Case Study Determination of Unitary Business Group

Overview:

The Blue and Gold Company (Blue and Gold) manufactures and sells commodity chemicals that are used in markets ranging from packaging, appliances, and containers to clothing and carpeting. The company sells its products to manufacturers all over the world. Blue and Gold Inc., the Parent Company (Parent), is headquartered in Philadelphia, Pennsylvania. Blue and Golds Philadelphia corporate headquarters houses its executive force and all administrative functions, including finance, legal, procurement (purchasing), treasury, communications, human resources, and information technology. The business operates on a calendar year basis.

In addition to the Parent, the business operates through four (5) affiliated subsidiaries. See attached Organization Chart. The business also has foreign subsidiaries in Canada, Latin America, South America, and Europe. Here is a brief description of the business activities of each affiliate:

DU Corporation DU owns 1,000 acres of timberland in Georgia and Florida. Many years ago, when the company was first formed, the bark from these trees was used by Blue and Gold in the tanning process to transform hides and skins into leather. Blue and Gold ultimately decided to abandon the tanning business in 2001 as it did not fit in with the organizations long-term core business strategy. Since 2001, DU has infrequently sold timber to local paper companies in both states. Revenues from timber sales are not material.

XYZ Inc. XYZ produces commodity chemicals, Blue and Golds core business, at 6 manufacturing plants in the U.S. and several plants in Canada and Europe:

• Chicago, IL
• Houston, TX
• Knoxville, TN
• Louisville, KY
• Midland, MI
• Newark, NJ

XYZs sales force is also based at these locations, as well as several small sales offices throughout the country. Pursuant to an intercompany services agreement, XYZ pays a management fee to the Parent for certain centralized general administrative services, including accounting, legal, and human resources. Parents management has an ongoing operational role with respect to XYZs business activities and visits the chemical plants on a regular basis.

In addition, XYZs global research & development facility is located at the Midland, MI site.

RM Inc. RM Inc. purchases certain raw materials from various outside suppliers and ships them in leased railcars or trucks to XYZs manufacturing facilities in Kentucky and Tennessee for use in the chemical production process. The raw materials are stored in tanks at RMs centrally located facility in Bowling Green, Kentucky.

B&G Finance Corp. B&G Finance provides short and long-term financing for the organizations general operating needs. This financing primarily consists of intercompany loans and advances. All of the financing transactions between B&G Finance and its affiliates are conducted at arms-length interest rates pursuant to various intercompany loan agreements. B&G Finance also holds controlling interests in Blue & Golds foreign subsidiaries and owns intellectual property which it licenses to affiliated companies. B&Gs income is derived solely from royalties, interest and dividends. B&G Finance leases office space in Wilmington, Delaware where its original books and records are maintained and its general administrative activities are operated from. B&G Finance does not conduct any business activities outside Delaware.

ABC Inc. ABC is a manufacturer of high-end bicycles, based in Pittsburgh, PA. ABC sells the bicycles to retailers throughout the U.S. Blue and Gold acquired 80% of the business (formerly privately held) several years ago as an investment. The CEO of Blue and Gold happens to be an avid fan of bicycle racing. ABC operates independently of the core chemicals business, but pays a management fee to the Parent for certain general administrative services. ABC Inc. has its own management team, manufacturing facility and sales force. Occasionally, the CEO of Blue and Gold will visit ABCs headquarters to discuss overall business strategy and to review the financial results. The CEO also enjoys a delicious Primanti Bros. sandwich when she visits Pittsburgh. The CEO is not involved in the day-to-day operations of ABC Inc.

Mario Inc. On July 1st of the current year, Blue and Gold acquired 100% of Mario, Inc. to increase its presence in the Western part of the U.S. Mario, based in Los Angeles, California, manufactures substantially the same commodity chemicals as Blue and Gold. The executive teams of the two businesses had been planning and negotiating the potential transaction for nine months prior to the acquisition. Immediately after the acquisition, Marios management team was eliminated and Blue and Golds executives took over the day to day operations of Marios manufacturing business. Shortly afterward, a significant portion of Marios administrative personnel were being separated from the company. After a few months, Mario began paying a management fee to Blue and Golds Parent for shared administrative services. Blue and Gold planned to gradually shut down Marios Texas manufacturing facility and consolidate operations with Blue and Golds plant in Houston by the end of the year. Blue and Gold also anticipated merging Marios accounting systems with its own existing system by the end of the year.

Other Facts:

• The Parent and its affiliated subsidiaries have several common (overlapping) officers and directors.
• There are transfers of technical information between the Parent and those affiliates which are in the chemicals business.

Task:

Based on the facts presented above, determine which entities (if any) in Blue and Golds affiliated group are engaged in a unitary business with the Parent (The Blue and Gold Company) in California. Assume all entities, except for RM Inc. and B&G Finance Corp., have nexus in California.

You must support your conclusion by reference to the various unitary tests established by the U.S. Supreme Ct. and state tax courts (the cases we covered in class). There is no right answer. The determination of a unitary business is a grey area of state taxation. You will be evaluated on the strength and persuasiveness of your arguments.

Please limit your submission to 2-3 pages.

BLUE \& GOLD ORG CHART BLUE \& GOLD CO (PARENT) DUCORP.(100%) XYZINC.(100%)ABCINC(80)% Mario Inc. Acquired July 1