The captive of the popular fast-food chain Wendy’s has received validation from Illinois’s first court of appeal.
The Illinois Department of Revenue challenged the validity of Vermont-domiciled Scioto Insurance Company, claiming that it did not meet the definition of an insurance company under the Internal Revenue Code.
Scioto, set up by Wendy’s in 2001 to insure the fast-food chain and its affiliated entities, owns a subsidiary called Oldemark, which is the assignee of the trademarks behind the Wendy’s brand. It licenses them back to the captive’s ultimate parent.
The captive was formed to cover, among other areas, workers' compensation, general liability, auto liability, and auto physical damage. Wendy’s also feared an outbreak of mad cow’s disease, and could not obtain appropriately priced coverage from the commercial market.
But in its case against Scioto, the Illinois Department of Revenue argued that the captive undertook no actual risk shifting and risk distribution, and that the majority of its income came from licensing revenue.
After subsequent motions and a summary judgement finding in favour of the Illinois Department of Revenue, the Illinois Appellate Court overturned the trial court’s finding on 7 October.
In his decision, Justice John Turner found that the character of Scioto's business was one of insurance and, under federal income tax law, the arrangements with affiliates met the requirements of risk shifting and risk distribution.
He wrote: “Scioto was licensed by Vermont as an insurance company. Scioto's only business was to furnish insurance to Wendy's and other affiliates. Its ownership of Oldemark, a disregarded entity for tax purposes, does not alter this conclusion since Scioto, unlike Oldemark, was not engaged in the business of licensing intellectual property.”
Justice Turner and the concurring justices reversed the trial court's decision to grant the Illinois Department of Revenue’s motion for summary judgment.
They remanded the case back to the trial court for the issuance of an order granting Wendy's motion for summary judgement.
Wendy’s has yet to respond for a request to comment on the ruling.
