SB 1995 — INC TX-BASE INCOME MODIFY

*LRB09517955BDD44037b* SB1995 95THEngrossed GENERALLRB095 ASSEMBLY17955 StateBDD of44037 Illinoisb andAN 2008ACT SB1995concerning Introducedrevenue. 2/7/2008, by Sen.

Michael Bond SYNOPSIS AS INTRODUCED:

ILCS 5/203 from Ch.

120, par.

2-203 Amends the Illinois Income Tax Act.

Requires an addition modification nonqualified withdrawal from a tuition savings program that was previously deducted from base income.

Effective immediately.

LRB095 17955 BDD 44037 b FISCAL NOTE ACT MAY APPLY A BILL FOR SB1995 LRB095 17955 BDD 44037 b AN ACT concerning revenue.

(B) An amount equal to the amount of tax imposed by SB1995 Engrossed - 2 - LRB095 17955 BDD 44037 b this Act to the extent deducted from gross income in the computation of adjusted gross income for the taxable year;

(D-5) An amount, to the extent not included in adjusted gross income, equal to the amount of money withdrawn by the taxpayer in the taxable year from a medical care savings account and the interest earned on the account in the taxable year of a withdrawal pursuant to subsection (b) of Section 20 of the Medical Care Savings Account Act or subsection (b) of Section SB1995 Engrossed - 3 - LRB095 17955 BDD 44037 b 20 of the Medical Care Savings Account Act of 2000;

The taxpayer is required to make the addition SB1995 Engrossed - 4 - LRB095 17955 BDD 44037 b modification under this subparagraph only once with respect to any one piece of property;

The addition modification required by this subparagraph shall be reduced to the extent that dividends were included in base income of the unitary group for the same taxable year and received by the taxpayer or by a member of the taxpayer’s unitary business group (including amounts included in gross income under Sections 951 through 964 of the Internal Revenue Code and amounts included in gross income under Section 78 of the Internal Revenue SB1995 Engrossed - 5 - LRB095 17955 BDD 44037 b Code) with respect to the stock of the same person to whom the interest was paid, accrued, or incurred.

or (iii) the taxpayer can establish, based on clear and convincing evidence, that the interest SB1995 Engrossed - 6 - LRB095 17955 BDD 44037 b paid, accrued, or incurred relates to a contract or agreement entered into at arm’s-length rates and terms and the principal purpose for the payment is not federal or Illinois tax avoidance;

(D-18) An amount equal to the amount of intangible expenses and costs otherwise allowed as a deduction in computing base income, and that were paid, accrued, or incurred, directly or indirectly, (i) for taxable years ending on or after December 31, 2004, to a foreign person who would be a member of the same SB1995 Engrossed - 7 - LRB095 17955 BDD 44037 b unitary business group but for the fact that the foreign person’s business activity outside the United States is 80% or more of that person’s total business activity and (ii) for taxable years ending on or after December 31, 2008, to a person who would be a member of the same unitary business group but for the fact that the person is prohibited under Section 1501(a)(27) from being included in the unitary business group because he or she is ordinarily required to apportion business income under different subsections of Section 304.

As used in this subparagraph, the term "intangible expenses and costs" SB1995 Engrossed - 8 - LRB095 17955 BDD 44037 b includes (1) expenses, losses, and costs for, or related to, the direct or indirect acquisition, use, maintenance or management, ownership, sale, exchange, or any other disposition of intangible property;

SB1995 Engrossed - 9 - LRB095 17955 BDD 44037 b (a) the person during the same taxable year paid, accrued, or incurred, the intangible expense or cost to a person that is not a related member, and (b) the transaction giving rise to the intangible expense or cost between the taxpayer and the person did not have as a principal purpose the avoidance of Illinois income tax, and is paid pursuant to a contract or agreement that reflects arm’s-length terms;

Nothing in this subsection shall preclude the Director from making any other adjustment otherwise allowed under Section 404 of this Act for any tax year beginning after the effective date of this amendment provided such adjustment is made pursuant to regulation adopted by the Department and such regulations provide methods and standards SB1995 Engrossed - 10 - LRB095 17955 BDD 44037 b by which the Department will utilize its authority under Section 404 of this Act;

The preceding sentence does not apply to the extent that the same dividends caused a reduction to the addition SB1995 Engrossed - 11 - LRB095 17955 BDD 44037 b modification required under Section 203(a)(2)(D-17) or Section 203(a)(2)(D-18) of this Act.

For taxable years beginning on or after January 1, 2007, in the case of a distribution from a qualified tuition program under Section 529 of the Internal Revenue Code, other than (i) a distribution from a College Savings Pool created under Section 16.5 of the State Treasurer Act, (ii) a distribution from the Illinois Prepaid Tuition Trust Fund, or (iii) a distribution from a qualified tuition program under Section 529 of the Internal Revenue Code that (I) adopts and determines that its offering materials comply with the College Savings Plans Network’s disclosure principles and (II) has made reasonable efforts to inform in-state residents of the existence of in-state qualified tuition programs by informing Illinois residents directly and, where applicable, to SB1995 Engrossed - 12 - LRB095 17955 BDD 44037 b inform financial intermediaries distributing the program to inform in-state residents of the existence of in-state qualified tuition programs at least annually, an amount equal to the amount excluded from gross income under Section 529(c)(3)(B).

(D-22) For taxable years beginning on or after January 1, 2008, in the case of a nonqualified SB1995 Engrossed - 13 - LRB095 17955 BDD 44037 b withdrawal of moneys from a qualified tuition program under Section 529 of the Internal Revenue Code administered by the State that is not used for qualified expenses at an eligible education institution, an amount equal to the contribution component of the nonqualified withdrawal that was previously deducted from base income under subsection (a)(2)(y) of this Section;

For taxable years ending on or after SB1995 Engrossed - 14 - LRB095 17955 BDD 44037 b December 31, 2001, any amount included in such total in respect of any compensation (including but not limited to any compensation paid or accrued to a serviceman while a prisoner of war or missing in action) paid to a resident by reason of being a member of any component of the Armed Forces of the United States and in respect of any compensation paid or accrued to a resident who as a governmental employee was a prisoner of war or missing in action, and in respect of any compensation paid to a resident in 2001 or thereafter by reason of being a member of the Illinois National Guard or, beginning with taxable years ending on or after December 31, 2007, the National Guard of any other state.

(F) An amount equal to all amounts included in such total pursuant to the provisions of Sections 402(a), 402(c), 403(a), 403(b), 406(a), 407(a), and 408 of the Internal Revenue Code, or included in such total as distributions under the provisions of any retirement or disability plan for employees of any governmental agency or unit, or retirement payments to retired partners, which payments are excluded in computing net earnings from self employment by Section 1402 of the Internal Revenue Code and regulations adopted pursuant SB1995 Engrossed - 15 - LRB095 17955 BDD 44037 b thereto;

provided that dividends eligible for the deduction provided in SB1995 Engrossed - 16 - LRB095 17955 BDD 44037 b subparagraph (J) of paragraph (2) of this subsection shall not be eligible for the deduction provided under this subparagraph (K);

provided that, in the case of any SB1995 Engrossed - 17 - LRB095 17955 BDD 44037 b statute of this State that exempts income derived from bonds or other obligations from the tax imposed under this Act, the amount exempted shall be the interest net of bond premium amortization;

(S) An amount, to the extent included in adjusted gross income, equal to the amount of a contribution made in the taxable year on behalf of the taxpayer to a medical care savings account established under the Medical Care Savings Account Act or the Medical Care Savings Account Act of 2000 to the extent the contribution is accepted by the account administrator SB1995 Engrossed - 18 - LRB095 17955 BDD 44037 b as provided in that Act;

(V) Beginning with tax years ending on or after December 31, 1995 and ending with tax years ending on or before December 31, 2004, an amount equal to the amount paid by a taxpayer who is a self-employed taxpayer, a partner of a partnership, or a shareholder in a Subchapter S corporation for health insurance or long-term care insurance for that taxpayer or that taxpayer’s spouse or dependents, to the extent that the amount paid for that health insurance or long-term care insurance may be deducted under Section 213 of the Internal Revenue Code of 1986, has not been deducted on the federal income tax return of the taxpayer, and does SB1995 Engrossed - 19 - LRB095 17955 BDD 44037 b not exceed the taxable income attributable to that taxpayer’s income, self-employment income, or Subchapter S corporation income;

(X) For taxable year 1999 and thereafter, an amount equal to the amount of any (i) distributions, to the extent includible in gross income for federal income tax purposes, made to the taxpayer because of his or her status as a victim of persecution for racial or religious reasons by Nazi Germany or any other Axis SB1995 Engrossed - 20 - LRB095 17955 BDD 44037 b regime or as an heir of the victim and (ii) items of income, to the extent includible in gross income for federal income tax purposes, attributable to, derived from or in any way related to assets stolen from, hidden from, or otherwise lost to a victim of persecution for racial or religious reasons by Nazi Germany or any other Axis regime immediately prior to, during, and immediately after World War II, including, but not limited to, interest on the proceeds receivable as insurance under policies issued to a victim of persecution for racial or religious reasons by Nazi Germany or any other Axis regime by European insurance companies immediately prior to and during World War II;

This paragraph is exempt from the provisions SB1995 Engrossed - 21 - LRB095 17955 BDD 44037 b of Section 250;

(1) "y" equals the amount of the depreciation SB1995 Engrossed - 22 - LRB095 17955 BDD 44037 b deduction taken for the taxable year on the taxpayer’s federal income tax return on property for which the bonus depreciation deduction was taken in any year under subsection (k) of Section 168 of the Internal Revenue Code, but not including the bonus depreciation deduction;

The aggregate amount deducted under this subparagraph in all taxable years for any one piece of property may not exceed the amount of the bonus depreciation deduction taken on that property on the taxpayer’s federal income tax return under subsection SB1995 Engrossed - 23 - LRB095 17955 BDD 44037 b (k) of Section 168 of the Internal Revenue Code.

(CC) The amount of (i) any interest income (net of the deductions allocable thereto) taken into account for the taxable year with respect to a transaction with SB1995 Engrossed - 24 - LRB095 17955 BDD 44037 b a taxpayer that is required to make an addition modification with respect to such transaction under Section 203(a)(2)(D-17), 203(b)(2)(E-12), 203(c)(2)(G-12), or 203(d)(2)(D-7), but not to exceed the amount of that addition modification, and (ii) any income from intangible property (net of the deductions allocable thereto) taken into account for the taxable year with respect to a transaction with a taxpayer that is required to make an addition modification with respect to such transaction under Section 203(a)(2)(D-18), 203(b)(2)(E-13), 203(c)(2)(G-13), or 203(d)(2)(D-8), but not to exceed the amount of that addition modification.

(DD) An amount equal to the interest income taken into account for the taxable year (net of the deductions allocable thereto) with respect to transactions with (i) a foreign person who would be a member of the taxpayer’s unitary business group but for the fact that the foreign person’s business activity outside the United States is 80% or more of that person’s total business activity and (ii) for taxable years ending on or after December 31, 2008, to a person who would be a member of the same unitary business group but for the fact that the person is prohibited under Section 1501(a)(27) from being included in the SB1995 Engrossed - 25 - LRB095 17955 BDD 44037 b unitary business group because he or she is ordinarily required to apportion business income under different subsections of Section 304, but not to exceed the addition modification required to be made for the same taxable year under Section 203(a)(2)(D-17) for interest paid, accrued, or incurred, directly or indirectly, to the same person.

and (EE) An amount equal to the income from intangible property taken into account for the taxable year (net of the deductions allocable thereto) with respect to transactions with (i) a foreign person who would be a member of the taxpayer’s unitary business group but for the fact that the foreign person’s business activity outside the United States is 80% or more of that person’s total business activity and (ii) for taxable years ending on or after December 31, 2008, to a person who would be a member of the same unitary business group but for the fact that the person is prohibited under Section 1501(a)(27) from being included in the unitary business group because he or she is ordinarily required to apportion business income under different subsections of Section 304, but not to exceed the addition modification required to be made for the same taxable year under Section 203(a)(2)(D-18) for intangible expenses and costs paid, accrued, or SB1995 Engrossed - 26 - LRB095 17955 BDD 44037 b incurred, directly or indirectly, to the same foreign person.

(C) In the case of a regulated investment company, an amount equal to the excess of (i) the net long-term capital gain for the taxable year, over (ii) the amount of the capital gain dividends designated as such in accordance with Section 852(b)(3)(C) of the Internal Revenue Code and any amount designated under Section 852(b)(3)(D) of the Internal Revenue Code, SB1995 Engrossed - 27 - LRB095 17955 BDD 44037 b attributable to the taxable year (this amendatory Act of 1995 (Public Act 89-89) is declarative of existing law and is not a new enactment);

(i) the addition modification relating to the net operating loss carried back or forward to the taxable year from any taxable year ending prior to December 31, 1986 shall be reduced by the amount of addition modification under this subparagraph (E) which related to that net operating loss and which was taken into account in calculating the base income of an earlier taxable year, and (ii) the addition modification relating to the SB1995 Engrossed - 28 - LRB095 17955 BDD 44037 b net operating loss carried back or forward to the taxable year from any taxable year ending prior to December 31, 1986 shall not exceed the amount of such carryback or carryforward;

(E-11) If the taxpayer sells, transfers, abandons, or otherwise disposes of property for which the taxpayer was required in any taxable year to make an addition modification under subparagraph (E-10), then an amount equal to the aggregate amount of the SB1995 Engrossed - 29 - LRB095 17955 BDD 44037 b deductions taken in all taxable years under subparagraph (T) with respect to that property.

(E-12) An amount equal to the amount otherwise allowed as a deduction in computing base income for interest paid, accrued, or incurred, directly or indirectly, (i) for taxable years ending on or after December 31, 2004, to a foreign person who would be a member of the same unitary business group but for the fact the foreign person’s business activity outside the United States is 80% or more of the foreign person’s total business activity and (ii) for taxable years ending on or after December 31, 2008, to a person who would be a member of the same unitary business group but for the fact that the person is prohibited under Section 1501(a)(27) from being included in the unitary business group because he or she is ordinarily SB1995 Engrossed - 30 - LRB095 17955 BDD 44037 b required to apportion business income under different subsections of Section 304.

(a) the person, during the same taxable SB1995 Engrossed - 31 - LRB095 17955 BDD 44037 b year, paid, accrued, or incurred, the interest to a person that is not a related member, and (b) the transaction giving rise to the interest expense between the taxpayer and the person did not have as a principal purpose the avoidance of Illinois income tax, and is paid pursuant to a contract or agreement that reflects an arm’s-length interest rate and terms;

Nothing in this subsection shall preclude the Director from making any other adjustment otherwise allowed under Section 404 of this Act for any tax year beginning after the effective date of SB1995 Engrossed - 32 - LRB095 17955 BDD 44037 b this amendment provided such adjustment is made pursuant to regulation adopted by the Department and such regulations provide methods and standards by which the Department will utilize its authority under Section 404 of this Act;

The addition modification required by this subparagraph shall be reduced to the extent that dividends were included in base income of the unitary group for the same taxable year and received by the taxpayer or by a member of the taxpayer’s unitary SB1995 Engrossed - 33 - LRB095 17955 BDD 44037 b business group (including amounts included in gross income pursuant to Sections 951 through 964 of the Internal Revenue Code and amounts included in gross income under Section 78 of the Internal Revenue Code) with respect to the stock of the same person to whom the intangible expenses and costs were directly or indirectly paid, incurred, or accrued.