                             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.
                          ____________
    ARGUED OCTOBER 31, 2003—DECIDED JANUARY 6, 2004
                          ____________


  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 pur-
chasing, financing, tax compliance, product line, personnel,
marketing and capital investment is not left to each mem-
ber).” 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 in-
terpreted 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 resi-
dents 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 in-
state 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 subsid-
iary 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 busi-
ness 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 gener-
ated in Illinois.
   The Illinois Department of Revenue filed a claim in bank-
ruptcy 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, sec-
onded 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 func-
tionally 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 consoli-
dated 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 oper-
ates. 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. Depart-
ment 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 out-
of-state income that Illinois wants to tax and one with in-
state 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 com-
mon 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 subsidi-
    aries 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 Con-
    necticut . . . 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 en-
    tered 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 appear-
ance 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 deter-
    mine the net income generated by a particular corpora-
    tion’s activities within the State and therefore allocable
    to that State for purposes of taxation. A classic illustra-
    tion 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 unifor-
    mity in areas such as product design, control mainte-
    nance, accounting procedures, research and develop-
    ment 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 rela-
tively autonomous in their day-to-day operations,” and
“there was no significant flow of goods between any of the
corporations,” the parent provided “centralized warehous-
ing, [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 subsid-
iaries 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 apportion-
ing 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 food-
packaging 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 ser-
vices 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 Illi-
nois’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 par-
ent 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 allo-
cation 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
