§100.3350. Property Factor (IITA Section 304)

a)         In general.  The property factor of the apportionment formula for each trade or business of a person shall include all real and tangible personal property owned or rented by such person and used during the tax period  in the  regular  course  of such trade or business.  The term "real and tangible personal property" includes land, building, machinery, stocks of goods, equipment, and other real and tangible personal property but does not include coin or currency.  Property used in connection with the production of nonbusiness income shall be excluded from the property factor.  Property used both in the regular course of a person's trade or business and in the production of nonbusiness income shall be included in the  factor only to the extent the property is used in the regular course of the person's trade or business.  The method of determining that portion of the value to be included in the factor will depend on the facts of each case.  The property factor shall include the average value of property includable in the factor.  See subsection (g), below.

 

b)         Property used for the production of business income.  Property shall be included in the property factor if it is actually used or is available for or capable of being used during the tax period in the regular course of the trade or business of the person.  Property held as reserves or standby facilities or property held as a reserve source of materials shall be included in the factor.  For example, a plant temporarily idle or raw material reserves  not currently being processed are includable in the factor.  Property or equipment under construction during the tax period (except inventoriable goods  in process),  shall be excluded from the factor until  such property is actually used in the  regular course of the trade or business of the person.  If the property is partially used in  the regular course  of the trade or business of the person while under construction, the value of the property to the extent  used shall be included in the property factor.  Property used in the regular course of the trade or business of the person shall remain in the property factor until its permanent withdrawal is established by an identifiable event such as its conversion to the production of nonbusiness income, its sale, or the lapse of an extended period of time (normally five  years) during which the property is held for sale.

 

1)         Example 1:  Corporation A closed its manufacturing plant in State X and held such property for sale.  The property remained vacant until its sale one year later.  The value of the manufacturing plant is included in the property factor until the plant is sold.

 

2)         Example 2:  Same as above except that the property was rented until the plant was sold.  The plant is included in the property factor until the plant is sold.

 

3)         Example 3:  Corporation A operates a chain of retail grocery stores.  The corporation closed Store A, which was then remodeled into three small retail stores, such as a dress shop, dry cleaning, and barber shop, which were leased to unrelated parties.  The property is removed from the property factor on the date the remodeling of Store A commenced.

 

c)         Consistency in reporting.  In filing returns with this State, if a person departs from or modifies the manner of valuing property, or of excluding or including property in the property factor used in returns for prior years, the person shall disclose in the return for the current year the nature and extent of the modification.  If the returns or reports filed by the person with all states to which the person reports under Article IV of the Multistate Tax Compact or the Uniform Division of Income for Tax Purposes Act are not uniform in the valuation of property and in the exclusion or inclusion of property in the property factor, the person shall disclose in its return to this State the nature and extent of the variance.

 

d)         Numerator.  The numerator of the property factor shall include the average value of the real and tangible personal property owned or rented by the person and used in this State during the tax period in the regular course of the trade or business of the person.  Property in transit between locations of the person to which it belongs shall be considered to be at the destination for purposes of the property factor.  Property in transit between a buyer and seller which is included by a person in the denominator of its property factor in accordance with its regular accounting practices shall be included in the numerator according to the state of destination.  The value of mobile or movable property such as construction equipment, trucks or leased electronic equipment which are located within and without this State during the tax period, shall be determined for purposes of  the numerator of the factor on the basis of total time within the State during the tax period.  An automobile assigned to a traveling employee shall be included in the numerator of the factor of the state to which the employee's compensation is assigned under the payroll factor or in the numerator of the state in which the automobile is licensed.

 

e)         Valuation of owned property.  Property owned by the person shall be at its  original cost.  As a general rule  "original cost" is the basis of property for  federal  income  tax  purposes  at  the  time  of acquisition  and will  not reflect any federal adjustments thereafter for deductions for depreciation, depletion,  amortization and  the  like.

 

1)         In addition,  however, the  valuation will include the original  cost, at  acquisition, of  any capital improvement as  well as  partial dispositions  of  any portion by reason of sale, exchange, abandonment, etc.

 

2)         However, capitalized intangible drilling and development costs shall be included in the property factor whether or not they have been expensed for either federal or state tax purposes.  Intangible drilling and development costs include such elements as wages, fuel, repairs, hauling, draining, roadbuilding, surveying, geological works, construction of derricks, tanks, pipelines, and other physical structures necessary for the drilling of wells and their preparation for the production of oil and gas, and supplies incident to and necessary for the drilling of wells and clearing of ground.

 

3)         Example 1:  Corporation  W  acquired  a  factory building in  this State at a cost of $500,000 and 18  months  later  expended  $100,000  for  major remodeling of  the  building.  The  corporation files its  return for the current taxable year on the calendar-year  basis. Depreciation  deduction in the  amount of  $22,000  was  claimed  on  the building for  its return  for the current taxable year.  The value  of the  building includable in the numerator  and denominator  of  the  property factor is  $600,000 as the depreciation deduction is not  taken into  account  in  determining  the value of the building for purposes of the factor.

 

4)         Example 2:  During  the current  taxable year, X Corporation  merges into  Y  Corporation  in  a tax-free  reorganization under the Internal Revenue Code.  At  the time  of  the  merger,  X Corporation owns  a factory  which X  built  five years earlier  at a  cost of  $1,000,000. X has been depreciating  the factory at the rate of two percent per  year, and  its basis in X's hands at the time  of the  merger is  $900,000.  Since the property is  acquired by  Y in  a transaction  in which, under the Internal Revenue Code, its basis in Y's  hands is  the same as its basis in X's, Y includes the  property in  Y's property factor at X's  original cost,  without adjustment for depreciation, i.e., $1,000,000.

 

5)         Example 3:  Corporation Y acquires the assets of Corporation X  in a  liquidation by  which  Y  is entitled to  use its  stock cost  as the basis of the X  assets under  26 U.S.C.  Section 334(b)(2) (i.e. stock  possessing  80  percent  control  is purchased  and liquidated  within  two  years). Under these circumstances, Y's cost of the assets is the  purchase price  of the  X stock, prorated over the X assets.

 

A)        If original cost of property is unascertainable, the property is included in the factor  at its  fair market  value as of the date of acquisition by the person.

 

B)        Inventory  or stock  of goods  shall  be included in  the factor  in accordance  with the valuation method used for federal income tax purposes.

 

C)        Property acquired  by  gift  or  inheritance shall be included in the factor at its basis for  determining  depreciation  for  federal income tax purposes.

 

f)         Valuation of rented property.

 

1)         Property rented  by the person is valued at eight times the net annual rental rate.  The net annual rental rate  for any  item of  rented property is the annual  rental rate  paid by  the person  for such property, less the aggregate annual subrental rates paid by subtenants of the person. (See Section 100.3380(a)  for special rules where  the use  of such  net annual  rental rate produces  a negative  or clearly  inaccurate value or  where property is used by the person at no charge  or rented  at a  nominal rental rate.)  Subrents are  not  deducted  when  the  subrents constitute business  income because  the property which  produces  the  subrents  is  used  in  the regular course  of a  trade or  business  of  the person  when it  is producing  such income. Accordingly there is no reduction in its value.

 

A)        Example A:  Corporation A receives subrents from a  bakery concession  in a  food market operated by  it.  Since  the  subrents  are business income  they are  not deducted from the rent  paid by Corporation A for the food market.

 

B)        Example B:  Corporation  B rents  a 5-story office building  primarily for  use  in  its multistate business,  uses three  floors for its offices  and  subleases  two  floors  to various other businesses and persons such as professional people,  shops  and  the  like. The rental of the two floors is attendant to the operation  of the corporation's trade or business.  Since the  subrents are business income they  are not  deducted from the rent paid by the corporation.

 

C)        Example C:  Corporation  C rents a 20-story office  building  and  uses  the  lower  two stories for its general corporation headquarters.  The remaining  18 floors are subleased to  others.  The  rental  of  the eighteen floors  is  not  attendant  to  but rather is separate from the operation of the corporation's trade  or business.  Since the subrents are  nonbusiness income they are to be  deducted  from  the  rent  paid  by  the corporation.

 

2)         "Annual rental rate" is the amount paid as rental for property  for a  12-month period  (i.e.,  the amount of  the annual  rent).  Where property is rented for  less than a 12-month period, the rent paid  for  the  actual  period  of  rental  shall constitute the  "annual rental  rate" for the tax period.  However, where a corporation has rented property for  a term of 12 or more months and the current tax  period covers  a period of less than 12 months  (due, for example, to a reorganization or change  of accounting  period), the  rent paid for the short tax period shall be annualized.  If the rental  term is  for less than 12 months, the rent shall  not be  annualized beyond  its  term. Rent shall  not  be  annualized  because  of  the uncertain duration  when the  rental term is on a month to month basis.

 

A)        Example A:  Corporation  A which ordinarily files its  returns based  on a calendar year is merged  into Corporation  B on  April 30. The net rent paid under a lease with 5 years remaining is  $2,500 a  month.  The rent for the tax  period January  1 to  April  30  is $10,000.  After the  rent is annualized the net rent is $30,000 ($2,500 X 12).

 

B)        Example B:  Same  facts  as  in  Example  A except that  the lease would have terminated August 31.  In this case the annualized net rent is $20,000 ($2,500 X 8).

 

3)         "Annual rent" is the actual sum of money or other consideration payable, directly or indirectly, by the person  or for its benefit for the use of the property and includes:

 

A)        Any amount  payable for  the use  of real or tangible  personal  property,  or  any  part thereof, whether  designated as  a fixed sum of  money  or  as  a  percentage  of  sales, profits or otherwise.

 

Example:  A  corporation  pursuant  to  the terms of  a lease,  pays a lessor $1,000 per month as a base rental and at the end of the year pays  the lessor  one  percent  of  its gross sales of $400,000.  The annual rent is $16,000  ($12,000 plus  one percent of $400,000 or $4,000).

B)        Any amount  payable as additional rent or in lieu of  rents,  such  as  interest,  taxes, insurance, repairs  or any other items which are required  to be paid by the terms of the lease or  other arrangement,  not  including amounts paid  as service  charges,  such  as utilities, janitor  services,  etc.  If  a payment  includes  rent  and  other  charges unsegregated, the  amount of  rent shall  be determined by  consideration of the relative values of the rent and the other items.

 

i)          Example i:  A corporation, pursuant to the terms  of a  lease, pays the lessor $12,000 a  year rent  plus taxes in the amount of  $2,000  and  interest  on  a mortgage in  the amount of $1,000.  The annual rent is $15,000.

 

ii)         Example ii:  A corporation stores part of its inventory in a public warehouse. The  total  charge  for  the  year  was $1,000 of which $700 was for the use of storage space  and $300  for  inventory insurance, handling and shipping charges, and  C.O.D. collections.  The annual rent is $700.

 

C)        "Annual rent" includes royalties based on extraction of natural resources, whether represented by delivery or purchase.  For this purpose, a royalty includes any consideration conveyed or credited to a holder of an interest in property that constitutes a sharing of current or future production of natural resources from such property, irrespective of the method of payment or how such consideration may be characterized, whether as a royalty, advance royalty, rental or otherwise.  "Annual rent"  does not  include incidental day-to-day expenses  such as  hotel or motel accommodations, daily rental of automobiles, etc.

 

4)         Leasehold improvements shall, for the purposes of the property factor, be treated as property owned by the person regardless of whether the person is entitled  to remove  the  improvements  or  the improvements revert to the lessor upon expiration of the  lease.  Hence,  the  original  cost  of leasehold improvements  shall be  included in the factor.

 

g)         Averaging property values

 

1)         As a general rule the average value of property owned by the person shall be determined by averaging the values at the beginning and ending of the tax period.  However, the Director may require or allow averaging by monthly values if such method of averaging is required to properly reflect the average value of the person's property for the tax period.  Averaging by monthly values will generally be applied if substantial fluctuations in the values of the property exist during the tax period or where property is acquired after the beginning of the tax period or disposed of before the end of the tax period.

 

2)         Example:  The monthly value of the person's property was as follows:

 

January	$ 2,000	July	$ 15,000
February	2,000	August	17,000
March	3,000	September	23,000
April	3,500	October	25,000
May	4,500	November	13,000
June	10,000	December	2,000
		TOTAL	$120,000

 

A)        The average value of the person's property includable in the property factor for the taxable year is determined as follows: $120,000 divided by 12 = $10,000

 

B)        Averaging with respect to rented property is achieved  automatically by the method of determining the net annual rental rate of such property as set forth in subsection(e) above.

 

(Source:  Amended at 26 Ill. Reg. 13237, effective August 23, 2002)