United States: 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.


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 derived from ConAgra's business in Maryland. Also, the Tax Court agreed with the Comptroller's use of a blended apportionment factor derived from the returns of the five ConAgra entities that filed in Maryland. Finally, the Tax Court abated all penalties and interest from February 23, 2009, the date when Brands filed the Tax Court petition, through February 24, 2015, the date of the Tax Court's decision, because Brands had a reasonable basis for challenging the law and acted in good faith. Brands filed a petition for judicial review and the Comptroller filed a cross-petition with the Circuit Court of Anne Arundel County.

Arguments Raised on Appeal

Prior to affirming the Tax Court's decision on the nexus and apportionment issues and reversing the Tax Court's decision on the interest abatement, the Circuit Court reviewed the arguments raised by Brands and the Comptroller.

Economically Viable Entity

Brands argued that it was an economically viable entity that differed from "phantom" holding companies that have essentially no employees, minimal expenses and rely on income almost solely provided from the parent company. In support of its claim, Brands contended that (i) it had substantial income from a variety of distinct businesses outside the parent company; (ii) a significant portion of its gross receipts was generated by distinct businesses separate from ConAgra; and (iii) it was created to manage the intellectual property of numerous ConAgra entities. Also, Brands noted that it rented its own space, paid for its own employees, paid legal and consulting fees to protect the intellectual property and spent significant amounts on national marketing and advertising campaigns. Finally, Brands emphasized that it had significant expenses, gross revenue, net income and net book value and paid taxes in a number of states. The Comptroller replied that Brands was part of ConAgra's unitary business during the years at issue.

Constitutional Arguments

According to Brands, the imposition of Maryland income tax was unconstitutional because Brands did not have the requisite connection with the state. Under Due Process Clause jurisprudence, a state may have jurisdiction over an out-of-state entity that has "minimum contacts" with the state. 5 An out-of-state entity with no physical presence in the state may be subject to income tax if it "purposely avails" itself of the benefits of the state's economic market.6 The Due Process Clause requires that: (i) there are minimum contacts between the state and the person, property or entity that the state seeks to tax; and (ii) the income attributed to the state is rationally related to values connected with the taxing state. 7

Brands argued that it lacked a meaningful connection with Maryland because it had no employees, agents or representatives in the state; did not own or lease any property in the state; and did not conduct business in the state. Also, the physical affixing of the trademarks and trade names to the products occurred outside the state. Brands argued that its facts were in direct contrast with other Maryland cases8 in which the entities' licensees operated manufacturing facilities or stores within Maryland where the products were made, affixed with trademarks or sold. The Comptroller replied that Brands collected substantial royalties that had a direct connection with the state because the income was paid on Maryland sales linked to the trademarks and Brands' advertising.

Furthermore, Brands alleged that the Commerce Clause was violated because it did not have substantial nexus with Maryland. 9 In support of this argument, Brands contended that it did not maintain a physical presence in the state, had no employees in the state, had no customers or contracting parties in the state, entered into no contracts in the state and all of its income was from activities outside the state. The Comptroller claimed that there was substantial nexus because Brands' income was directly connected to Maryland.

Blended Apportionment Formula

Brands argued that the use of a blended apportionment formula disproportionately reflected the amount of business that it conducted in Maryland. Because Maryland is not a unitary state, each member of an affiliated group must file a separate return and generally apportions income to the state using property, payroll and a double-weighted sales factor. 10 The Comptroller may use a blended apportionment formula if the standard formula does not fairly reflect the taxpayer's income in the state. 11 In the instant case, the standard formula would equal zero because Brands did not have payroll, property or sales in the state. Brands argued that any imposition of income tax would not fairly represent its activities in Maryland because it had no business activity in the state. Furthermore, Brands argued that the use of ConAgra's apportionment figures in determining Brands' blended formula constituted the use of the unitary model, which has been rejected by Maryland law. 12 In response, the Comptroller relied on the perceived factual similarities to Gore, where the Maryland Court of Appeals upheld a blended apportionment approach because the statutory formula would have resulted in a zero apportionment factor. Also, the Comptroller argued that the blended apportionment factor was fair and related to Maryland income because it was the same apportionment factor actually used by the parent company and its affiliated filers in the state.

Interest Abatement

The Comptroller argued that the Tax Court incorrectly abated interest from the filing of the appeal to the date of the Tax Court's decision. 13 After acknowledging that it may waive interest on unpaid tax for reasonable cause, 14 the Comptroller argued that case law required that Brands bear the burden of proving the erroneous assessment. 15 The Comptroller contended that the Tax Court's reliance merely on the finding that Brands did not intend to delay tax collection and that Brands brought the proceeding in good faith, was too low a standard to apply to waivers of interest and did not reflect the intended statutory scheme outlined by the Maryland Court of Appeals. 16 Also, the Comptroller argued that the Tax Court's selection of the time period to abate the interest was arbitrary and capricious. Brands replied that the Tax Court properly applied the reasonable cause standard and that the time period for abating the interest was within its discretion.

Tax Court's Nexus and Apportionment Holdings Affirmed

After considering the arguments made by Brands and the Comptroller, the Circuit Court relied on Gore in upholding the Tax Court on the nexus and apportionment issues. Because the Circuit Court determined that the instant case was factually similar to Gore, the Court concluded that Brands should be treated in the same manner as the subsidiaries in Gore. Both cases involved the creation of a subsidiary for the purpose of managing the parent company's patents and trademarks. The parent companies in both cases shared their employees and executives with the subsidiaries. Brands unsuccessfully argued that the instant case differed from Gore because neither Brands nor ConAgra operated manufacturing facilities in Maryland and Brands was self-sufficient. According to the Court, the "minor differences" raised by Brands did not rise to the level of distinguishing Brands as a "separate entity." Also, similar to the instant case, the subsidiaries in Gore unsuccessfully raised the same constitutional arguments and disputed the fairness of the blended apportionment formula based on the parent company's income. Thus, the Circuit Court upheld the Tax Court's nexus and apportionment determinations.

Interest Not Abated Following Gore Decision

The Circuit Court agreed with the Comptroller that the Tax Court's decision to abate interest after the Gore decision constituted an abuse of discretion. Because the Circuit Court found that the facts in the instant case were substantially similar to the facts in Gore, it held that the treatment of interest in the instant case should follow Gore. The Circuit Court rejected Brands' argument that the appeal was pursued in good faith with no intention to delay the collection of taxes. Thus, Brands' failed to fulfill the reasonable cause standard specified by the Maryland Court of Appeals. The Circuit Court held that Brands was responsible for interest from the date that the Gore case was decided on March 24, 2014.


This case affirmed the Tax Court's application of the analysis taken from the controversial Maryland Court of Appeals' Gore decision. In Gore, the Court of Appeals used a distinctive economic substance test to be applied when determining whether and if so, to what extent Maryland can subject the income of out-of-state holding companies to the Maryland corporation income tax. Notably, the actual level of economic substance that a subsidiary must have to be considered an independent entity for purposes of the Maryland corporation income tax was not outlined in Gore, and likewise, was not addressed in this case by the Circuit Court.

The Circuit Court expressly affirmed the Tax Court on the nexus and apportionment issues based on a finding that the instant case and Gore shared similar facts. However, despite the Circuit Court's finding, an argument can be made that there are significant factual differences between the instant case and Gore. Some of these differences support an argument that Brands had more economic substance than the Gore subsidiaries. For example, Brands had employees that performed quality control for the numerous licensed brands and monitored trademark infringements. Brands had its own corporate officers, who were actually paid by Brands. During a portion of the disputed period, Brands had 23 employees tasked with conducting advertising for its trademarks and other trademark management activities. Considering the vast number of trademarks that Brands serviced, and the fact that the Brands had a significant number of employees, it is difficult to argue that Brands had no level of economic substance apart from ConAgra.

Furthermore, the Comptroller's use of blended apportionment was summarily accepted as a means to approximate Brands' presence in Maryland. The Circuit Court did not examine how the use of blended apportionment, which measured Maryland factors for the five ConAgra entities that filed Maryland corporation income tax returns, achieved a fair representation of Brands' Maryland presence. Moreover, the Circuit Court did not undertake an examination of whether other apportionment methods might have been more equitable to the taxpayer. Instead, the Circuit Court simply relied on the alternative apportionment method identified in Gore as the appropriate tool needed to approximate a Maryland apportionment factor for Brands, producing a result similar to what would happen under unitary combined reporting required by statute in many states, but not by Maryland.

Finally, the Circuit Court's decision to reverse the Tax Court on the interest abatement issue and impose interest following the release of the Gore decision is noteworthy. Based on the Circuit Court's decision, taxpayers found to be factually similar to the taxpayers in Gore will not be able to satisfy the "reasonable cause" requirement and have interest abated after the Gore decision. As discussed above, Maryland courts are broadly applying the analysis from Gore to taxpayers that arguably are significantly different from the taxpayers in Gore. For this reason, taxpayers appealing assessments similar to the assessments in Gore will have difficulty in obtaining any waiver of interest following the date of the Gore decision. However, there may be further developments concerning this case because Brands has filed a notice of appeal.


1 In re ConAgra Brands, Inc., Maryland Circuit Court for Anne Arundel County, No. C-02-CV-15-993, Oct. 19, 2015.

2 87 A.3d 1263 (Md. 2014). For a detailed discussion of this case, see GT SALT Alert: Maryland High Court Holds Intangible Holding Companies Have Corporate Income Tax Nexus.

3 87 A.3d 1263 (Md. 2014).

4 ConAgra Brands, Inc. v. Comptroller of the Treasury, Maryland Tax Court, No. 09-IN-00-0150, Feb. 24, 2015. For a discussion of the Maryland Tax Court's decision, see GT SALT Alert: Maryland Tax Court Holds Intangible Holding Company Had Corporate Income Tax Nexus.

5 International Shoe Co. v. Washington, 326 U.S. 310 (1945); CSR, Ltd. v. Taylor, 983 A.2d 492 (Md. 2009).

6 Quill Corp. v. North Dakota, 505 U.S. 298 (1992).

7 Id.

8 Gore, 87 A.3d 1263; Comptroller of the Treasury v. SYL, Inc., 825 A.2d 399 (Md. 2003), cert. denied, 540 U.S. 984 and 540 U.S. 1090 (2003); The Classics Chicago, Inc. v. Comptroller of the Treasury, 985 A.2d 593 (Md. Ct. Spec. App. 2010).

9 In Complete Auto Transit Inc. v. Brady, 430 U.S. 274 (1977), the U.S. Supreme Court developed a four-part test to determine whether a state's imposition of a tax satisfies the Commerce Clause. To meet the test, the tax must (1) be applied to an activity with a substantial nexus with the taxing state, (2) be fairly apportioned, (3) not discriminate against interstate commerce and (4) be fairly related to the services provided by the state.

10 MD. CODE ANN., TAX-GEN §§ 10-402(c)(1); 10-811.

11 MD. CODE ANN., TAX-GEN § 10-402(d).

12 MD. CODE ANN., TAX-GEN § 10-811.

13 Note that the Tax Court waived both interest and penalties, but the Comptroller only appealed the waiver of interest.

14 MD. CODE ANN., TAX-GEN § 13-606.

15 Frey v. Comptroller of the Treasury, 29 A.3d 475 (Md. 2011).

16 Id.

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