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.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

In association with
Related Video
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement

Mondaq.com (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of www.mondaq.com

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about Mondaq.com’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to unsubscribe@mondaq.com with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to webmaster@mondaq.com.

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to EditorialAdvisor@mondaq.com.

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at enquiries@mondaq.com.

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at problems@mondaq.com and we will use commercially reasonable efforts to determine and correct the problem promptly.