Appeal from the Circuit Court of Cook County. No. 09-L-51291 Honorable James C. Murray, Jr., Judge Presiding.
The opinion of the court was delivered by: Justice Robert E. Gordon
PRESIDING JUSTICE ROBERT E. GORDON delivered the judgment of the court, with opinion.
Justices Garcia and Palmer concurred in the judgment and opinion.
¶ 1 In this appeal, plaintiff Clarcor, Inc. seeks a refund of a portion of the Illinois corporate taxes that it had already paid.
¶ 2 This corporate plaintiff has subsidiaries that are engaged
primarily in packaging, and subsidiaries that are engaged primarily in
filtration. On its original tax returns for the tax years 2002 and
2003, plaintiff included both the packaging and the filtration
subsidiaries on its returns. However, after the Seventh Circuit issued
a decision in In re Envirodyne Industries, Inc., 354 F.3d 646 (7th
2004), plaintiff filed amended returns, in an attempt to
report the packaging subsidiaries as a separate entity and to claim a
¶ 3 Plaintiff does not seek to report the filtration subsidiaries separately. Thus, plaintiff asks us to find that the parent and the filtration subsidiaries are one group, and that the packaging subsidiaries are a second and separate group for tax purposes.
¶ 4 Specifically, in this appeal, plaintiff challenges the finding of the defendant Director of the Illinois Department of Revenue that the packaging subsidiaries should be included with plaintiff and its filtration subsidiaries as one "unitary business group" for tax purposes. In support, plaintiff raises two distinct arguments. First, plaintiff argues that the Seventh Circuit's holding in Envirodyne, 354 F.3d 646, requires horizontal integration between the subsidiaries, and not just vertical controls between the parent and its subsidiaries; and that there was insufficient horizontal integration between its packaging and filtration subsidiaries for the Department to find a unitary business group. Second, plaintiff argues that, even if horizontal integration was not required between the subsidiaries, there was insufficient vertical integration between the parent and its packaging subsidiaries to justify the Department's finding of a unitary business group. In other words, plaintiff argues that both the horizontal connections (between subsidiaries) and the vertical connections (between parent and subsidiaries) were lacking. For the following reasons, we do not find these arguments persuasive.
¶ 6 I. Factual Background
¶ 7 The record before us establishes the following facts concerning plaintiff Clarcor and its subsidiaries.
¶ 8 Plaintiff Clarcor is a publicly traded corporation with its headquarters in Rockford, Illinois. It was first established in 1904 under the name "J.L. Clark Manufacturing," as a company which engaged exclusively in packaging and metal lithography.
¶ 9 J.L. Clark had a long history of manufacturing packaging materials, specifically high-end lithographic packaging, before it entered into the filtration business. After 70 years of operation, plaintiff entered the filtration business in 1974 when it acquired Stone Industrial Corporation, which also had a filter division. In 1981, plaintiff expanded its filtration business when it also acquired J.A. Baldwin Company, which was later renamed Baldwin Filters.
¶ 10 In 1987, plaintiff became reorganized. Instead of being named "J.L.
Clark Manufacturing, Inc.," it was renamed "Clarcor, Inc." It also created two new holding companies: Clarcor Consumer Products, Inc., which became the holding company for the group's packaging business; and Clarcor Filtration Products, Inc., which became the holding company for the group's filtration companies.
¶ 11 Despite the reorganization, plaintiff Clarcor maintained ownership of both the filtration and the packaging holding companies which, in turn, owned the filtration and packaging subsidiaries. Thus, plaintiff Clarcor owned the stock of Clarcor Consumer Products which, in turn, owned the stock of J.L. Clark, which was engaged in the manufacture of metal packaging, as well as related services. Similarly, plaintiff Clarcor owned the stock of Clarcor Filtration Products which, in turn, owned the group's filtration companies, such as Baldwin Filters.
¶ 12 Plaintiff Clarcor's chief executive officer, chief financial officer, vice president and controller, and its general counsel all became officers of each filtration and packaging subsidiary. Plaintiff Clarcor's officers also had the signing authority for the tax returns of all its subsidiaries. Plaintiff Clarcor oversaw the hiring of senior management personnel at each of its subsidiaries, and determined the compensation of their senior management officials. Stock option compensation for these employees was determined based on the performance of plaintiff Clarcor as a whole, and not on the performance of the individual subsidiary.
¶ 13 The subsidiaries did not have their own separate boards of directors. However, they did maintain their own departments for purchasing, accounting, sales, human resources, information technology, marketing, and research and development. The packaging and filtration businesses did not share common facilities, such as warehouses, or common product catalogs.
¶ 14 Plaintiff Clarcor did provide services to its subsidiaries, such as payroll services and income tax preparation. There was an intercompany charge for these services. Specifically, Gary Weaver, plaintiff Clarcor's vice president of tax, testified before the administrative law judge that, for the services provided by the parent, plaintiff Clarcor charged "1.6 percent of revenue to the filtration companies[,] and 1 percent of revenue [was] charged to the packaging [subsidiary], J.L. Clark." As part of its payroll services, plaintiff Clarcor prepared the payroll tax returns and all the payroll checks came from plaintiff Clarcor's account. Plaintiff Clarcor also managed the employee benefit programs for its subsidiaries, including pension plans, 401(k) plans, and health insurance plans. The benefit plans available to the subsidiaries were the same. Although the subsidiaries had separate human ...