Corporate Close-Up: Affiliated Companies Financing the Purchase of Insurance, a Service, Must File an Illinois Combined Return with Other Financial Organizations

 

Three affiliated corporations engaged in the business of providing insurance premium financing were qualified sales finance companies that provided funding for the purchase of a service, the Illinois Independent Tax Tribunal ruled in Premier Auto Finance, Inc. v. Illinois Dept. of Revenue. As a result, the corporations were financial organizations required to be included in an Illinois combined return with other financial organizations and not in a combined return with affiliated general corporations.

Premier Auto Finance (Premier) was a wholly owned subsidiary of Aon Corporation and the parent company of several corporations, including three subsidiaries referred to as the Cananwill entities. Aon and its subsidiaries filed three separate Illinois combined unitary business group returns for tax years 2006 through 2008. One of the combined returns reported the unitary business income of a subgroup of financial organizations and included Premier and the Cananwill entities.

In 2012, Premier filed amended returns for the tax years at issue for the financial organizations, requesting a refund of approximately $1.68 million. Premier adjusted the returns to remove the Cananwill entities and include them on the returns for Aon’s general corporations. Thus, the issue for the tribunal was whether the Cananwill entities were financial organizations under 35 ILCS 5/1501(a)(8).

Illinois includes sales finance companies in the statutory definition of a financial organization, in addition to various types of banks. The statute, in turn, defines a sales finance company as one engaged in specific financing activities, including “the business of making loans for the express purpose of funding purchases of tangible personal property or services by the borrower.”

Businesses borrowed money from the Cananwill entities in order to fund the purchase of commercial property and casualty insurance. Finance companies like the Cananwill entities earn income by charging financing fees on the loans.

Premier argued that the purchase of insurance is neither the purchase of tangible personal property nor the purchase of a service, but is the purchase of an intangible. Thus, each Cananwill entity could not be a sales finance company. The Illinois Department of Revenue countered that the purchase of insurance is the purchase of a service and, therefore, the Cananwill entities were properly included in the combined returns of the financial organizations.

The tribunal sided with the Department of Revenue in a thorough opinion that reviewed case law under the Illinois Consumer Fraud and Deceptive Practices Act, establishing decades ago that the sale of insurance is the sale of a service. Premier contended that the focus should be on the intangible nature of an insurance contract and that a company that provided financing for the purchase of an intangible could not be a sales finance company under the statutory definition. The tribunal disagreed, concluding instead that the statute looks to the item being purchased in the underlying transaction evidenced by the contract.

As the tribunal explained, the item purchased by the clients of the Cananwill entities was the service an insurer provides to make an insured whole, subject to the terms and limits of an insurance agreement, by performing its obligations under that agreement to take an insurable loss upon itself. It was that service for which the Cananwill entities provided financing. Accordingly, each of the entities was a sales finance company and, therefore, a financial organization. Their operational income, the tribunal concluded, was properly reported initially on the unitary business group income tax returns for the financial organizations.

The tribunal’s decision also illustrates the complexity of combined reporting in Illinois for the Aon group’s 2006 through 2008 tax years. Before recent legislation, no unitary business group could include members that are required to use different formulas to apportion business income to Illinois. Instead, separate unitary business groups could be formed of two or more corporations using the same apportionment formula out of a larger affiliated group of corporations, such as the Aon group. Each of those unitary groups is then treated as a single taxpayer and required to file a combined return. Illinois 2017 S.B. 9 amended the definition of unitary business group in 35 ILCS 5/1501(a)(27) to eliminate this noncombination rule, effective for tax years ending on or after Dec. 31, 2017. The Department of Revenue explained that unitary business groups no longer must exclude members that are ordinarily required to apportion business income using different apportionment formulas.

Continue the discussion on the BBNA State Tax Group on LinkedIn: Will inclusion of corporations that use different apportionment formulas in the same unitary business group simplify the compliance obligations of corporations required to file Illinois combined returns?

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