Section 100.9730 Investment Partnerships (IITA Section 1501(a)(11.5))

TITLE 86: REVENUE

CHAPTER I: DEPARTMENT OF REVENUE

PART 100 INCOME TAX

SECTION 100.9730 INVESTMENT PARTNERSHIPS (IITA SECTION 1501(A)(11.5))

Section 100.9730  Investment Partnerships (IITA Section

1501(a)(11.5))

a)         For

taxable years ending on or after December 31, 2004, an "investment

partnership" is exempt from Illinois income taxation.  (IITA Section

205(b))

For tax years ending before December 31, 2023,

the term

"investment partnership" means

any entity that is treated as a

partnership for federal income tax purposes and that meets each of the

following requirements:

1)

No

less than 90% of the partnership's cost of its total assets consists of

qualifying investment securities, deposits at banks or other financial

institutions, and office space and equipment reasonably necessary to carry on

its activities as an investment partnership.

(IITA Section

1501(a)(11.5)(A)(i))  The "asset test" under this subsection (a)(1)

is applied for each taxable year by computing the percentage of the

partnership's cost of its total assets that consists of qualifying investment

securities, deposits at banks or financial institutions, and office space and

equipment as of the beginning of the taxable year and as of the end of each month

of the taxable year, and then computing the average of those percentages; and

2)

No

less than 90% of its gross income consists of interest, dividends, and gains

from the sale or exchange of qualifying investment securities.

(IITA

Section 1501(a)(11.5)(A)(ii))  The "gross income test" under this subsection

e and

equipment as of the beginning of the taxable year and as of the end of each month

of the taxable year, and then computing the average of those percentages; and

2)

No

less than 90% of its gross income consists of interest, dividends, and gains

from the sale or exchange of qualifying investment securities.

(IITA

Section 1501(a)(11.5)(A)(ii))  The "gross income test" under this subsection

(a)(2) is computed separately for each taxable year on the basis of gross

income for the entire taxable year, determined using the method of accounting

used for federal income tax purposes for the taxable year; and

3)

The

partnership is not a dealer in qualifying investment securities.

(IITA

Section 1501(a)(11.5)(A)(iii))

A)        A

partnership is a dealer in qualifying investment securities if it regularly

purchases qualifying investment securities from or sells qualifying investment securities

to customers in the ordinary course of a trade or business or regularly offers

to enter into, assume, offset, assign or otherwise terminate positions in

qualifying investment securities with customers in the ordinary course of a

trade or business.  (IRC Section 475(c)(1))

B)        A

partnership that, at any time during a taxable year, holds or derives gross

income from any qualifying investment security in which it is a dealer shall

not qualify as an investment partnership for that taxable year.

b)

For tax years ending on or after December 31, 2023

,

the term "investment partnership" means

any entity that is

treated as a partnership for federal income tax purposes and that meets each of

the following requirements:

1)

No

less than 90% of the partnership's cost of its total assets consists of

qualifying investment securities, deposits at banks or other financial

institutions, and office space and equipment reasonably necessary to carry on

its activities as an investment partnership

entity that is

treated as a partnership for federal income tax purposes and that meets each of

the following requirements:

1)

No

less than 90% of the partnership's cost of its total assets consists of

qualifying investment securities, deposits at banks or other financial

institutions, and office space and equipment reasonably necessary to carry on

its activities as an investment partnership.

(IITA Section 1501(a)(11.5)(A-5)(i))

The "asset test" under this subsection (b)(1) is applied for each

taxable year by computing the percentage of the partnership's cost of its total

assets that consists of qualifying investment securities, deposits at banks or

financial institutions, and office space and equipment as of the beginning of

the taxable year and as of the end of each month of the taxable year, and then

computing the average of those percentages; and

2)

No

less than 90% of its gross income consists of interest, dividends, gains from

the sale or exchange of qualifying investment securities, and the distributive

share of partnership income from lower-tier partnership interests meeting the

definition of qualifying investment security under

subsection (c)(13).

For purposes of this

subsection (b)(2),

"gross

income" does not include income from partnerships that are operating at a

federal taxable loss.

(IITA Section 1501(a)(11.5)(A-5)(ii))

The

"gross income test" under this subsection (b)(2) is computed

separately for each taxable year on the basis of gross income for the entire

taxable year, determined using the method of accounting used for federal income

tax purposes for the taxable year.

c)         "Qualifying

investment securities" means and includes only:

1)

Common

stock, including preferred or debt securities convertible into common stock,

and preferred stock.

(IITA Section 1501(a)(11.5)(B)(i))  "Stock"

means shares in an association, joint stock company, or insurance company

termined using the method of accounting used for federal income

tax purposes for the taxable year.

c)         "Qualifying

investment securities" means and includes only:

1)

Common

stock, including preferred or debt securities convertible into common stock,

and preferred stock.

(IITA Section 1501(a)(11.5)(B)(i))  "Stock"

means shares in an association, joint stock company, or insurance company.

(IRC Section 7701(a)(7))  "Stock" includes any interest in a publicly

traded partnership that is treated as a corporation under IRC Section 7704.

2)

Bonds,

debentures, and other debt securities.

(IITA Section

1501(a)(11.5)(B)(ii))  "Debt security" means any note, bond,

debenture or other evidence of indebtedness, or any evidence of an interest in

or right to subscribe to or purchase any of the foregoing.  (See 26 CFR

1.864-2(c)(2)(i) (2007).)

3)

Foreign

and domestic currency deposits secured by federal, state, or local governmental

agencies.

(IITA Section 1501(a)(11.5)(B)(iii)) "Currency deposits

secured by federal, state or local government agencies" means any balance

in a demand or time deposit at a bank, savings and loan, or similar financial

institution and that is insured by the Federal Deposit Insurance Corporation or

by a similar deposit insurance agency of a state or local government, including

any balance in an otherwise insured account that is in excess of any insurance

limit.  Deposits secured by a foreign government agency, but not by an agency

of the federal or of a state or local government, do not qualify.

4)

Mortgage

or asset-backed securities secured by federal, state, or local governmental

agencies.

(IITA Section 1501(a)(11.5)(B)(iv)) Examples of mortgage-backed

securities secured by a federal agency include securities issued or backed by

the Federal Home Loan Mortgage Corporation, the Federal National Mortgage

Association and the Government National Mortgage Association.  Similar

securities issued by a similar agency of a state or local government also

qualify

al governmental

agencies.

(IITA Section 1501(a)(11.5)(B)(iv)) Examples of mortgage-backed

securities secured by a federal agency include securities issued or backed by

the Federal Home Loan Mortgage Corporation, the Federal National Mortgage

Association and the Government National Mortgage Association.  Similar

securities issued by a similar agency of a state or local government also

qualify.  Mortgage or asset-backed securities secured by a foreign government

do not qualify under this subsection (c)(4).

5)

Repurchase

agreements and loan participations.

(IITA Section 1501(a)(11.5)(B)(v))

A)        A

repurchase agreement is a secured loan in which the loan agreement takes the

form of a purchase by the lender of the collateral with the borrower agreeing

to repurchase the collateral at a future date.  See Nebraska Dept. of Revenue

v. Loewenstein, 513 U.S. 123 (1994).  A repurchase agreement is a qualified

investment security only if the item that is sold subject to repurchase is a

qualified investment security.

B)        A loan

participation is an undivided fractional interest in a loan that is acquired by

the participant by means of a sale of such undivided fractional interest by the

lead lender to the participant, in contrast to a loan syndication, which is a

loan made by an agent on behalf of a group of lenders or syndicate in which the

member of the lender group or syndicate is a lender in the original loan.

Generally, the borrower's obligations in a loan participation run only to the

lead lender and not to the participant, and the participant's interest is

generally limited to an undivided fractional interest in payments of principal

or interest under the loan agreement between the lead lender and the borrower.

6)

Foreign

currency exchange contracts and forward and futures contracts on foreign

currencies.

(IITA Section 1501(a)(11.5)(B)(vi))

7)

Stock

and bond index securities and futures contracts and other similar financial

securities and futures contracts on those securities

d fractional interest in payments of principal

or interest under the loan agreement between the lead lender and the borrower.

6)

Foreign

currency exchange contracts and forward and futures contracts on foreign

currencies.

(IITA Section 1501(a)(11.5)(B)(vi))

7)

Stock

and bond index securities and futures contracts and other similar financial

securities and futures contracts on those securities.

(IITA Section

1501(a)(11.5)(B)(vii))

8)

Options

for the purchase or sale of any of the securities, currencies, contracts, or

financial instruments described in

subsections (c)(1) through (7)

.

(IITA

Section 1501(a)(11.5)(B)(viii))

9)

Regulated

futures contracts.

(IITA Section 1501(a)(11.5)(B)(ix))  A regulated

futures contract is a contract bought, sold or traded on a regulated exchange,

such as the Chicago Board of Trade.

10)

Commodities

(not described in section 1221(a)(1) of the Internal Revenue Code) or futures,

forwards, and options with respect to such commodities, provided, however, that

any item of a physical commodity to which title is actually acquired in the

partnership's capacity as a dealer in such commodity shall not be a qualifying

investment security.

(IITA Section 1501(a)(11.5)(B)(x))  IRC Section

1221(a)(1) provides that stock in trade of the taxpayer or other property of a

kind that would properly be included in the inventory of the taxpayer if on

hand at the close of the taxable year, or property held by the taxpayer

primarily for sale to customers in the ordinary course of the taxpayer's trade

or business are not capital assets.

11)

Derivatives

ion 1501(a)(11.5)(B)(x))  IRC Section

1221(a)(1) provides that stock in trade of the taxpayer or other property of a

kind that would properly be included in the inventory of the taxpayer if on

hand at the close of the taxable year, or property held by the taxpayer

primarily for sale to customers in the ordinary course of the taxpayer's trade

or business are not capital assets.

11)

Derivatives.

(IITA Section 1501(a)(11.5)(B)(xi))  A derivative is:

A)        An

interest rate, currency (of a kind customarily dealt in on an organized

commodity exchange), equity, commodity or notional principal contract; or

B)        An

evidence of an interest, or a derivative financial instrument (including any

option, forward contract, short position and any similar financial instrument),

in any:

i)          Commodity;

ii)         Currency

of a kind customarily dealt in on an organized commodity exchange;

iii)        Share

of stock under subsection (c)(1);

iv)        Partnership

or beneficial ownership interest in a widely held or publicly traded

partnership or trust;

v)         Note,

bond, debenture or other evidence of indebtedness; or

vi)        Notional

principal contract.

12)

A

partnership interest in another partnership that is an investment partnership.

(IITA Section 1501(a)(11.5)(B)(xii))

13)

For

tax years ending on or after December 31, 2023, a partnership interest that, in

the hands of the partnership, qualifies as a security within the meaning of

15 U.S.C. 77b(a)(1)

.

(IITA Section

1501(a)(11.5)(B)(xiii))

d)         Items that are not

"qualified investment securities" include:

1)         Loans,

other than loan participations and repurchase agreements that are characterized

as loans.

2)         Bank

deposits that are not insured by the federal government or by one of the

states.

3)         Securities,

for tax years ending on or after December 31, 2023, subject to the dealer

accounting rules in IRC Section 475 (26 U.S.C. 475).

e)         Cost

of Assets

es" include:

1)         Loans,

other than loan participations and repurchase agreements that are characterized

as loans.

2)         Bank

deposits that are not insured by the federal government or by one of the

states.

3)         Securities,

for tax years ending on or after December 31, 2023, subject to the dealer

accounting rules in IRC Section 475 (26 U.S.C. 475).

e)         Cost

of Assets.  For purposes of applying the "cost of assets" test in

IITA Sections 1501(a)(11.5)(A)(i) and 1501(a)(11.5)(A-5)(i), the cost of an

asset shall be determined for federal income tax purposes without regard to

depreciation or amortization of the asset, except that the cost of an asset

shall include any accrued interest or discount, and shall be reduced by any

premium amortization, that has been recognized in the computation of federal

taxable income of the partnership and that is included on the partnership's

balance sheet as of the date the cost of assets is determined.

f)         Gross

Income.  For purposes of applying the "gross income" test in IITA Sections

1501(a)(11.5)(A)(ii) and 1501(a)(11.5)(A-5)(ii):

1)         "Gross

income" means income minus costs of sales or basis in an asset sold or

traded, but without reduction for any other expenses or deductions.  For

purposes of this Section, gross income does not include any item of income that

is excluded from base income of the partnership, either because it is excluded

from federal taxable income of the partnership or because it is subtracted from

taxable income in computing base income, and gross income does not include

income that results from transactions outside the ordinary course of a

partnership's regular activities.  For example, amounts received from the sale

of an entity's office equipment shall be disregarded, whether or not the gain

is characterized as business income. For tax years ending on or after December

31, 2023, "gross income" does not include income from partnerships

that are operating at a federal taxable loss

m transactions outside the ordinary course of a

partnership's regular activities.  For example, amounts received from the sale

of an entity's office equipment shall be disregarded, whether or not the gain

is characterized as business income. For tax years ending on or after December

31, 2023, "gross income" does not include income from partnerships

that are operating at a federal taxable loss.

2)         "Interest"

means "compensation for the use or forbearance of money".  See Deputy

v. du Pont, 308 U.S. 488, 498 (1940).  Interest includes the amortization of

any discount at which an obligation is purchased and is net of the amortization

of any premium at which an obligation is purchased.  Any amount in excess of

the purchase price received in payment of an obligation purchased at an

arm's-length discount shall be rebuttably presumed to be interest.  Interest

includes any amount received upon the sale, exchange or other disposition of an

obligation to the extent that such amount represents the accrual of interest on

the unpaid balance of the obligation since the most recent payment made on that

obligation.

3)         "Dividend"

means any item defined as a dividend under IRC Section 316 and any other item

of income characterized or treated as a dividend under the Internal Revenue

Code.

4)         "Gain

from sale or exchange" of qualifying investment securities is the sum of

all gains realized on the sale or exchange of qualifying investment securities,

without reduction or offset for losses realized on such sales or exchanges.

5)         For

purposes of the gross income test, gross income derived from investment in a

partnership, subchapter S corporation, trust or estate shall be characterized

as if the taxpayer received the income directly and, in the case of any item of

income reported to the taxpayer by the partnership, subchapter S corporation,

trust or estate for federal income tax purposes as net of related expenses,

include only such net amount

income test, gross income derived from investment in a

partnership, subchapter S corporation, trust or estate shall be characterized

as if the taxpayer received the income directly and, in the case of any item of

income reported to the taxpayer by the partnership, subchapter S corporation,

trust or estate for federal income tax purposes as net of related expenses,

include only such net amount.  The provisions of this subsection (f)(5) only

apply to tax years ending before December 31, 2023.