Captive finance subsidiary is not financial organization.The issue of whether a corporation qualifies as a financial organization under Illinois law is an important one. Illinois taxpayers engaged in a unitary business must file a combined report for all members of the unitary group In mathematics, the unitary group of degree n, denoted U(n), is the group of n×n unitary matrices, with the group operation that of matrix multiplication. The unitary group is a subgroup of the general linear group GL(n, C). (regardless of nexus), with all members being subject to the same apportionment The process by which legislative seats are distributed among units entitled to representation; determination of the number of representatives that a state, county, or other subdivision may send to a legislative body. The U.S. formula. Financial organizations, on the other hand, are subject to a special apportionment formula and, therefore, cannot be included in a unitary group with nonfinancial organizations. Accordingly, Illinois taxpayers often seek to treat affiliated entities that do not have nexus in Illinois as financial organizations to exclude these entities from an Illinois unitary combined report.
In a recent case, the Illinois Circuit Court for Cook County was forced to interpret the boundaries of Illinois's financial organization statute. In Automatic Data Processing Same as data processing. (ADP (1) (Automatic Data Processing) Synonymous with data processing (DP), electronic data processing (EDP) and information processing.
(2) (Automatic Data Processing, Inc., Roseland, NJ, www.adp. ) & Affiliates v. Dep't of Rev., No. 96 L 50918 (Dec. 23, 1998), the court held that a taxpayer's four wholly owned subsidiaries Wholly Owned Subsidiary
A subsidiary whose parent company owns 100% of its common stock.
In other words, the parent company owns the company outright and there are no minority owners. were not financial organizations for Illinois tax purposes and, thus, could not be excluded from the taxpayer's unitary combined report. The primary issue was whether the subsidiaries qualified as investment companies, one of the categories of entities that qualifies as financial organizations for Illinois tax purposes.
The taxpayer in ADP formed four wholly owned asset management subsidiaries. These subsidiaries performed a variety of functions, such as extending intercompany loans Intercompany loan
Loan made by one unit of a corporation to another unit of the same corporation. to the taxpayer and licensing intangible assets Intangible Asset
An asset that is not physical in nature.
Examples are things like copyrights, patents, intellectual property, and goodwill. These are the opposite of tangible assets. to the taxpayer and its affiliates. (Such arrangements are typical among large corporate organizations, as they allow for centralization cen·tral·ize
v. cen·tral·ized, cen·tral·iz·ing, cen·tral·iz·es
1. To draw into or toward a center; consolidate.
2. of functions and creation of economies of scale.) The taxpayer sought to classify the subsidiaries as financial organizations for Illinois tax purposes on the grounds that they qualified as investment companies. (Investment companies are included in the definition of a financial organization; however, the statute contains no guidance as to the definition of an investment company.)
The court concluded that the term "investment company" includes only regulated investment companies Regulated investment company
An investment company allowed to pass capital gains, dividends, and interest earned on fund investments directly to its shareholders so that it is taxed only at the personal level, and double taxation is avoided. . The court's narrow decision was based on the fact that all of the other types of entities included in the definition of a financial organization under Illinois law (such as banks) are subject to regulation. However, there was no direct authority for this interpretation. The court's ruling reads into the Illinois statute limitations that will impede taxpayers from excluding captive finance subsidiaries from the Illinois unitary combined report. Accordingly, the court's decision will render it more difficult for corporations to take advantage of the preferential tax treatment associated with the use of financial organizations.
The court asserted that its ruling was based on its earlier decision in Shaklee Corp. v. Dep't of Rev., 93 L 50530 (1996), which was recently upheld on appeal; see Shaklee Corp. v. Dep't of Rev., No. 1-96-3780 (Ill. App. Ct., Aug. 12, 1998). However, the ADP decision goes one step further than Shaklee. In Shaklee, the court ruled that two holding companies that existed for the primary purpose of owning stock in foreign subsidiary corporations were not investment companies. The decision focused on the differences between holding companies (which typically do not diversify their assets and are not considered financial organizations) and investment companies (which have diversified holdings and do qualify as financial organizations). The subsidiaries in ADP were organized to serve an internal financing internal financing
The financing of asset purchases with funds generated in the usual course of operations rather than funds that are borrowed or raised from the issuance of stock. function and were not holding companies. Thus, the court's decision in ADP narrows the field for companies seeking financial organization status.
Despite ADP and Shaklee, there is still only scant guidance as to how the financial organization statute should be applied. However, these decisions do signal that the provisions will not be interpreted liberally, and, in the aftermath of ADP, it appears that the types of entities that will qualify as investment companies for Illinois tax purposes have been severely limited.
FROM SHARLENE E. AMITAY, J.D., CPA (Computer Press Association, Landing, NJ) An earlier membership organization founded in 1983 that promoted excellence in computer journalism. Its annual awards honored outstanding examples in print, broadcast and electronic media. The CPA disbanded in 2000. , WASHINGTON, DC