United States: Gore Decided: Unitary Nexus Rejected; Economic Substance Test Clarified

Today, the Maryland Court of Appeals issued its highly anticipated decision in Gore Enterprise Holdings, Inc. v. Comptroller of the Treasury; Future Value, Inc. v. Comptroller of the Treasury.1 The court held that under the Due Process and Commerce Clauses, Maryland had the authority to tax the income of two out-of-state subsidiaries that did not have economic substance as separate business entities apart from their Maryland parent. The court also clarified that the unitary business principle cannot be used as a basis to assert nexus over an out-of-state entity engaged in a unitary business with another entity with a presence in Maryland. A copy of the opinion can be accessed here.


W.L. Gore & Associates, Inc. ("Gore") is a Delaware corporation that uses certain patented material in the manufacture of various products. Gore operates in Maryland and is the parent to two wholly owned, out-of-state subsidiaries – Gore Enterprises Holdings, Inc. (GEH) and Future Value, Inc. ("FVI"). GEH holds all of Gore's patents and granted Gore an exclusive license to use the patents. In exchange for this license, Gore paid a royalty fee to GEH. FVI holds all of Gore's financial assets and makes loans to Gore. In return, Gore pays interest to FVI. Gore deducts its royalty payments to GEH and its interest payments to FVI from its taxable income.

In 2006, the Comptroller audited Gore and issued its typical "pick your poison" alternative assessments. The Comptroller issued assessments to GEH and FVI, asserting that the entities had nexus with Maryland, and apportioning their income to the state using Gore's apportionment factor. The Comptroller also issued an alternative assessment to Gore, disallowing Gore's royalty and interest expense deductions for its payments to GEH and FVI. Upon the Comptroller's Notice of Final Determination, which upheld the audit assessment, the entities appealed the matter to the Maryland Tax Court.

The Tax Court affirmed the assessments against GEH and FVI, explaining that because it was Gore's business in Maryland that produced the income of GEH and FVI, the subsidiaries did not have real economic substance as business entities separate from Gore, and were engaged in a unitary business in Maryland with Gore. The taxpayers then appealed to the Circuit Court for Cecil County, which reversed the Tax Court decision. The Comptroller appealed to the Maryland Court of Special Appeals. The Maryland Court of Special Appeals reversed the decision of the circuit court, stating that GEH and FVI had nexus with Maryland because they were engaged in a unitary business with Gore, and Gore had nexus with Maryland. Gore appealed the decision of the Court of Special Appeals to the Court of Appeals (Maryland's highest court).

Court of Appeals Rejects "Unitary Nexus"; Clarifies "Economic Substance as Separate Business Entities" Test

The Court of Appeals determined that the Maryland Tax Court was correct in holding that Maryland could tax GEH and FVI consistent with the Court of Appeals' holding in Comptroller of the Treasury v. SYL, Inc.2

In reaching this decision, the court's opinion does two important things. First, it clarifies that the test to be applied in evaluating intercompany transactions and intangible holding company type cases is whether the entities in question have "real economic substance as separate business entities."

Second, the court's opinion acknowledges that the unitary business principle cannot be used to assert nexus over an entity. The court notes:

We must be clear about what the unitary business principle allows. The principle can be used to 'tax an apportioned sum of [a] corporation's multistate business if the business is unitary.' But the principle does not confer nexus to allow a state to directly tax a subsidiary based on the fact that the parent company is taxable and that the parent and subsidiary are unitary.3

In reconciling the two principles in its analysis of Gore's facts, the court determined that although the unitary business principle cannot be used to establish nexus over GEH and FVI, the subsidiaries nevertheless lacked economic substance as separate entities. The court pointed to the subsidiaries' dependence on Gore for their income, the circular flow of money between the subsidiaries and Gore, the subsidiaries' reliance on Gore for core functions and services, and the general absence of substantive activity from either subsidiary that was in any meaningful way separate from Gore as support for this finding.

Impact on Subsequent Cases and Audits

Behind the Gore decision stands a line of cases involving similar issues currently pending at the Maryland Tax Court and at audit.4 Taxpayers will want to pay close attention to the application of Gore to these cases. Specifically, although the Gore decision represents a partial victory for taxpayers due to its rejection of the use of the unitary business principle to establish nexus, taxpayers will need to analyze how the "economic substance as separate entities" test applies to their facts.

Although the Court of Appeals decision rejects the unitary nexus theory, it notes that there's no reason that factors that indicate a unitary business cannot also be relevant in determining whether subsidiaries have no real economic substance as separate business entities.5 This statement seems to suggest that there's still a significant risk that the Maryland courts will continue to conflate the "unitary nexus" and "economic substance" theories as they apply the Gore decision in pending cases.


1. Gore Enterprise Holdings, Inc. v. Comptroller of the Treasury; Future Value, Inc. v. Comptroller of the Treasury, No. 36, September Term, 2013 (Md. March 24, 2014).

2. 825 A.2d 399, 375 Md. 78 (Md. 2003).

3. Gore at 13 (internal citations omitted).

4. For instance, ConAgra Brands, Inc. v. Comptroller of the Treasury, No. 09-IN-OO-0150, involving intercompany royalty payments, was heard by the Tax Court in October 2010. The Tax Court also heard arguments in August 2011 in Staples, Inc. v. Comptroller, No. 09-IN-OO-0148, and Staples the Office Superstore, Inc. v. Comptroller, No. 09-IN-OO-0149 ("Staples"), involving intercompany royalty and interest payments. In addition to these cases, there are a line of other cases involving intercompany royalty and interest payments pending before the Tax Court awaiting to be heard. Now that Gore has been decided, we may see a ruling from the Tax Court in these cases, regardless of whether the taxpayers in Gore seek certiorari to the U.S. Supreme Court.

5. See Gore at 23-24.

This article is presented for informational purposes only and is not intended to constitute legal advice.

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