*1 directing in favor of the de- a verdict County circuit court’s decision fendant.
Affirmed. GOLDENHERSH, JJ., concur.
RARICK and COMPANY, Acceptance to A.B. Dick as Successor in Interest A.B. DICK McGRAW, Acting Director of Plaintiff-Appellant, Corporation, v. SAM Revenue, al., Defendants-Appellees. Department of et 4 — 96—0057 Fourth District No. April January Opinion filed 1997.
Argued McCULLOUGH, J., dissenting. *2 (argued), McDermott, Chicago, Emery, Richard Will & A. Hanson of of appellant.
for (Barbara General, Preiner, Ryan, Attorney Springfield James E. of A. General, General, (argued), Attorney Solicitor F. and Brian Barov Assistant counsel), appellees. of for JUSTICE the the opinion COOK delivered of court: (A.B. Dick) Company wholly and its owned subsidiar- ies, Corporation (Acceptance) A.B. Dick Acceptance Systems (Videojet), tax separate International filed Illinois income 31, 1986, 1987, for years ending returns the tax March and 1988. During audit, the companies single amended their returns and filed year, combined return alleging companies for each were a uni- 1501(a)(27) tary group meaning business within the of section of (Tax Act) (now 5/1501(a)(27) (West Illinois Income Tax Act 35 ILCS 1995)). returns, Supp. companies they Under the amended claim owed a Department are refund of million. The of Revenue $1.2 (Department) Acceptance concluded that A.B. Dick parts of business, but that As a result of was not. the audit Acceptance deficiency determined that owed a $2,450. Acceptance paid protest amount under and filed a veri- complaint County fied in Sangamon pursuant the circuit court of (now Employees Disposition the State Money Officers and Act (West 1994)) tax, through ILCS return of seeking 6a inter- 230/1 court, penalties paid protest. est and under circuit The one- paragraph entry, Department. docket ruled in favor of taxpayer appeals. We reverse remand.
It is not an easy question corporation’s what income particular corporation should taxed in a state when does question business in even more complicated several states. when the multistate group carried on associated corporate entities. See Citizens Utilities Co. v. Reve nue, 32, 39, (1986);Caterpillar 111 Ill. 2d 488 N.E.2d Tractor (1981). 1343,1347 Lenchos, 102, 108, Co. v. 84 Ill. There 2d N.E.2d power are constitutional limitations on the state to tax income power A to tax out- activities. state has arising out of interstate apportion corporations formula activities of associated of-state "unitary business.” corporations constitute only when the ment 159, 165-67, Board, Tax Corp. v. Franchise question S. Ct. 2940-41 Ed. 2d present case is one of "unitary business” there is a whether the statute power, but statutory interpretation, not constitutional cases. defined the constitutional terms that have been employs part: provides, pertinent The statute group persons group’ means a 'unitary business "The term are ownership whose business activities through common related integrated *** with, upon contribute to each other. dependent ordinarily where the activity be illustrated Unitary business can (such (1) general in the same line the members are: activities of manufacturing, personal prop- wholesaling, retailing tangible (2) finance); steps in a insurance, transportation or erty, (such steps process as the enterprise or vertically structured resources, might natural production involved and, marketing); in ei- mining, refining, and exploration, include functionally integrated instance, the members are ther the exercise of (where, strong centralized financing, purchasing, matters as example, over such line, marketing capital personnel, product compliance, tax 5/1501(a)(27) member).” 35 ILCS not left to each investment is *3 1995). (West Supp. unitary a business. required for ownership is
More than common
controlling interest in several
owns
holding company
a
The fact that
Mo
group unitary
a
business.
enough to make the
is not
corporations
440,
Taxes,
425,
Ed. 2d
U.S.
63 L.
445
Corp. v. Commissioner
bil Oil
of
(1980)
business, however,
1223,
(unitary
510, 523,
1233
S. Ct.
100
functionally
a
from
profits derived
represent
dividends
where
"
mere
something
'beyond the
be
enterprise). There must
integrated
busi
or a distinct
passive
investment
arising out of
flow of funds
”
47,
N.E.2d at
Ill. 2d at
488
111
Citizens
operation.’
ness
554,
166,
103
Ed. 2d at
77 L.
990,
Corp., 463 U.S.
quoting Container
occasional
type
of
more than
There must be
S. Ct. at 2940.
”
"
subsidiary.’
gives to an investment
any parent
oversight
'that
n.19,
S.
n.19,
103
Ed. 2d at 563
Some seem to indicate that "functional cases integration is a that functional operations company to the of Woolworth, F. separate concept management. from centralized W. 3135-36; 828-29, S. Ct. at see also U.S. at 73 L. Ed. 2d 521, Mobil, Ct. at 1232 L. Ed. 2d at 100 S. ("contributions integration, resulting to income from functional scale”). management, of It seems centralization and economies logical integration that whenever there is functional strong management is also and vice versa. Section 1501(a)(27) rejects separate the Tax Act two the idea shown, integration tests. If functional has been or if central- shown, ized has been then there is a business.
I corporation A.B. Dick is a with principal Delaware its office in Niles, It variety Illinois. manufactures and sells office and busi- ness printing duplicating equipment. Acceptance a wholly was owned provided financing purchasers A.B. Dick that of A.B. equipment. During pendency appeal, Accep- of this Dick, tance liquidated into A.B. Acceptance’s which succeeded to rights obligations. Over the several years course of A.B. Dick developed type printing ink-jet noncontact known as technology. time, line, For a product line, this "Videojet” called the January manufactured marketed A.B. Dick. On however, Dick incorporated A.B. Videojet, wholly owned subsid- iary, assets, to which A.B. Dick transferred its line of includ- ing machinery, equipment, materials, inventory. supplies Dick also contributed or 41 patents Videojet. According licensed Walker, A. incorporated Harris line was because the growing they line was performance; wanted to measure the line’s they closely doing. wanted to more monitor what
David is president Powell the chairman and of A.B. Dick. He is Videojet. Henry vice-president also the chairman of Bode J. is the that, A.B. Dick Videojet. also the Bode testified president Videojet’s prior incorporation employed by he had been 1972. Videojet’s since board of directors consists of Powell Dick, Walker, general and Bode. A. Harris counsel of A.B. sec- *4 retary companies. secretary both Pat Hoffman is assistant Levin, companies. both Kenneth the chief financial officer of A.B. Dick, Videojet, determining, example, exercised control over for how much Videojet cash be to There should transferred A.B. Dick. was Powell, testimony Levin, before after incorporation that both managed Videojet Walker A.B. as if were Dick the two a single company.
Purchasing. Videojet separate purchasing department, had a but Videojet’s purchase costing requests equipment for than more $500 by approved general were reviewed Levin and Powell. A.B. Dick’s Videojet had to all approve counsel real estate contracts and some purchase personal contracts for the property.
Financing. Videojet immediately opera- All funds not needed for intercompany tions were transferred A.B. Dick as an loan. Since interest, paid; those bore but that interest never loans year a instead it treated as dividend at end. March A.B. financing Videojet’s provided acquisition Dick for of the Cheshire Company through million interest-free loan. Division Xerox $12 1990, Videojet headquarters has a new and manufac- occupied Since facility Dale, required Dick turing in Wood Illinois. lessor A.B. lease, $199,000 obligates per rent sign pay A.B. Dick to escalating for five rent years month thereafter. accountant, Videojet tax compliance. employed only
Tax one who Videojet tax responsibility preparation had for the of state returns. library. approve have tax A.B. had did not its own by Videojet. During all tax filed federal and state returns Videojet’s with em- Videojet, audit of dealt Videojet as ployee, Jung. Jerome When the assessed ow- $213,070, Jung tendered a check in that amount ing an additional seeking approval of A.B. Dick. A.B. protest without and without Levin, officer, Videojet chief testified that when Dick’s financial unitary tax should incorporated pointed he had out returns "[m]y not Levin returns were filed because filed. testified on income tax it and I didn’t concentrate state department blew taxes, quite frankly.” Videojet engaged are
Product line. Both A.B. Dick printing equipment, manufacture and sale office printing equipment to line of Videojet’s activities restricted but sepa- technology. Videojet maintained utilizing ink-jet A.B. Dick and develop any engineering departments and did not rate research and (At least after Video- products patents to be the other. not used year met times jet’s incorporation.) separate departments four technology although the record does dis- "corporate updates,” Videojet foreign used some subjects what discussed. close any royalties. paying patents byit A.B. Dick without licensed to department, but separate personnel had Personnel. approval salary all levels. Dick controlled *5 $40,000 earning Videojet employees more than required was hire (10% workforce) Videojet A.B. Dick and for some terminations. approval required Videojet all contracts with dealers or for distributors. legal legal department. Videojet’s work is
Videojet has no All by legal department, spent done Dick about 30% of the A.B. counsel, Videojet Videojet its time If needed outside A.B. on matters. $200,000 year hiring. Videojet paid per Dick did A.B. Dick about legal provides A.B. all real estate ser- services. Dick Videojet. designed Videojet’s facility vices to Wood Dale and department. contracted to be built the A.B. Dick real estate A.B. Videojet. all provides Dick insurance services to A.B. Dick and Video- jet Videojet were for which policies, covered same insurance (1986), $350,000 paid $249,000 $324,000 (1987), Videojet employees plan. were Dick A.B. retirement A.B. manager Dick’s employment supervised plan spent benefits that Videojet about his 10% of time on matters. corporate accounting spent
A.B. Dick’s director of about 5% of Videojet his time manager spent on matters. A.B. tax Dick’s 5% to 8%. A.B. Dick’s chief spent financial officer 5% to 10%. separate A.B. Dick and
Marketing. Videojet had and market- sales ing departments, although Videojet’s offices, personnel sales shared support facilities, secretarial and other with Dick services A.B. sales personnel eight at A.B. Dick offices the United States. A.B. Dick is reimbursed its cost for Videojet the offices. had two other sales offices it did not share with Videojet A.B. Dick. The A.B. Dick and sales departments did not employ marketing advertising common or programs. They did not share a common trademark or other market- ing symbol. They did products. not sell each Dick other’s A.B. con- regarding trolled all decisions Videojet products introduction of new pricing all Videojet products. intercompany There were no sales or purchasing common of raw or supplies. materials Contracts with Videojet products required dealers distributors to sell A.B. Dick approval. Kingdom A.B. in the Dick’s distributors United Canada also Videojet’s distributors.
Capital
investment. A.B. Dick decided how much cash would
Videojet.
Videojet
remain in
Before
into the
Dale facil-
moved
Wood
ity,
facility
A.B.
manufacturing
Dick subleased
and office
located
Illinois,
Grove,
924,000-
Elk
at
Videojet,
occupied
cost. A.B.
Niles,
square-foot facility
Illinois,
Videojet
which it
leased to
way
cost. Levin testified the rent was determined the same
as when
division,
Videojet
profit
a actual cost with no
built in.
Department argues
oversight
The
that
the financial
that A.B.
Videojet
relationship
over
normal financial
Dick exercised
be-
Woolworth,
parent
corporation.
F.W.
tween
Cf.
(type
Ed. 2d at
102 S. Ct.
oc-
oversight
any parent gives
"that
investment
sub-
casional
added)). The
that
sidiary” (emphasis
Department
*6
testimony
self-serving.
of
Dick
some
A.B.
officials
only
personnel
one
of
Department
The
notes there was
transfer
companies, Videojet employee
the two
who was transferred
between
managerial
The
Department
to A.B. Dick.
concedes
were some
argues
proof
no
companies,
the two
but
there was
links between
managerial
they provided
"that these
links
so substantial
that
significant sharing
Dick
or economies of scale for A.B.
and
of values
Videojet
Dick
Videojet.”
Department
paid
The
indicates that
A.B.
for
got
Department argues
it
A.B. Dick. The
that nei-
everything
from
style
subjective
a relevant
personal management
nor
intent
is
ther
management.
determining
whether there is centralized
criterion
argues
separately
A.B.
acted
Department
The
that
Dick
autonomously marketing
selling
products,
their
advertising,
marketing,
research or sales. There
was no common
A.B.
are
intercompany
sales.
Dick technicians
were no
products (except
each
repair
maintain
other’s
not cross-trained
Canada).
argues
potential
takes
The
that it
more than
Department
unity.
pricing decisions to show
over
II
participated
question
taxpayer
whether
47,
Utilities,
N.E.2d witnesses, a credibility court be determined from fact must they findings factual unless of will defer to the circuit court’s review v. Anheuser- weight of the evidence. Kalata against the manifest (1991). 656, 425, 433, Cos., 660 evi 144 581 N.E.2d Busch Ill. 2d stipulation of facts ac 29-page presented dence here testimony exhibits, of presented by companied
237 Bode, Levin, any evi present did not Department and Walker. case, for the any findings of fact in this but dence. We would defer See Patrolmen’s Ass’n v. undisputed. Chicago most the facts are (1996) Revenue, 263, 271, 52, 56 Department 171 Ill. 2d 664 N.E.2d of (where law); undisputed, v. question Kroger facts are is one of Co. Revenue, 473, 482, 710, Department App. 284 Ill. 3d 673 N.E.2d 715 (1996). court, argued In the circuit that centralized offic requires not the involvement or more one all group, ers in the but central members also important operational ized all perform group units functions for suggests argument something to the members. adds statutory requirement integration] through "[functional that there be (35 management” exercise ILCS (West 5/1501(a)(27) 1995)) Supp. and that has argument abandoned this court. The construction of statute question is a be independently reviewing law to decided Ramaker, 370, Village 368, court. v. App. Glenview 282 Ill. 3d N.E.2d problems There are entity appears profitable where the local but the claim is made that its tax should be reduced because losses other in other corporations may states. Those losses be difficult to verify Illinois bemay required depend on the cooperation of states, the other may always forthcoming. See Moor- Bair, man v. Manufacturing Co. L. U.S. 57 Ed. 2d 98 S. (1978) formula). (sales) Ct. (upholding single-factor Iowa Never theless, aberration; reporting combined necessary is not it is a prevent triumph tool to corporate formality over economic reality. Citizens 111 Ill. 2d at N.E.2d reporting advantageous body. Combined often taxing to the In all *7 the opinion, taxing cases cited in body position this the took the that unitary the a taxing body business was The business. was successful (effec in all except recently those cases F.W. Woolworth. Illinois has 1996) April tive rejoined compact, the tax multistate as an associ ate taxpayer member. Neither the nor a has choice whether combined unitary, returns are filed. the business is If reporting required. combined is It important is that rules be developed to establish what a unitary is and what is not business. 1501(a)(27) Act, purpose section of the Tax as in explained Thompson’s message amendatory Governor accompanying the veto section, that certainty created the "provide to and the stabil ity important businesses, so particularly considering expand those ing Journal, within or into Illinois.” Ill Senate 82d Ill. Gen. Assem. (November (1982 Sess.) (Governor’s 1982), recommenda- 2588). Bill tions to House
III following present court in the case made the docket circuit
entry: 1501(a)(27) strong "Section reads that both elements central- i.e.[,] management, authority strong
ized
central
authority through
operations[,J
the exercise
that
centralized
unitary
present
persons
[a]
must be
in order
be
group. The Court finds that there is
lack of fundamental
[sic]
integration
manufacturing, marketing,
key
in the
areas of
distribution,
engineering, purchasing, advertising
demon-
single
case.”
strating
unitary
that there was not
business in this
added.)
(Emphasis
regula
emphasized language
Department’s
comes from the
(86
(1996);
100.9700(g)
100.9700(g)
regulation
Ill.
Code
tion
Adm.
§
cf.
100.3010(c)(1)(C) (86
100.3010(c)(1)(C) (1996)), which
Ill. Adm. Code §
conclu
justify
"must exist in order to
explains that both elements
separate
or
seemingly
that
of otherwise
trades
sion
integrated
significantly
so as
constitute a
businesses are
regulation
require
does not
that "both elements”
business.” The
case,
every
be
to exist
operations”
"centralized
shown
seemingly
cases
businesses
are involved.
separate
those
where
Utilities,
event,
any
at 992. In
239
manage
as
of
appears
way
There
to be much
centralized
Utilities,
parent
in this
was in
where the
ment
case as there
Citizens
subsidiaries,
different
utility
operated
24
owned
each of which
Utilities,
directors,
interlocking
state.
Citizens
there were
(for
separate companies),
parent
approve
same officers
24
had to
purchases,
legal,
parent provided
engineering,
some
and the
some
services,
Utilities,
48,
accounting
at cost.
111
at
Citizens
Ill. 2d
990;
166,
Ed.
488 N.E.2d at
see
Container
463 U.S. at
Corp.,
also
554,
2d at
103
2941
to
(unitary principle
applied
S. Ct. at
can be
of similar
com
enterprises operating separately
series
but linked
resources).
managerial
operational
mon
or
signifi
argues
showing
there
no
has been
of a
flow of
companies
cant
value between the two
or the creation of
management
economies of scale
We
centralized
functions.
agree
significant,
the flow
than
of value must be
that it must be more
minimis, but
of
disagree
proof
required.
de
we
exact
value is
justification
reporting
"many
for combined
is that
there are
subtle
largely unquantifiable
among
place
transfers of value
take
components
single
enterprise.”
Corp.,
of
463
at
U.S.
2940;
553,
where
business was held
violate the due
retailer,
Woolworth,
foreign
cess clause.
owned all
stock of three
subsidiaries,
retailers,
also
and elected all
their
"It
directors.
potentially
operate
companies
integrated
has the
these
as
business,”
single unitary
divisions of a
not
potential
but mere
was
enough when the facts showed the
to be discrete busi-
subsidiaries
Woolworth,
enterprises.
362,
ness
F.W.
458
73 L. Ed. 2d at
U.S.
826,
subsidiary’s
102 S. Ct. at
phase
any
"[N]o
business was
integrated
parent’s.”
original.)
with the
(Emphasis
F.W. Wool-
worth,
458 U.S. at
L. Ed.
S. Ct.
2d at
at 3135. Wool-
integrated
worth’s
functionally
were not
with those
its
subsidiaries,
was no
centralization
subsidiary operated
achievement
other economies of scale.
Each
full-time management,
distinct business
enterprise
the level of
none of the
employees
subsidiaries’ officers were current or former
parent,
participant
one officer of
Woolworth,
profit-sharing plan.
Woolworth’s
There
a notable
umbrella
absence
Woolworth,
ment
F. W.
458 U.S. at
and controlled interaction.
L.
102 S.
at 3138-39.
noted
Ed. 2d
Ct.
The dissent
frequent
upper
management, major
communication between
levels of
approved
parent,
financial
had to
and Woolworth’s
decisions
*9
reports
published
prepared
financial
were
on a consolidated basis.
Woolworth,
833-34,
F.W.
458
at
In
custom-ordered
Container
the
manufactured
engaged
20
paperboard packaging
foreign
and controlled
subsidiaries
essentially
parent
relatively
in
same
maintained
business.
subsidiaries,
guaranteed
with the
but held or
about
hands-off attitude
debt,
provided
half of
advice and consultation in
the subsidiaries’
areas,
occasionally
with
number of
assisted the subsidiaries
purchases,
by selling
by employing
them used
or
its
equipment
either
agent
purchasing department
own
to act as
for the subsidiaries. The
business,
Supreme
upheld
finding
relying espe-
of a
Court
cially
guarantees
managerial
role
on the loans
loan
and on the
"
played
'type
oversight—
not the
by appellant. This was
of occasional
structure, major debt,
respect
capital
with
and dividends —that
”
any
subsidiary.’
Corp.,
parent gives to
investment
n.19,
n.19,
n.19,
at
S. Ct. at
463
at 180
77 L. Ed. 2d
563
103
2948
U.S.
Woolworth,
at
2d at
102 S.
quoting F.W.
73 L. Ed.
Instead,
managerial
grounded
role
in Container
Ct. at
3138.
Corporation’s
expertise
operational
strategy—
and its overall
own
lacking
we
in F. W.
"precisely
operational
the sort of
role
found
Wool-
n.19,
180
L. Ed. 2d at 563
Corp., 463 U.S. at
worth.” Container
n.19,
IV
investment,”
Dick
Videojet a
to which A.B.
"passive
Is
mere
integration
gives only
oversight, or is
functional
occasional
management?
Citizens Utilities
operations
actively
parent
involved
significant
of the
were
saw it as
that officers
2d at
111 Ill.
of the subsidiaries. Citizens
officers
Bode, Walker, in this case with
at 992. We have that
N.E.2d
subsidiary’s
complained that none
Hoffman. F.W. Woolworth
parent.
presi
employees
or
were current
former
officers
Bode,
years
Dick for over 10
employed
Videojet,
dent of
Although
argues
Videojet’s incorporation.
before
companies,
the two
personnel between
only
there was
one transfer of
incorporation
the time
had
employees Videojet
in fact all
of its
was much
this case than
employees of A.B. Dick. There
more
been
personal management style
one or two
individuals.
they
Assuming
required,
that centralized
Woolworth,
complaint
In F. W.
was made that "no
present here.
integrated
phase
any subsidiary’s
parent’s.”
business was
with
Woolworth,
(Emphasis
original.)
F.W.
U.S. at
Ed. 2d
828,.
Videojet
separate departments,
102 S. Ct.
had some
it
real
legal department,
department,
but
had no
estate
and no in-
no
department. Videojet
surance
on A.B. Dick for all those ser-
relied
purchasing, accounting, personnel,
vices.
other
such as
areas
marketing,
oversight.
was either
F. W.
assistance
Woolworth
noted that
officer of a
participant
one
n.15,
Woolworth,
profit-sharing plan.
Woolworth
U.S. at 366
F.W.
n.15,
73 L. Ed.
Videojet
2d at 829
Even significant disputed there were facts contrary weight circuit clearly court’s decision was to the manifest judgment weight the evidence. A against manifest evi- opposite apparent findings dence when an conclusion is or when the unreasonable, appear arbitrary, or not upon to be based the evidence. R.R., 213, 242, Rhodes v. Illinois Central Ill. 2d 665 N.E.2d Gulf reverse Accordingly, we the decision of circuit court and remand with instructions the circuit court enter an sought. granting order the relief
Reversed remanded.
GARMAN, J., concurs. McCULLOUGH, dissenting:
JUSTICE disagree majority. decision respectfully I with the 1501(a)(27) states, Tax Act majority As the section sets requirements forth three for determination of a business and integration through the only the element of functional exercise of is at issue. The circuit court found that "a lack of fundamental marketing, engineer- integration key manufacturing, in the areas ing, purchasing, advertising and distribution.” agrees disputed majority significant facts. clearly contrary The circuit court’s decision was not manifest evidence. weight of the McGEE, Representative Indiv. of the Estate of
MARY and as Personal HEIMBURGER, McGee, Deceased, Plaintiff-Appellant, v. JOHN A. Travis (James Heimburger al., Respondents et Defendant W. Discovery-Appellees). No.
Fourth District 4 — 96—0486 Opinion April 1997. Argued filed December notes Depart- The charged intercompany A.B. Dick interest on the loan. ignore loan to ment would million interest-free $12 years very question. it was at the the tax because made end of argues Jung’s refutes Dick’s Department action assertion oversight Videojet’s accounting that it maintained strict matters argues expenditures, potential tax over tax argues enough. may is not the circuit court matters Dick. credibility made determinations adverse to A.B. have rejected argues also the circuit court could have