Tax Law

Where’s the Substance? Maryland Court of Special Appeals Upholds Assessment of Tax Against Out-of-State Holding Company Based on Parent Company Nexus

The Maryland Court of Special Appeals upheld the Maryland Tax Court’s decision holding that the State Comptroller can subject an out-of-state holding company to tax because the holding company did not have economic substance apart from its parent, which was conducting business in the state. In addition to upholding the assessment of tax, the Court of Special Appeals also upheld the Tax Court’s abatement of penalties and interest. The Circuit Court for Arundel County had previously reversed the tax court’s decision with respect to abatement of interest.

The Maryland Comptroller assessed ConAgra Brands, Inc. (Brands) for the 1996-2003 tax years, arguing that the Brands was nothing more than a conduit used to shift its affiliates’ income out of Maryland. Brands had no employees or property in Maryland and did not otherwise conduct business in the state. However, Brands held and managed the intellectual property of a number of affiliated companies, all of which were owned by ConAgra Foods, Inc. (ConAgra), and many of which did business in Maryland. Brands licensed the trademarks to the ConAgra subsidiaries from which they had been acquired in exchange for annual royalty payments. These annual royalties were the primary source of Brands’ income and were ultimately paid to ConAgra through various intercompany transactions.

The Court of Special Appeals applied a “substantial evidence” standard of review to the Tax Court’s decision, and found that there was substantial evidence for the Tax Court’s decision findings that Brands depended on ConAgra and its subsidiaries for the majority of its income, there was a circular flow of money from ConAgra and affiliates to Brands and back to ConAgra, Brands relied on ConAgra for its core functions, and Brands lacked any meaningful substantive activity apart from ConAgra. As a result, the Court of Special Appeals agreed with the Tax Court that, based on the Maryland Court of Appeals’ decision in Gore Enterprise Holdings, Inv. v. Comptroller of the Treasury, Brands lacked economic substance as a business separate from ConAgra. Additionally, the Court of Special Appeals upheld the use of an alternative apportionment method, based on a blended apportionment factor using the apportionment factors of ConAgra and its subsidiaries, citing once again to the Gore decision.

ConAgra Foods RDM, Inc. v. Comptroller of the Treasury, No. 1940 (Md. Ct. Spec. App. June 27, 2019). For more information on the tax court’s prior decision in this case, see our previous post, here.