In a somewhat troubling decision, an Illinois Appellate Court held that a taxpayer’s parent company and its subsidiaries engaged in two lines of business—consumer packaging manufacturing and filtration product manufacturing—were unitary and had to file a combined Illinois return. Clarcor, Inc. v. Hamer, 2012 WL 1719518 (Ill. App. 1st May 11, 2012). The taxpayer contended that there was a lack of unity between the entities because: (1) the subsidiary groups lacked horizontal integration as required by the Seventh Circuit’s holding in In re Envirodyne Industries, Inc., 354 F.3d 646 (2004), and (2) even if horizontal integration is not required, there was insufficient vertical integration between the parent and the subsidiary groups to support a unitary finding.
The court rejected both of the taxpayer’s arguments. First, the court held that the taxpayer’s subsidiaries were horizontally integrated because the subsidiaries participated in a centralized cash management system operated by the parent, shared common employee benefit plans, and compensated their officers based on the performance of the whole group rather than just the subsidiary. Second, the court rejected the taxpayer’s argument that the parent is only unitary with the filtration subsidiary group and not the packaging subsidiary group. In rejecting the taxpayer’s argument, the court cautioned that: “The tax code does not create a pupu platter from which a parent selects the subsidiaries that provide the best tax treatment and then leave the others on the plate.”
In our view, the court’s opinion is troubling, less for its outcome and more for its failure to focus on the classic unitary business indicia—functional integration, centralized management, and economies of scale. The court’s decision suggests that the presence of minimal stewardship and administrative functions, such as a centralized cash management system, may be sufficient to support a unitary finding because it allows the subsidiaries to receive money “essentially from each other.” While a cash management system may be one indicator of a unitary business, the U.S. Supreme Court made clear in F.W. Woolworth and other cases that a flow of cash among companies is not the same as a flow of value. The court also failed to distinguish between the mere ability of a parent to control a subsidiary, which is almost always present and does not create a unitary relationship, and the actual exertion of control, which is required for a unitary relationship to exist.