Maryland Circuit Court Affirms Intangible Holding Company Had Corporate Income Tax Nexus

The Maryland Circuit Court for Anne Arundel County recently affirmed a Maryland Tax Court decision holding that an out-of-state intangible holding company had corporate income tax nexus with Maryland because it was considered to have no real economic substance as a business entity separate from its parent company.1 In affirming the Tax Court, the Circuit Court agreed that a Maryland Court of Appeals decision, Gore Enterprise Holdings, Inc. v. Comptroller of the Treasury,2 was factually similar to the instant case and must be followed. The Circuit Court also affirmed the Tax Court's holding that the Maryland Comptroller properly used a blended apportionment factor based on the income tax returns of the related entities in Maryland. However, the Circuit Court reversed the Tax Court's waiver of interest following the release of the Gore decision.

Background

The parent company, ConAgra Foods, Inc. (ConAgra), a multi-national producer and marketer of processed foods and agricultural products, was based in Nebraska and had a physical presence in Maryland. In 1996, ConAgra incorporated ConAgra Brands, Inc. (Brands), a Nebraska corporation, to hold and enforce trademarks owned by ConAgra and several related subsidiaries, conduct central advertising for the corporate brands, and achieve other corporate efficiencies, including tax savings. Brands, which was entirely owned by ConAgra, licensed the trademarks back to ConAgra and the related subsidiaries, as well as to third-party corporations in a few cases. In exchange for the licensed trademarks, the licensees paid annual royalties to Brands, which was the primary source of Brands' income. All profits from Brands' operations were transferred back to ConAgra in annual payments and through other internal financial arrangements. Brands was physically housed on ConAgra's corporate campus in Nebraska and rented space and equipment from ConAgra. Brands had its own board of directors and officers which were originally provided by ConAgra from ConAgra's corporate executive corps. The officers were paid by Brands. In addition, Brands acquired employees from 1996 to 2003, the tax years in question, and had as many as 23 employees during this period. However, Brands did not have any employees, agents or property located in Maryland.

For the 1996-2003 tax years, Brands did not file corporation income tax returns in Maryland. However, five ConAgra entities, including the parent company, filed Maryland corporation income tax returns during this time. In 2007, the Maryland Comptroller assessed corporate income tax, interest and penalties against Brands for the 1996-2003 tax years. Brands appealed from a notice of final determination that upheld the Comptroller's assessment. In the notice, the Comptroller alleged that Brands was operated, at least in part, as a conduit to shift income out of the reach of Maryland's taxing authorities. Brands contested the notice and argued that it was established for legitimate economic business purposes.

The Maryland Tax Court conducted the trial of this case in October 2010. However, the Tax Court, with the consent of Brands and the Comptroller, decided to wait until the resolution of the Gore3 case involving similar issues before issuing its decision. In effect, this resulted in an informal stay of the case.

In February 2015, the Maryland Tax Court affirmed the notice of final determination and upheld the assessment of corporate income taxes. 4 Applying Gore, the Tax Court held that Brands had nexus with Maryland because it lacked real economic substance as a separate business entity. According to the Tax Court, the imposition of tax on Brands satisfied both the Due Process and Commerce Clauses of the U.S. Constitution, on the basis that sufficient nexus existed to tax Brands because Brands' income was...