In the

United States Court of Appeals

For the Seventh Circuit ____________

No. 02-1632

IN RE: ENVIRODYNE INDUSTRIES, INC., et al.,

Debtors-Appellees.

APPEAL OF: ILLINOIS DEPARTMENT OF REVENUE.

____________

Appeal from the United States District Court for the

Northern District of Illinois, Eastern Division.

No. 01 C 7861—Suzanne B. Conlon, Judge.

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ARGUED OCTOBER 31, 2003—DECIDED JANUARY 6, 2004

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Before POSNER, EASTERBROOK, and EVANS, Circuit Judges.

POSNER, Circuit Judge. The Illinois income tax statute

requires firms that constitute a “unitary business group”

to file a consolidated (called a “combined”) return. 35

ILCS 5/502(e); Ill. Admin. Code tit. 86, § 100.5200. The

quoted term signifies “a group of persons related through

common ownership whose business activities are integrated

with, dependent upon and contribute to each other.” 35

ILCS 5/1501(a)(27). They must be “functionally integrated

through the exercise of strong centralized management

(where, for example, authority over such matters as purchasing, financing, tax compliance, product line, personnel,

marketing and capital investment is not left to each member).” Id.
2 No. 02-1632

Why does Illinois require unitary business groups so

defined to file consolidated returns? Presumably to reach

income generated in other states by businesses that operate

in Illinois as well. The federal Constitution has been interpreted to forbid a state to tax income generated wholly

outside the state. Allied-Signal, Inc. v. Director, Division of

Taxation, 504 U.S. 768, 777-78 (1992); Container Corp. of

America v. Franchise Tax Bd., 463 U.S. 159, 164 (1983). But the

income of a genuinely integrated multistate enterprise is not

generated entirely in one state, and so its income must be

apportioned for tax purposes among the states in which the

enterprise operates. Id. at 169; Allied-Signal, Inc. v. Director,

Division of Taxation, supra, 504 U.S. at 772. If a firm owns a

plant in Illinois that delivers its output of beer mugs to the

firm’s distribution facilities in Wisconsin for sale to residents of Wisconsin, is the income generated from those sales

earned in Wisconsin or in Illinois? It is earned in both, and

so must be apportioned in a way that will avoid, so far as

possible, multiple taxation of the firm. But suppose the firm

is a holding company one of whose subsidiaries owns a

plant in Illinois that sells toothbrushes to Chicagoans and

the other a dance studio in Wisconsin that sells dancing

lessons to Wisconsinites, and the subsidiaries are operated

as more or less independent enterprises. It would be

unreasonable for Illinois to try to tax the income of the

dance studio but reasonable for it to tax some of the income

of the beer-mug sales in our first hypothetical, for that is a

case of a unitary business group. The constitutional test is

that “the out-of-state activities of the purported ‘unitary

business’ [must] be related in some concrete way to the instate activities. The functional meaning of this requirement

is that there be some sharing or exchange of value not

capable of precise identification or measurement—beyond

the mere flow of funds arising out of a passive investment

or a distinct business operation—which renders formula
No. 02-1632 3

apportionment a reasonable method of taxation. . . . [We

have] recognized that the unitary business principle could

apply, not only to vertically integrated enterprises, but also

to a series of similar enterprises operating separately in

various jurisdictions but linked by common managerial or

operational resources that produced economies of scale and

transfers of value.” Container Corp. of America v. Franchise

Tax Bd., supra, 463 U.S. at 166.

Envirodyne owns several subsidiaries that make food

packaging materials and several others (including

Wisconsin Steel Company) that make steel; for simplicity,

we’ll pretend that there is just one food-packaging subsidiary and one steel subsidiary, and we’ll also ignore other

subsidiaries of Envirodyne. For the tax years in question,

Envirodyne filed consolidated Illinois income tax returns so

that it could offset losses incurred by the steel subsidiary

against income of the food-packaging subsidiary. The losses

were incurred outside Illinois, and so are allocable to Illinois

only if the subsidiaries are parts of the same unitary business group. Envirodyne and the food-packaging subsidiary

are conceded to constitute a unitary business enterprise

entitled to file a consolidated Illinois income tax return. The

record contains little information on the scope of

Envirodyne’s food-packaging operations. It does indicate

that some of these operations are in Illinois and some in

other states, including California, Massachusetts, and Ohio,

and also overseas, but it does not indicate what percentage

of Envirodyne’s total food-packaging earnings are generated in Illinois.

The Illinois Department of Revenue filed a claim in bankruptcy court for the additional taxes that Envirodyne owes

if, as the Department concluded after an audit, Envirodyne

wasn’t authorized to include the losses of the steel subsid-
4 No. 02-1632

iary in its consolidated returns. The bankruptcy judge, seconded by the district judge, ruled in favor of Envirodyne,

which had the burden of proving its entitlement to file

consolidated returns, because that would have been its

burden in an Illinois state court. Raleigh v. Illinois Dep’t of

Revenue, 530 U.S. 15, 20-22 (2000); see 35 ILCS 5/904(a); Ill.

Admin. Code tit. 86, § 100.9300(a); PPG Industries, Inc. v.

Department of Revenue, 765 N.E.2d 34, 48-49 (Ill. App. 2002).

The facts are stipulated; the issue is their legal significance.

Envirodyne is actively involved in the management of

both subsidiaries; both may therefore be said to be under

common management and each, we may assume, is functionally integrated with Envirodyne. That, Envirodyne

argues (and the district court agreed, which is why the

Illinois Department of Revenue is the appellant), is all that’s

required to create a unitary business group. That there is no

integration between the food-packaging subsidiary and the

steel subsidiary—no common pension or welfare plans, no

common employee handbook, no joint advertising—the two

companies constituting spokes with a hub at Envirodyne

but no rim, except, of course, that Envirodyne files consolidated tax returns on behalf of all its subsidiaries and

therefore must provide the legal and accounting services

required for the preparation of the returns—all this,

Envirodyne’s argues, is irrelevant.

The statute, however, says that the members of a unitary

business group must depend on and contribute to each other.

It cannot be enough that each depends on and contributes

to its parent. The concept of the unitary business group, to

be a constitutional basis for taxing income earned out of

state, must identify a genuine multistate enterprise—an

enterprise that generates income which can’t confidently be

ascribed to a particular state in which the enterprise operates. If a holding company owns two unrelated companies
No. 02-1632 5

that operate in two different states, the state in which one of

them operates cannot tax the income of the other just

because the two are affiliates and each is under the control

of their common parent. Allied-Signal, Inc. v. Director,

Division of Taxation, supra, 504 U.S. at 772-73; F.W. Woolworth

Co. v. Taxation & Revenue Dep’t, 458 U.S. 354, 362 (1982);

Mobil Oil Corp. v. Commissioner of Taxes, 445 U.S. 425, 439-40

(1980). By the same token—since what is sauce for the goose

is sauce for the gander—one of the affiliates can’t use the

other’s losses to reduce its own tax liability. If Envirodyne

owned a money-losing rickshaw operator in Mandalay, it

could not reduce the income from its food-packaging

operations in Illinois by the losses of its rickshaw operation.

Illinois may be shortsighted in urging a construction of

“unitary business group” that requires genuine integration,

for that will make it harder for the state to reach out and tax

income of affiliates of Illinois firms in other states. But that

is a tactical decision for the state to make; it has no bearing

on our interpretation and application of the statute.

Both parties point to judicial language that supports

their respective interpretations of the meaning of unitary

business enterprise. Compare Citizens Utilities Co. v. Department of Revenue, 488 N.E.2d 984, 990-92 (Ill. 1986); Hormel

Foods Corp. v. Zehnder, 738 N.E.2d 145, 149-53 (Ill. App.

2000); Borden, Inc. v. Illinois Dep’t of Revenue, 692 N.E.2d

1335, 1337-41 (Ill. App. 1998), and A.B. Dick Co. v. McGraw,

678 N.E.2d 1100, 1104-08 (Ill. App. 1997), cited by

Envirodyne, with Louis Dreyfus Corp. v. Huddleston, 933

S.W.2d 460, 469-71 (Tenn. App. 1996); State ex rel. Arizona

Dep’t of Revenue v. Talley Industries, Inc., 893 P.2d 17, 25-26

(Ariz. App. 1994); Department of Revenue v. Terrace Tower

U.S.A., Inc., 15 Ore. Tax 168, 173 (Tax Ct. 2000), and Central

National-Gottesman, Inc. v. Director, Division of Taxation, 14
6 No. 02-1632

N.J. Tax 545, 556-60 (Tax Ct. 1995), cited by the Illinois

Department of Revenue. The Illinois cases, all cited by

Envirodyne, bear more directly on the meaning of the

Illinois statute, so we shall focus on them. Envirodyne

points out that they require neither any actual transfer of

product (vertical integration) between an affiliate with outof-state income that Illinois wants to tax and one with instate income for unitary status to be achieved, nor that the

affiliate having out-of-state income be integrated with all the

affiliates that have in-state income. But there has to be some

integration beyond the bare minimum of central-office

functions shared by virtue of the affiliates’ having a common parent that has decided to file consolidated tax returns

and, as a corollary of that decision, to perform the legal and

accounting services required for the preparation of those

returns.

In the only decision by the Supreme Court of Illinois that

Envirodyne cites on the meaning of unitary business group,

we read:

The record shows the taxpayer and all other subsidiaries in the group to be wholly owned subsidiaries of

the parent, and—with few exceptions—the parent and

all its subsidiaries share the same officers as well as

interlocking boards of directors. Although day-to-day

management of the operating subsidiaries is controlled

by local managers, the parent’s headquarters in Connecticut . . . must specifically approve disbursements

made by local managers over certain amounts. In the

taxpayer’s case, specific approval is required for all

purchases exceeding $500. Headquarters also reviews

major engineering projects and provides legal assistance

in interpretation of State and Federal laws. Complex

accounting functions, including preparation of the

taxpayer’s income tax returns, are also provided by the
No. 02-1632 7

headquarters. All of these services are performed for the

taxpayer, and the other subsidiaries, at cost: the parent

charges only to recover labor and overhead costs

associated with those services provided. Revenues

received by the taxpayer are deposited in a local bank

and can be withdrawn by the parent at any time. When

revenues are withdrawn by the parent, a debit is entered on the taxpayer’s intercompany account. That

account, carried as a liability by all the subsidiaries with

a corresponding account on the parent’s books, is the

means by which the parent skims earnings from one

subsidiary for investment in another. Such investments

are made as interest-free loans routed through the

intercompany account.

Citizens Utilities Co. v. Department of Revenue, supra, 488

N.E.2d at 990-91. At first glance it might seem that all that

was involved in Citizens Utilities was parental control of

each sub—a hub and spokes with no rim. But the appearance is misleading. All the subsidiaries were engaged in the

same business, that of supplying water and water-treatment

services, and, primarily through the capital-allocation

method described at the end of the quoted passage, they

were being managed essentially as a single enterprise.

The functional integration was as clear or clearer in the

three decisions by the Illinois Appellate Court that

Envirodyne cites, as well as in the only other pertinent

Illinois decisions that we have found. Caterpillar Tractor Co.

v. Lenckos, 417 N.E.2d 1343, 1351 (Ill. 1981); PPG Industries,

Inc. v. Department of Revenue, supra, 765 N.E.2d at 40-42. In

the Caterpillar case, the Supreme Court of Illinois said that

the term “unitary business group,” when applied to a

corporation which has subsidiaries or other associated

corporations in other States or countries, is used to
8 No. 02-1632

describe a group of functionally integrated corporate

units which are so interrelated and interdependent that

it becomes relatively impossible for one State to determine the net income generated by a particular corporation’s activities within the State and therefore allocable

to that State for purposes of taxation. A classic illustration of a unitary business is the Caterpillar Tractor

Company. . . . Despite the magnitude and diversity of

[its] multistate and multinational operations, there is an

overriding corporate design to maintain strict uniformity in areas such as product design, control maintenance, accounting procedures, research and development and even a uniform standard or code of the

conduct for its personnel throughout the world.

417 N.E.2d at 1351. There is nothing comparable here.

Envirodyne cites a regulation of the Illinois Department of

Revenue which says that it’s enough to create a unitary

business group that although the “subsidiaries were relatively autonomous in their day-to-day operations,” and

“there was no significant flow of goods between any of the

corporations,” the parent provided “centralized warehousing, [financing, inventory,] and accounting functions for

itself and its subsidiaries.” Ill. Admin. Code tit. 86,

§ 100.3010(c)(4)(D). This makes sense because if the subsidiaries were sharing all these functions, the income of each

subsidiary would be determined to a significant effect by

activities taking place in another state, just as in the Citizens

Utilities case. Suppose that one subsidiary sells widgets in

Illinois and another in Wisconsin, but all the widgets are

warehoused in Illinois, the billing and all other back-office

functions are performed in Illinois, and so forth; then the

income from the sale of the widgets in Wisconsin would be

generated to a significant extent by activities in Illinois, and
No. 02-1632 9

Illinois would therefore have a claim to tax part of that

income. It would be providing public services to the Illinois

branch of the enterprise (police and fire protection for the

warehouse, for example) and in doing so helping the

Wisconsin branch to obtain revenues. The goal of apportioning income for tax purposes is, so far as possible, to match

income to the state’s provision of services that help to

produce or safeguard that income.

Envirodyne is left to argue that since it participated in the

management of the steel company, it should be deemed

integrated with it. If true, this is irrelevant. It is trying to

offset the steel company’s losses in Wisconsin (and other

states other than Illinois) not against income by the foodpackaging subsidiary in Wisconsin, but rather against the

income of that subsidiary that is taxable in Illinois, and that

subsidiary has no connection with the steel company

beyond what is implicit in Envirodyne’s filing consolidated

returns for all its subsidiaries. No protective or other services rendered by Illinois to the food-packaging subsidiary

contributed to the income, or caused the losses, of the steel

company in Wisconsin. There would be no basis for Illinois’s trying to tax any of the steel company’s income, and

there is likewise no basis for Envirodyne’s trying to reap an

Illinois tax benefit from any of those losses.

We will not pretend that the course of decision in Illinois

has run entirely true. Particularly troublesome is language

in two of decisions of the Illinois Appellate Court cited by

Envirodyne that, in the teeth of the statute, equates common

management to functional integration, A.B. Dick Co. v.

McGraw, supra, 678 N.E.2d at 1102; Borden, Inc. v. Illinois

Dep’t of Revenue, supra, 692 N.E.2d at 1340, which if taken

literally—since wholly owned subsidiaries of the same parent corporation are normally considered under common
10 No. 02-1632

management—would imply unconstitutionally that all such

affiliated groups were unitary business enterprises. But our

decision is supported by the purpose and the language of

the statute, and neither party has suggested that we certify

the question to the Supreme Court of Illinois, a referral that

would in any event be awkward because of the fact-specific

nature of the question. Diginet, Inc. v. Western Union ATS,

Inc., 958 F.2d 1388, 1395 (7th Cir. 1992); Konradi v. United

States, 919 F.2d 1207, 1213 (7th Cir. 1990); see also 17A

Charles Alan Wright, Arthur R. Miller & Edward H.

Cooper, Federal Practice and Procedure § 4248, pp. 173-74 (2d

ed. 1988).

One loose end remains to be noted. We know that some of

Envirodyne’s food-packaging operations are in Illinois and

others outside, but we do not know how much of the

earnings from those operations Envirodyne allocated to

Illinois. To the extent that such allocation is discretionary

because of the inherent uncertainties involved in the allocation of joint and common costs, Envirodyne would have

had an incentive to allocate as much of those earnings

as possible to Illinois, up to the amount of the out-of-state

steel losses, if it thought it could offset the latter against the

former. With that option denied, Envirodyne may wish to

consider filing an amended return “deconsolidating” the

food-packaging operations in order to be able to file a

consolidated return in another state, which might be more

advantageous given our ruling that the Illinois Department

of Revenue was entitled to deny the offset. Whether

Envirodyne can do this is a question of Illinois law on which

we express no view; it can be considered on remand. 

The judgment of the district court is reversed and the case

remanded for further proceedings consistent with this

opinion.

REVERSED AND REMANDED.
No. 02-1632 11

A true Copy:

Teste:

 _____________________________

Clerk of the United States Court of 

Appeals for the Seventh Circuit 

USCA-02-C-0072—1-6-04