The Illinois Appellate Court, Fourth District, issued a ruling last month on the matter of Wendy’s International V. Brian A. Hamer. (Brian Hamer is the Director of the Illinois Department of Revenue.) The case concerned the tax status of a captive insurance company owned by Wendy’s, specifically the issue of whether that captive should be treated as a bona fide insurance company for Illinois tax purposes.
A bit of background first. A captive insurance company is a subsidiary company formed to provide insurance to its parent company. Doing insurance in house can save on the bottom line, and captives also often net tax benefits for their parent companies and they’ve become increasingly popular over the last several years.
This issue in Wendy’s v. Hamer was whether the captive should be taxed as an insurance company, or if it should be included in a combined return for the larger Wendy’s group. Because of how insurance companies are taxed in Illinois–based on the premiums they write–and because many of the profits for the Wendy’s captive derived from intercompany trademark royalties and interest, this distinction would affect the taxes owed significantly.
The district court which initially heard the case found in favor of the Department on a motion for summary judgment. The Appellate Court, however, reversed that decision and held that the captive should be treated as an insurance company. More than the particular consequences for captive insurance, it’s the reasoning behind the decision that’s most interesting.
The court pointed to three elements in particular. First, that the captive was a licensed insurance company under Vermont law (where the company was incorporated). Second, that in offering a broad range of coverage to its parent, the captive met the test of risk shifting and risk distribution, one of the benchmarks of an insurance company. Finally, and perhaps most interesting, the court looked to the IRS for precedent, pointed to how the IRS had treated the captive as an insurance company under multiple audits, even making adjustments to the company’s deductions consistent with treatment as an insurance company.
Horowitz Law Offices represents numerous individuals and bushiness before the Illinois Department of Revenue, the Internal Revenue Service and the Chicago Department of Finance on a wide range of tax matters. You are welcome to contact us at (312) 787-5533 or firstname.lastname@example.org