An external auditor informed us in 2005 that if we hold out-of-state stock, we do not have to pay Illinois franchise taxes on these assets. This year, our external auditor told us that we must pay Illinois franchise taxes on these assets regardless of where they are located. Is that correct?

Because the Illinois franchise tax does not apply to banks, we assume that your inquiry relates to a bank’s holding company or corporate affiliate.

The Illinois corporate franchise tax applies to a corporation’s “paid-in capital,” defined as “the cash and other consideration received, less expenses, including commissions, paid or incurred by the corporation, in connection with the issuance of shares, plus any cash and other consideration contributed to the corporation by or on behalf of its shareholders, plus amounts added or transferred to paid-in capital by action of the board of directors or shareholders pursuant to a share dividend, share split, or otherwise . . . .” If a corporation’s paid-in capital includes shares of out-of-state stock, we believe that the Illinois franchise tax would apply to that capital.

Out-of-state stock also may affect a corporation’s apportionment factor, which is applied to a corporation’s paid-in capital to determine a corporation’s ultimate franchise tax liability. In calculating the apportionment factor, the numerator includes the corporation’s property located in Illinois (among other factors) and the denominator includes all of the corporation’s property, wherever located (among other factors). The Illinois Secretary of State has issued guidance on the allocation factor calculation stating that securities are “located in Illinois” if the certificates evidencing the securities are located in Illinois; however, if they are uncertificated, the securities are “located in Illinois if they are administered, managed, or controlled in Illinois.”

We cannot provide any specific guidance or advice on how specific securities should be characterized or your organization’s potential franchise tax liabilities, and we recommend consulting with bank counsel and experienced accountants on these questions.

For resources related to our guidance, please see:

Illinois Business Corporation Act of 1983, 805 ILCS 5/15.35 (“For the privilege of exercising its franchises in this State, each domestic corporation shall pay to the Secretary of State the following franchise taxes, computed on the basis, at the rates and for the periods prescribed in this Act: . . . (d) An annual franchise tax payable each year with the annual report which the corporation is required by this Act to file.”)

Illinois Business Corporation Act of 1983, 805 ILCS 5/14.05 (“Each domestic corporation organized under any general law or special act of this State authorizing the corporation to issue shares, other than homestead associations, building and loan associations, banks and insurance companies . . . shall file, within the time prescribed by this Act, an annual report . . . .”)

Illinois Business Corporation Act of 1983, 805 ILCS 5/15.40(d) (“(d) The basis for the annual franchise tax payable by a domestic corporation shall be the amount represented in this State, determined in accordance with the provisions of this Section, of its paid-in capital on the last day of the third month preceding the anniversary month or, in the case of a corporation that has established an extended filing month, on the last day of the corporation’s fiscal year preceding the extended filing month.”)

Illinois Business Corporation Act of 1983, 805 ILCS 5/1.80(j) (“‘Paid-in capital’ means the sum of the cash and other consideration received, less expenses, including commissions, paid or incurred by the corporation, in connection with the issuance of shares, plus any cash and other consideration contributed to the corporation by or on behalf of its shareholders, plus amounts added or transferred to paid-in capital by action of the board of directors or shareholders pursuant to a share dividend, share split, or otherwise, minus reductions as provided elsewhere in this Act. . . .”)

Illinois Form BCA 1.35, Allocation Factor Interrogatories (“3. Invested cash, U.S. Government obligations, tax-exempt securities, loans to stock holders, mortgage and real estate loans, and other investments are located in Illinois if the notes, securities or certificates evidencing such investments are located in Illinois. If there no notes, securities or certificates evidencing such investments, such investments are located in Illinois if they are administered, managed, or controlled in Illinois.”)

Illinois Business Corporation Act of 1983, 805 ILCS 5/15.40(e) (“(e) For the purpose of determining the amount represented in this State of the paid-in capital of a domestic corporation, the amount represented in this State shall be that proportion of its paid-in capital that the sum of (1) the value of its property located in this State and (2) the gross amount of business transacted by it at or from places of business in this State bears to the sum of (1) the value of all of its property, wherever located, and (2) the gross amount of its business, wherever transacted, except as follows: . . .”)