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Plaintiffs Hormel Foods Corporation and one of itssubsidiaries, Jennie-O Foods, Inc. (collectively Taxpayers), appeal anorder of the circuit court affirming a decision of the Director ofthe Illinois Department of Revenue (Director). The Director foundthat, for purposes of the Illinois Income Tax Act (Tax Act) (Ill.Rev. Stat. 1981, ch 120, par. 1-101 et seq. (now 35 ILCS 5/101 et seq.(West 1998))), Taxpayers were members of a "unitary business group"for the years 1991, 1992, and 1993, as defined in section1501(a)(27) of the Tax Act (35 ILCS 5/1501(a)(27) (West 1998)) andissued notices of deficiency against Hormel in the amount of$101,191 and Jennie-O in the amount of $214,210. We affirm.

Hormel is an Austin, Minnesota-based meat processor andmanufacturer of food products. Hormel has acquired severalsubsidiary companies, all of which are somehow related to the foodbusiness. Hormel classifies its subsidiaries as either "core"subsidiaries or "stand-alone" subsidiaries. The core subsidiariesare operated as divisions of Hormel and are not run as separatecompanies. During the tax years at issue, the core companies wereDubuque Foods, Logistice Services, Inc., Creative ContractPackaging (CCP), Rochelle Fresh Meats, Rochelle Processed Meats,Rochelle Foods, and Dold Foods. During the tax years at issue, thestand-alone companies were Jennie-O, Catalogue Marketing, HormelInternational, Vista, Farm Fresh Catfish, Algona Food EquipmentCo., Inc., Dan's Prize, Inc., and Dubuque/FDL Marketing.

Hormel filed a separate Illinois corporate income tax returnfor the tax year ending October 31, 1991. Hormel filed a combinedIllinois return with CCP (one of Hormel's core subsidiaries) forthe tax year ending October 31, 1992. Hormel filed a combinedIllinois return with CCP and Dubuque (also a core subsidiary) forthe tax year ending October 31, 1993. Vista (a stand-alonesubsidiary) filed separate Illinois corporate income tax returnsfor tax years ending October 31, 1991 through October 31, 1993.

After an audit, the Director issued notices of deficiency toHormel and Jennie-O for $101,919 and 214,210, respectively, and anotice of overpayment of $28,293 to Vista on January 31, 1996. Hormel and Jennie-O protested the notices and asserted that theywere not a unitary business group for purposes of the Tax Act.

After a hearing, the administrative law judge (ALJ) found that"Hormel and all of its subsidiaries are functionally integratedthrough the exercise of strong centralized management, andtherefore constitute a unitary business group pursuant to 35 ILCS5/1501(a)(27)." As such they were required to file combinedIllinois corporate tax returns. The ALJ's finding was based inpart upon the existence of a flow of knowledge and a flow of valuebetween Hormel and its subsidiaries, in addition to the centralization of a number of corporate services at Hormel. The Directoradopted the ALJ's finding. Thereafter, Taxpayers sought administrative review in the Cook County circuit court. The circuitcourt affirmed the ALJ's ruling and Taxpayers now appeal.

The issue before us is whether Hormel and its subsidiariescomprise a unitary business group as defined in section 1501(a)(27)of the Illinois Income Tax Act.

Under the due process and commerce clauses of the UnitedStates Constitution, a state may tax income earned only within itsborders. See Container Corporation of America v. Franchise TaxBoard, 463 U.S. 159, 77 L. Ed. 2d 545, 103 S. Ct. 2933 (1983). Athorough review of the principles of income apportionment for stateincome taxation purposes can be found in our supreme court'sopinion General Telephone Co. v. Johnson, 103 Ill. 2d 363, 368-72(1984). We will very briefly reiterate them here.

When a single-taxable entity owns and operates separate anddistinct businesses in different states, the entity must determineand account for the amount of income that is attributable to theoperations in each taxing state. In such a case, because eachoperation is separate and distinct, the entity can accuratelydetermine income earned in each state by utilizing the "separateaccounting" method. See General Telephone Co. v. Johnson, 103 Ill.2d 363, 369 (1984); Citizens Utilities Co. v. Department ofRevenue, 111 Ill. 2d 32, 39 (1986).

Somewhat more complicated is the case of a corporation thatoperates a single, functionally integrated business in more thanone state (i.e., a unitary business where each operation contributesto the income of the business as a whole). In the case of aunitary business, the separate accounting method does notaccurately divide the income among the various taxing states. SeeGeneral Telephone, 103 Ill. 2d at 369; Citizens Utilities, 111 Ill.2d at 39. So, to provide for a more exact accounting, many states,including Illinois, employ some variation of "formula apportion-ment." See General Telephone, 103 Ill. 2d at 370; CitizensUtilities, 111 Ill. 2d at 39; 35 ILCS 5/304(a) (West 1998). Underthe formula apportionment method, the income of the taxable entityis totaled and apportioned to each taxing state based on the ratiothat the entity's activities in the taxing state bear to theentity's activities in all the states. See General Telephone, 103Ill. 2d at 370; Citizens Utilities, 111 Ill. 2d at 40.

An even more complicated situation exists in the case of acorporation that carries on a multistate unitary business as partof an associated group of corporations, commonly referred to as a"unitary business group." See General Telephone, 103 Ill. 2d at371; Citizens Utilities, 111 Ill. 2d at 40. In the case of aunitary business group, Illinois uses the "combined apportionment"method to determine the income attributable to Illinois by anymember of the group. See General Telephone, 103 Ill. 2d at 371; 35ILCS 5/304(e)(West 1998). The combined apportionment methodoperates to treat the group of corporations as though it was asingle-taxable entity carrying on a unitary business. See CitizensUtilities, 111 Ill. 2d at 40. Similar to formula apportionment,the combined apportionment method takes the total income of theunitary business (by combining the income from each corporationinvolved in the business) and applies an apportioning ratio to thetotal to determine the taxable income of the member operating inthe taxing state. See General Telephone, 103 Ill. 2d at 371-72;Citizens Utilities, 111 Ill. 2d at 40.

Because there are constitutional limitations on a state'spower to tax income that arises out of interstate activities, astate may tax out-of-state activities of an associated corporationby combined apportionment only when the corporations constitute a"unitary business." See Container Corp. v. Franchise Tax Board,463 U.S. 159, 165-67, 77 L. Ed. 2d 545, 553-55, 103 S. Ct. 2933,2940-41 (1983). Taxpayers in the case at bar appeal the determination that they comprise a unitary business group and, as such, arerequired to report their income using the combined reportingmethod.

In reviewing a final decision under the Administrative ReviewLaw (735 ILCS 5/3-101 et seq. (West 1998)), we review theadministrative agency's decision, not the circuit court'sdetermination. See XL Disposal Corporation, Inc. v. Zehnder, 304Ill. App. 3d 202, 207 (1999). An administrative agency's decisionson questions of fact are entitled to deference and are reversedonly if against the manifest weight of the evidence. See XLDisposal, 304 Ill. App. 3d at 207. Questions of law decided by anadministrative agency are not entitled to deference and, however,are reviewed de novo. See XL Disposal, 304 Ill. App. 3d at 207.

Here, both parties recognize that the issue in this casecannot be neatly characterized as either one of law or fact. SeeCity of Belvidere v. Illinois State Labor Relations Board, 181 Ill.2d 191, 205 (1998). The ALJ's finding is factual, in part, becauseit involves considering whether the facts in this case support afinding that Taxpayers participated in a unitary business. SeeCitizens Utilities, 111 Ill. 2d at 47. The ALJ's finding alsoconcerns a question of law because the term "unitary business" isstatutory and, thus, requires interpretation. Consequently,because this case involves an examination of the legal effect of agiven set of facts, it involves a mixed question of fact and lawand the ALJ's determination should be affirmed unless clearlyerroneous. See XL Disposal Corp, 304 Ill. App. 3d at 207.

"Clearly erroneous" is said to rest somewhere between the"manifest weight of the evidence" standard and the de novostandard, requiring us to afford some deference to the agency'sexperience and expertise. City of Belvidere, 181 Ill. 2d at 205. Under this standard, we must accept the administrative agency'sfindings unless we are "left with the definite and firm convictionthat a mistake has been committed." Concrete Pipe & Products ofCalifornia, Inc. v. Construction Laborers Pension Trust, 508 U.S.602, 622, 124 L. Ed. 2d 539, 563-64, 113 S. Ct. 2264, 2279 (1993),quoting United States v. United States Gypsum Co., 333 U.S. 364,395, 92 L. Ed. 746, 766, 68 S. Ct. 525, 542 (1948).

Taxpayers argue on appeal that the ALJ's finding that Hormeland its subsidiaries constitute a unitary business group must bereversed because the ALJ based her finding on improper factors and,moreover, failed to independently examine the elements of strongcentralized management as provided in section 1501(a)(27) of theTax Act.

Under section 1501(a)(27) of the Tax Act, a "unitary businessgroup" is defined in pertinent part as follows:

"(27) Unitary business group. The term'unitary business group' means a group ofpersons related through common ownership whosebusiness activities are integrated with,dependent upon and contribute to each other. *** Unitary business activity can ordinarilybe illustrated where the activities of themembers are: (1) in the same general line(such as manufacturing, wholesaling, retailingof tangible personal property, insurance,transportation or finance); or (2) are stepsin a vertically structured enterprise orprocess (such as the steps involved in theproduction of natural resources, which mightinclude exploration, mining, refining, andmarketing); and, in either instance, themembers are functionally integrated throughthe exercise of strong centralized management(where, for example, authority over suchmatters as purchasing, financing, tax compliance, product line, personnel, marketing andcapital investment is not left to each member)." 35 ILCS 5/1501(a)(27)(West 1998).

"Business activity" is the essential element in the definition ofa unitary business group and under the Tax Act unitary businessactivity is illustrated where the members are either (1) engaged inthe same line of business and functionally integrated through theexercise of strong centralized management, or (2) steps of avertically integrated enterprise and functionally integratedthrough the exercise of strong centralized management.

In the ALJ's analysis of whether Hormel and its subsidiariescomprise a unitary business group, the ALJ began by referencing theTax Act. She noted, and we agree, that there is no dispute thatHormel and its subsidiaries are in the same general line ofbusiness; all of the companies are involved in some aspect ofmanufacturing in the food industry. Therefore, as the ALJdetermined, the issue before her, and now before this court, iswhether the entities are functionally integrated through theexercise of strong centralized management.

First, the ALJ recognized the existence of a flow of valuebetween Hormel and its subsidiaries. She stated that while a flowof value was certainly typified through intercompany transfers ofraw materials and finished product, it more significantly wasdemonstrated through a flow of knowledge. She emphasized that atransfer of know-how "is a key indicator of the economic interrelationship between the companies." She stated that a transfer ofknow-how occurred between Hormel and its subsidiaries through thetransfer of employees; the existence of a standard quality improvement process for all subsidiaries; the instruction provided to thesubsidiaries by Hormel engineers on plant maintenance; and the useby the subsidiaries of Hormel's research and development facility.

Second, the ALJ found the existence of "synergies" betweenHormel and its subsidiaries. She pointed to the following testimony of Dan Hodapp (executive vice president and chief financialofficer of Hormel and vice president of Jennie-O) regardingHormel's decision-making process related to acquisitions:

"And there we're looking for companies that wethink - that some way we can - that will add towhat we're doing or that can help in some wayor another add to what they're doing.

***

We likely will not go out and buy anelectronics company or make radios or television sets. But we are interested in anythingin the food business because we think that'swhere our expertise is, and that's where ourknowledge and skills are.

So what we are looking for are ways toexpand the company to get returns to ourshareholders, especially in those areas and inthose functions where there is some knowledgeand some additions can be made both ways, andalso that are consistent with the reason thatour shareholders have invested in your company. In other words we're in the foodbusiness." (Emphasis added.)

The ALJ stated that the synergies described by Hodapp existingbetween Hormel and its subsidiaries exemplify "a group of personsrelated through common ownership whose business activities areintegrated with, dependent upon and contribute to each other." 35ILCS 5/1501(a)(27)(West 1998).

Third, the ALJ found the existence of strong centralizedmanagement. This was indicated, she noted, by significant movementof highly placed personnel from Hormel to the subsidiaries andoften back to Hormel. She also found relevant the fact that Hormelprovides a number of services to its subsidiaries, such as: internal audit services, legal services, insurance services andinvestment services. She also noted that Hormel prepares theconsolidated financial statements and tax returns. She furthernoted that Hormel's approval is required for large purchases by thesubsidiaries. In addition, she noted that Hormel's subsidiaries donot obtain their own financing but that all monies come from Hormelin the form of intercompany loans. Finally, she noted that all ofthe subsidiaries report their financial results to the Hormel Boardat every board meeting, which occurs every two months.

Thus, the ALJ concluded that, because the facts demonstrate aflow of knowledge, a significant level of control by Hormel overthe subsidiaries, and the centralization of a number of corporateservices at Hormel, Hormel and its subsidiaries comprise a unitarybusiness group.

The Taxpayers challenge the ALJ's finding and argue that shefailed to properly apply section 1501(a)(27) of the Tax Act. Specifically, Taxpayers assert that the ALJ ignored the followingphrase in section 1501(a)(27)(2): "where, for example, authorityover such matters as purchasing, financing, tax compliance, productline, personnel, marketing and capital investment is not left toeach member." 35 ILCS 5/1501(a)(27)(2) (West 1998). Taxpayersassert that this language requires the ALJ to find that Hormel hascontrol over each of the enumerated areas in order to conclude thatTaxpayer's are functionally integrated through the exercise ofstrong central management and, that the ALJ's failure to do sorenders her decision erroneous. To support this argument,Taxpayers rely on the legislative history of section 1501(a)(27)and assert it demonstrates an intent of the General Assembly tomore narrowly define a unitary business for purposes of the Tax Actthan permitted under the United States Constitution.

During the 1982 session, the Illinois General Assembly passedHouse Bill 2588, which completely prohibited combined tax reportingby corporations. Ill. House Journal, 82d Ill. Gen. Assem., May 19,1982, at 1353, 1361, 1362; 82d Ill. Gen. Assem., May 21, 1982, at85-100; 82 Ill. Gen. Assem., House Senate Proceedings, June 24,1982, at 127-50. Governor Thompson, however, exercised an"amendatory veto" pursuant to article IV, section 9(e), of theIllinois Constitution of 1970, and returned the bill to the Housewith specific recommendations for change. The Governor suggestedthat the bill be amended to allow combined reporting ofcorporations' domestic income, but not for earned income overseas. He also proposed a definition of "unitary business group" toclarify when combined reporting was necessary:

"First, I am recommending that Illinoisstatutes clearly define a unitary group as onein which the members are in the same line ofbusiness, are on the same apportionment formula, and are functionally integrated. Inmany of the other States which apply combinedreporting, these definitions are not spelledout and taxation decisions may be arbitraryand may be based on factors other than business activity. With these definitions placedin the Statutes, Illinois will provide thecertainty and the stability so important tobusinesses, particularly those consideringexpanding within or into Illinois." Ill.Senate Journal, 82d Ill. Gen. Assembly,November 19, 1982, at 3756.

Thereafter, the recommended changes were adopted by a majority ofeach house of the General Assembly. As amended, the Tax Act addeda provision that expressly requires combined apportionment fortaxpayers who are members of a statutorily defined unitary businessgroup. Ill. Rev. Stat. 1983, ch. 120, pars. 3-304(e), 15-1501(a)(28).

Taxpayers argue that the Governor's veto message "leaves nodoubt that the intent of the statute was to narrow the definitionthat had been applied by other states." (Emphasis in original.) Taxpayers contend that the focus on "business activity" allows onlyconsideration of objective facts and not the subjective "transfersof knowledge" or "synergies" relied upon by the ALJ.

Taxpayers also assert that any reliance on cases decided priorto the enactment of the amendment is misplaced. Prior to theamendment, Illinois defined a unitary business through state commonlaw. In its 1981 decision in Caterpillar Tractor Co. v. Lenckos,84 Ill. 2d 102 (1981), our supreme court described a unitarybusiness group as a

"group of functionally integrated corporateunits which are so interrelated and interdependent that it becomes relatively impossiblefor one State to determine the net incomegenerated by a particular corporation's activities within the State and therefore allocableto that State for purposes of taxation." Catepillar Tractor Co., 84 Ill. 2d at 116.

In concluding that the Catepillar Tractor Company was a unitarybusiness the court noted that it

"maintain[ed] strict uniformity in areas suchas product design, control maintenance,accounting procedures, research and development and even a uniform standard or code ofthe conduct for its personnel throughout theworld. Any suggested changes or departuresfrom these uniform procedures are subject tofinal approval from the corporation's principal headquarters in Peoria." CatepillarTractor Co., 84 Ill. 2d at 117.

In the later case of Citizens Utilities Company of Illinois v.Department of Revenue, 111 Ill. 2d 32 (1986), which dealt with taxyears ending prior to the enactment of section 1501(a)(27), thesupreme court stated that "[f]unctional integration and economiesof scale, as well as direct transfers of value, are all indicativeof a unitary business since the contributions of each entityincrease the taxable income of all the others." CitizensUtilities, 111 Ill. 2d at 48. In upholding the finding that thetaxpayer was part of a unitary business, the Citizens Utilitiescourt found the following facts relevant: (1) the parent and allits subsidiaries share the same officers as well as interlockingboards of directors; (2) parent must approve disbursements; (3)parent provides legal assistance and reviews major engineeringprojects; (4) parent provides complex accounting functions; and (5)an intercompany account provides parent access to revenues receivedby subsidiaries. See Citizens Utilities, 111 Ill. 2d at 48.

We find that the ALJ properly found Taxpayers to be a unitarybusiness group. First, we reject Taxpayers' assertion that section1501(a)(27) of the Tax Act requires us to find that Hormel exertsauthority over every function enumerated. Section 1501(a)(27)states:

"[T]he members are functionally integratedthrough the exercise of strong centralizedmanagement (where, for example, authority oversuch matters as purchasing, financing, taxcompliance, product line, personnel, marketingand capital investment is not left to eachmember)." (Emphasis added.) 35 ILCS 5/1501(a)(27) (West 1998).

Enumeration of a list of factors in a statute does imply theexclusion of others unless there is evidence of a contrarylegislative intent. See Baker v. Miller, 159 Ill. 2d 249, 260(1994). Here the use of the phrases "for example" and "suchmatters as" in the definition is evidence of a contrary legislativeintent. Those phrases show that the list of items is exemplaryonly and not exclusive. Cf. Gem Electronics of Monmouth, Inc. v.Department of Revenue, 286 Ill. App. 3d 660, 667 (1997) ("The words'include' or 'including' are ordinarily terms of enlargement ratherthan restriction and indicate that items enumerated in a statuteare not meant to be exclusive").

Moreover, a review of the pertinent department regulationdemonstrates that the functions enumerated in the Tax Act are notthe only factors which may be considered. The regulation states:

"The exercise of strong centralized managementwill be deemed to exist where authority oversuch matters as purchasing, financing, taxcompliance, product line, personnel, marketingand capital investment is not left to eachmember. Thus some groups of persons mayproperly be considered to constitute a unitarybusiness group under [the Tax Act] Section1501(a)(27) when the executive officers of oneof the persons are normally involved in theoperations of the other persons in the groupand are centralized units which perform forsome or all of the persons functions whichtruly independent persons would perform forthemselves. Note in this connection thatneither the existence of central managementauthority, nor the exercise of that authorityover any particular function (through centralized operations), is determinative itself;the entire operations of the group must beexamined in order to determine whether or notstrong centralized management exists." (Emphasis added.) 86 Ill. Adm. Code,