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Sosa Strikes Out and Illinois Residents Lose the Game (for Now.)

The goal of state income tax systems is to make sure all income is subject to tax once. For individual taxpayers, this is usually accomplished through a system of credits. Individuals pay tax on all of their income to their state of residence and receive a credit for tax paid to other states. Or at least that’s the way it is supposed to work . . .

Sammy Sosa, a former Chicago Cub many of us are familiar with, was a resident of Illinois in 1999. As an Illinois resident, Sosa paid tax on all of his income, even income earned in other states. He also paid state income tax to other states from games against the dreaded New York Mets, St. Louis Cardinals, and other professional ball clubs. Because some of his income was taxed in Illinois and in another state, on his 1999 Illinois income tax return, he claimed a credit for the state income taxes paid to these other states. This credit is allowed to prevent the same income from being taxed twice.

Unfortunately, the Illinois Department of Revenue (IDOR) took issue with this credit. IDOR claimed that as an Illinois resident working for an Illinois employer, all of the wages Sammy earned were Illinois wages. Therefore, New York, Missouri, and other states had no right to tax that income and Illinois was not required to provide relief in the form of the credit. Effectively, Illinois implied that Sosa voluntarily paid tax to the other states and was subject to tax twice on the same income.

The Circuit Court of Cook County agreed with IDOR! Can you believe it? Since that case was settled in 2002, IDOR has said that an Illinois resident working for an Illinois-based employer is not entitled to a credit for tax paid to another state. During 2009, the Illinois legislature statutorily changed the law to reflect the policy. What's more, Illinois has changed the form used to claim the credit, Schedule CR, to more easily identify taxpayers to whom this law would apply.

What does this mean for Joe Taxpayer? If you are an Illinois resident working for an Illinois employer and receive wages from more than one state, IDOR thinks you should pay tax twice on the same income. Typically, this would apply to consultants, speakers, and others who receive Form W-2’s showing withholding in more than one state.

Attorneys are already discussing anticipated litigation and we fully expect this law to be challenged in the courts. Because of the uncertainty involved, your Blackman Kallick advisor will be discussing options with you when preparing your return, but if you have questions before then, please contact Jason Parish at jparish@BlackmanKallick.com or 312-980-2959, or your Blackman Kallick representative.  Our thanks to Deb Rood for her contribution to this article. 

This publication is part of Blackman Kallick’s marketing of professional services, and is not written tax advice directed at the specific facts and circumstances of any person and/or entity. Contents of this publication are of a general nature, and you should not act on this information without obtaining professional advice from your business advisor that is appropriately tailored to your individual needs and circumstances. This written advice is not intended or written to be used, and cannot be used by any taxpayer, for the purpose of avoiding penalties that may be imposed under the Internal Revenue Code.