A partner in your firm has asked that you prepare a first draft of a letter to a new client, J. Ro Clothing, Inc. J. Ro designs and manufactures a clothing line for women. J. Ro has realized very considerable profits in the past two years. Its headquarters and design team are based in Florida and its manufacturing operations are in North Carolina. J. Ro is considering the acquisition of a shoe designer and manufacturer, Metallic Shoes, Inc., as a separate subsidiary corporation. Metallic has been experiencing financial difficulties over the past several years and is operating at break even. Its headquarters and design team are based in New York. Its manufacturing operations are in North Carolina. J. Ro believes it can operate Metallic at a profit by marketing the Metallic Shoes, Inc. line of shoes as complimenting the J. Ro clothing line. J. Ro expects to continue to operate Metallic at break even for the next several years, however. After the acquisition, Metallic will continue to operate and design its shoes from its New York headquarters and J. Ro. will move its design team to New York to combine with the Metallic design team. The J. Ro. headquarters will remain in Florida and oversee both the Metallic and the J. Ro. Operations. The two companies manufacturing will remain separate, except that Metallic will be able to take advantage of some of the favorable pricing terms that J. Ro. has negotiated with suppliers.

For purposes of this question assume that: Each state requires that separate corporations that meet the constitutional definition of a unitary business file combined state corporate income tax returns.

(a) Discuss whether J. Ro. must file combined state corporate income tax returns in New York, Florida and North Carolina for J. Ro and Metallic Shoes, or may the two companies file separate returns? Identify any additional facts that would help you be more certain in making this determination.

(b) Assume that each state requires a flow of goods in its definition of a unitary business, instead of the constitutional test. Discuss whether J. Ro. must file combined state corporate income tax returns in New York, Florida and North Carolina for J. Ro and Metallic Shoes, or may the two companies file separate returns? Identify any additional facts that would help you be more certain in making this determination.