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Illinois Adopts Tax Relief for Investment Partnerships

Date

August 1, 2004

Read Time

3 minutes

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On July 30, 2004, Illinois adopted P.A. 093-0840 which exempts “Investment Partnerships” from the Illinois Personal Property Tax Replacement Income Tax and affords favorable treatment to such partnership’s non-resident investors. The new provisions apply for the tax years ending on or after December 31, 2004.

An Investment Partnership is an entity other than a dealer in securities that is treated as a partnership for federal income tax purposes and that meets both an asset test and an income test. The asset test requires that at least 90% of the partnership’s cost of its total assets must consist of qualifying investment securities, deposits at banks or other financial institutions, and office space and equipment that is reasonably necessary to carry on its activities as an investment partnership. The income test requires that at least 90% of the partnership’s gross income must consist of interest, dividends, and gains from the sale or exchange of qualifying investment securities.

Qualifying investment securities include the following:

  • Common stock, including preferred or debt securities convertible into common stock, and preferred stock
  • Bonds, debentures, and other debt securities
  • Foreign and domestic currency deposits secured by federal, state, or local governmental agencies
  • Mortgage or asset-backed securities secured by federal, state, or local governmental agencies
  • Repurchase agreements and loan participations
  • Foreign currency exchange contracts and forward and futures contracts on foreign currencies
  • Stock and bond index securities and futures contracts and other similar financial securities and futures contracts on those securities
  • Options for the purchase or sale of any of the securities, currencies, contracts, or financial instruments described above
  • Regulated futures contracts
  • 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 the title is actually acquired in the partnership’s capacity as a dealer in such commodity shall not be a qualifying investment security
  • Derivatives
  • A partnership interest in another partnership that is an investment partnership

The new law also provides favorable treatment for non-resident partners of Investment Partnerships.

In general, a non-resident partner’s distributive share of the income of an Investment Partnership is treated as non-business income apportioned to a non-resident individual’s or trust’s state of residence and any other entity’s commercial domicile, unless the non-resident partner elects to treat all of its income as business income. However, a non-resident partner who has not elected to treat all income as business income must treat its distributive share of

Investment Partnership income as business income apportioned to Illinois if the income is from investment activity:

  1. That is directly or integrally related to any other business activity conducted in Illinois by the non-resident partner or any member of its unitary business group
  2. That serves an operational function to any other business activity of the non-resident partner or any member of its unitary business group in Illinois, or
  3. Where assets of the Investment Partnership were acquired with working capital from a trade or business activity conducted in Illinois in which the non-resident partner or any member of its unitary business group owns an interest.

For additional information on the new provisions, please contact Darryl
Jacobs by phone at (312) 476-7527 or email at

djacobs@lplegal.com

© COPYRIGHT 2004. ALL RIGHTS RESERVED.


Filed under: Corporate, Tax Planning

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