, however the Department has taken the position that interest will not be paid on the refund. No authority has been given as to why interest will not be paid on these prior audits.

Specific example: An audit was completed in May of 1999. The taxpayer agreed to the audit and issued a check to Department for the Use Tax plus interest. No reduction of the tax was made due to the application of credits. In March of 2000 a claim request (form EDA-98) was filed to apply earned credits against the liability. In May of 2000 we received a call from the Department indicating that they were going to audit the claim and the next audit period. The new audit was finally concluded in April of 2002. A great portion of the delay in concluding the audit was because Springfield had not decided how to handle these claims. Springfield was also involved in revising the Regulations during this period. The total audit was agreed to in February 2002 with the exception of the interest issue on the claim. The claim for refund substantially exceeded the current audit liability. The taxpayer finally settled the new audit to avoid continuation of the interest on the MPC portion of the audit. The claim remained open for the interest issue. We received a call from the audit supervisor indicating that Springfield has decided not to pay interest.

a. What is the Department's reasoning for not paying interest on the refund from the date the tax was paid at the conclusion of the prior audit?

Since there was sufficient MPC to eliminate substantially all the additional tax assessed as it arose for the second audit period, the State of Illinois was never "out-of-pocket" in terms of tax revenue. Why is interest charged on the tax assessed as if the MPC were not applied? If this is due to a regulation, what is the statutory authority for such a position? The taxpayer's position in treating certain chemicals as exempt machinery and equipment was not frivolous, as some of these chemicals were later under a settlement reached with administrative hearings.

a. Does this mean that the taxpayer is considered to have used the credit in January 2002 instead of April 2000?

a. In processing a taxpayer's Offer in Compromise, will the Illinois Department of Revenue consider using similar guidelines?