company by the name of clark or should be treated as a single unitary business group for illinois income tax reporting purposes it's our position that the packaging company is a separate group that should not be included with their filtration relationship or in our position the lack of relationship between the filtration companies and the packing companies you're talking about horizontal integration and vertical control it's it does go to horizontal integration in  sense that the packaging companies and the filtration companies for opera provide different products they sell different products and for that reason it really isn't true horizontal integration as far as the vertical integration goes i will address that when we get to the lack of the relationship between the other parent company and the operating companies but i think the problem that the ail jay made was that he did not look at the lack of relationship between the filtration companies and the pectin companies and the reason it's  a fatal flaw or a mistake is because the income tax act itself says that in order to have a unitary business the persons that would otherwise comprise that unitary business have to contribute to and depend on each other up so in other words it's not enough that they contribute to and depend on a common parent there has to be actual contribution and dependency is between the operating business and that's the room portion of th consolidate all of those companies for income tax reporting purposes there has to be interglacial there has to be a relationship between the operating companies themselves the fact that there's a common parents you know who might provide some centralize functions or services that by itself is not enough to create unitary relationships and that's exactly what we have here is we have two sets of operating companies for which there is no overlap there's no dependency there's no contribution and so going back to the the bicycle analogy what judge posner suggested was that even if you have a hub even if you have a common parents that's not enough by itself to create unitary relationship amongst all the companies because you don't have the room t evidence of centralized management so for example he pointed to common officers and directors well if you look at their record it's pretty clear that the officers and directors here were figureheads but they really were not involved in the day to day management or the day to day running of these businesses they were there to sign tax returns they were there to sign annual reports is this license renewals they were not there to manage the business on a day to day basis  sale writing checks was not limited it was limited but it was a a very broad limit in that the cap on their expenditure authority was twenty five thousand dollars for capital expenditures so in other words they could spend subsidiaries could spend anything they wanted on non capital expenditures rent utilities raw materials consulting they had unfettered spending authority on those items even on the capital items twenty five thousand relatively high limit the other thing as well is is in terms of spending what they actually spent the money on it was up to the subsidiaries to decide because they were the experts they knew their business they knew the packaging they knew the filtration the executives a clerk or that was not their business well how about their subsidiaries in their decision making processes that they have any decision making process or was it always the parent company who made those decisions with all of the decisions were made at the business units of the record it's clear that each business unit had its own president yale's very fine to make findings of fact to the contrary i believe what the a l j suggested is that there was some general oversight for example he suggested that  company's human resources department had some general oversight over human resource functions but i think it's important in that regard to remember what u s supreme court said one word which is that the type of occasional oversight that any parent gives to an investment of a subsidiary is not enough to create a unitary relationship so and so if you look at that statement and apply it to to the context of this case keep in mind that clark court is a publicly traded company and because it's a shareholders investments are going to be protected so whether that's looking at a budget whether that's you know providing some type of general oversight for human resources whether that's moving money around whatever it might be it's the   centralized management if you make a sufficient showing under that wrong you can satisfy the unified business group for india but i have a hard time it's too difficult to it's it's either too easy to meet or it's too difficult to really say what is and i think that's exactly right i think that's exactly right and if you look at the statute what you'll see is that there is a definition of a unit and what that says that what the department did pass that regulation remember a collision seems to support their position in this case well it depends on on how you apply that regulation to this case and what i would suggest is while there is a school of thought to suggest that if you have centralized management you also have functional integration and vice versa i think the problem with the application of that rule to this case is what companies are you looking at in other words if you look at simply the parent and the packaging companies and say if they're essential eyes management then there's also functional integration ok maybe that's a defensible point of view the problem and again this is this  jay committed is he did not apply that rule visa vi the packaging companies and the filtration companies and i think if that's your perspective there is no centralized management and therefore there is initial position our primary position is that because of the absence of that the pendency and contribution at the operating company level you don't have a unitary business to the extent that there is some type of centralized management or centralized functions that are provided by clark or the parent well at worst what you have there are two separate groups with the parents a member on a program the basis of each group and that's actually a result that is mandated by recent legislation and which we believe applies for attracted to the years but the argument of the subsidiaries where you have filtration companies on one hand packaging and the other i mean are they related absolutely not absolutely not i mean if you look at the record it's clear there were no intercompany sales there were no intercompany personnel transfers no shared space in jail clark the packaging company was based is based in rockford one of the filtration companies at a warehouse in rockford at a completely different part of the city so there is no shared space they have logos they have different marketing they have different hustlers different products different departments so why do they have different departments they produce different products if you're producing different products you're going to have a separate purchasing department you're going to have a separate sales department separate r and d i mean it makes sense you know when you look at the record in the case  take a high level approach to the nature of these businesses why there's no integration the products are entirely different if you look at some of the other illinois unitary cases that both sides have cited in the briefs you'll see that in cases where the courts have found a unitary business you have companies that produced the same thing the citizens utilities case all the companies who are in the water business the boring case the companies were all in the bottling business hormel were all food subsidiaries caterpillar were all heavy industrial machinery manufacturers and that's not a surprise to to have functional integration it's a lot easier when you have companies that produce the same thing and i think that goes to your maybe as a whole but it will certainly be based in large part on what the individual business units did as well and to the extent that an individual business unit was more profitable then there were more stock options available and the profitability of the of the business unit was really a product of what they did on a day to day basis which is what they managed on their own again the part for executives were not involved day to day management of those things well you know why in reading this it seems that the stack caption car for itself is the parent holding company right so it's not really manufacturing anything or selling anything so that the group's profitability is a function of what the individual businesses themselves do and what the individual businesses themselves do depends on what their business unit presidents do the vice presidents do and that all occurs at the individual company level it doesn't occur at headquarters i think i've touched upon all the points that i would like i think the one final point that i would like to make is as far as the standard of review goes to the extent that there are legal issues here they are if you don't know and it's our think i think the threshold issue here is what is the proper rule of law you know are we looking at only the relationship between the parents and its subsidiaries or are we looking at the relationship between the operating companies themselves that's a legal issue and that should be reviewed under the they know those standard with no deference paid the agency's decision as far as some of the factual issues that we mentioned in our briefs you know the extent to which the parent control human resources department at the operating companies that's a factual question that's going to be reviewed on the other the manifest way and then yes as far as applying the proper rule of law whatever that might be held well look when we get to the standard or review the two of you agree as to what the standard name please the corp i think i'd like to begin with a colloquy between justice garcia and opposing counsel regarding what you can refer to as the two paths to get to functional integration because i think that's at the core of this case and i think there's a bit of confusion as to where plaintiff's legal argument and and his sort of clearer factual argument really begins i think the easiest way for me to do this would be to ask the court to consider a hypothetical circumstance imagine a parent that owns a lumber company and a shelf maker and imagine that there are three different ways they could theoretically structure companies or middle east stream examples but one would be to structure the parent as  company simply receives reports and files those the relevant government authorities run another would be to dictate to its to subsidiaries that they have to buy and sell products to each other a the lumber that's necessary to make the shells for the shell this necessary to herd the lumber axles now i think i like that hypothetical and now all you have to do is connect the good to the facts that are before us i absolutely can do that you see there that then that that the connection between the two subsidiaries in the hypothetical that you've just given is really the period holding company they act is the middling i mean baby in fact are at the top but they're also between the two because they accept products from one and sell it to the other and i have a question whether that situation exists in the me in the fact before well i think it's common ground between the parties that in the second variation there where the two companies are  it can we simply focus on the centralized mean strong management or do we have to find a functional integration between the e children i look if you look at what the statute requires here it says very clear you can have yes i integration with each other and then improvised as plaintiff is with each other what are you referring to each other each other between all of the different al and duties within the organization box that that functional integration is sufficient to demonstrate build a large new facility a factory where are they going to get the money from they're not going to get it from their own account they're going to get it from clark or where clark or get clark or got it from all of the subsidiary the profits of all the other subsidiaries and it got estimation of the business that originates in the stay and therefore you're going to pull in income from another stay but because you really can't know for sure where that that income is but how much is attributable to the year well actually yes  huge there has to be that connection as a matter first place was i think that you're absolutely right that's the root of the business role is the commerce clause and the and the due process clause and the question is whether or not you can truly say the income generated in one state was only generated in one state irrespective of any other activities that took place elsewhere and i think as a matter first principles the direct subsidiary to subsid the direct dealings with rule that the plaintiff is trying to smuggle into this into the statute here which is not provide for as a matter of plaintext i think that's pretty obvious that standard is nowhere to be found with respect to those concerns if you use the examples that have that i think i meet the law here what you will see is that is entirely possible that the citizens made in illinois can affect business that takes place in tennessee and so you can't say that the business took place in tennessee th dollars on there were not there so burning as a result of activities in illinois that's the prabha that's the broad constitutional role and so using my factory example i don't think you can say that the factor that tennessee was not built as a result of activities that took place in illinois it's integrate it's all part of one cohesive whole and it's not just the it's not just the centralized caste management system which i think the plaintiff has largely somewhat comprehensive program in order to do that factory they still got to get permission from their parent that because it's going to be more than twenty five thousand dollars presumably they're also and so your court as a parent is going to be making this budgeting decision with the entire group as a whole in mind we kept the factory for every one of our subsidiaries in one year they're benefiting decisions and their constant reviewing of it here as to the budget is also done based on the global concern years here's the problem  you're absolutely right in terms of the connections and the flow money benefits that subsidiaries because money coming from one use to benefit the other but you know that's i didn't think that was part of  what if they've gotten a bank loan what's the difference where the money comes from interest is the first obvious difference but what's the difference in terms of we're the the state of illinois interest in finding income that is it's very clear that these frustration companies that are out of state for example are gaming the benefit of a large pool of cash that they control in order to better their own businesses from activities that take place in illinois beth where do they pay they better their businesses they'd better their businesses in the state in which they're located they don't better their businesses in the state of illinois certainly i think they would absolutely absolutely they do because  car enough for the state of illinois you know to to tax it why does it have to go in trying to bring in income from this other subsidiary that's outside our i think with respect to the unitary business rule i think you have to view it through the lens of that provision which states were going to have the broadest possible you know terry business group i understand the policy concerning expressing your honor that perhaps we're getting a position the department took in fired that just the sort of incidental byproduct functions which in this case would be those that are required just by a whole just because it's a holding company the steps that has to take in terms of probably tax and to a lesser degree posner include at the end which says i'm not entirely persuaded that just set just central management alone is sufficient right i don't think we're in the market i think he says in many cases that were absolutely be sufficient but but these are really purely incidental accidental by products that they that corporate has no discretion there are no additional questions thank you  that let me address the environment decision first because i think there is a very key sentence in the decision that i think really brings into focus what we have at issue here today the second circuit said that environment is actively involved in the management of both subsidiaries both may therefore be said to be under common management and each one we may assume is functionally into graded with environment  so what counsel just mentioned about all of the alleged centralized services that clarke or provides whether it's a pension whether it's payroll the cash management system whatever that might be was arguably presence in  fired on as well the court recognizes that there was a parent that provided strong centralized management services just posers point was that's not enough that's the hub you still need a room you need a connection between the operating subsidiaries going back to to councils hypothetical i think what i would prefer to do is is look at the actual facts of this case and maybe use those as a as a basis for a hypothetical but what we have here is we have  packaging company that's based in illinois that is is producing producing packaging products in illinois and has some affiliates outside illinois that are in the filtration business those businesses do nothing to depend on or contribute sure it is agree with i do i do it just because as far as the cash management system goes your honor that's just a means for a parent company or for subsidiaries really to pay dividends for their parent and then for the parents to make capital contributions to spent the expenses that are incurred again are for the most productive to the individual bit business units you have the twenty five thousand dollars capital expenditure limit but other than that the nine capital expenditures the raw materials the consulting fees the rent and utilities business unit so how they incur their expenses is left up to them and it's not as if when money swept up the subsidiaries are left with nothing i think that's exactly right now that's exactly right but make it right right so if you have this illinois business if it were for example selling products or providing raw materials or providing know how technology r and d intercompany personnel transfers if you hand that between the illinois based packaging company and the out of state filtration businesses i can see the integration there i could see that that's not what we have here because we have to separate businesses with the different raw materials with different customers as republican five minutes sure sure this is my final point but i think it's important to note that the packaging companies are continuing to file in illinois i mean this is not a situation where the companies trying to avoid it want to thank you both sides here you provided interesting interesting arguments and an interesting case will take it under advisement and the court is now with your