The Maryland Tax Court has held 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 According to the Tax Court, the imposition of tax on the intangible holding company satisfied both the Due Process and Commerce Clauses of the U.S. Constitution. Because the holding company’s income was produced from the parent company’s business in Maryland, sufficient nexus was established to tax the holding company. The Tax Court also held that the Maryland Comptroller properly used a blended apportionment factor based on the income tax returns of the related entities that filed in Maryland.


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. Also, Brands had its own officers, who were actually paid by Brands, but their payroll was serviced by ConAgra. 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 through 2003 tax years, Brands did not file income tax returns in Maryland. In 2007, the Maryland Comptroller assessed corporate income tax, interest and penalties against Brands for these 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.

Out-of-State Intangible Holding Company Subject to Maryland Tax

The Tax Court applied the analysis developed by the Maryland Court of Appeals, the state’s highest court, in Gore Enterprise Holdings, Inc. v. Comptroller of the Treasury2 and held that Brands had nexus with Maryland because it lacked real economic substance as a business entity separate from ConAgra. To begin its analysis, the Tax Court explained that the Maryland Court of Appeals has consistently held that certain constitutional principles must be satisfied before an entity is subject to Maryland corporation income tax. The U.S. Supreme Court has held that “[b]oth the Due Process and Commerce Clauses [of the U.S. Constitution] require that there be ‘some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.'”3 Both constitutional provisions are distinct and “reflect different constitutional concerns.”4 The Due Process Clause requires the fairness of governmental activity, while the Commerce Clause primarily concerns “the effects of state regulation on the national economy.”5 The Commerce Clause requires that an entity have substantial nexus before it may be taxed by a state.6

The unitary business principle allows a state to tax the portion of value that a unitary business derives from its operations in the state.7 However, the unitary business principle does not confer nexus to allow a state to directly tax a subsidiary based on the fact that the parent company is taxable in the state and the parent and subsidiary are unitary.

The Tax Court explained that Maryland courts have consistently concluded that the basis of nexus sufficient to justify taxation of an out-of-state subsidiary is the economic reality that the parent’s business in Maryland produced the subsidiary’s income.8 As a result, the Tax Court was required to initially determine whether Brands had real economic substance as a business separate from ConAgra.

According to the Tax Court, an examination of the facts supported the Comptroller’s position that Brands lacked real economic substance. The Tax Court noted that Brands’ most significant activity was conducting national advertising campaigns for the trademark brands. Brands’ employees performed quality control for the licensed brands and monitored trademark infringements. In exchange for the licensed trademarks, the licensees paid annual royalties to Brands. These royalty payments were the primary source of Brands’ income.

The Tax Court determined that Brands could not have functioned as a corporate entity without the support services that it received from ConAgra. Also, the facts indicated functional integration and control through stock ownership, as well as common employees, directors and officers. The facts indicated that Brands relied on ConAgra’s corporate personnel, office space and corporate services. Furthermore, the functional source of Brands’ income was derived from ConAgra’s ideas and discoveries. The circular flow of money was traced by the valuable trademarks. Finally, the tax returns and other financial data reflected the lack of Brands’ separate substantial activity.

After reviewing the facts, the Tax Court agreed with the Comptroller that similar to the subsidiary corporations in Gore andComptroller of the Treasury v. SYL, Inc.,9 Brands lacked any economic substance separate from its parent. These cases explained that a subsidiary must have economic substance as a separate entity from its parent to avoid nexus and taxation. In the instant case, Brands’ income was produced from its parent’s business in Maryland which established nexus sufficient to justify taxation. As a result, the Tax Court held that the Comptroller properly asserted that there was substantial nexus to support the taxation of Brands’ income from its Maryland business activity.

Blended Apportionment Factor Allowed

The Tax Court agreed with the Comptroller’s use of a blended apportionment factor rather than the standard three-factor (double-weighted sales) apportionment formula.10 Because Brands did not have any payroll, property or sales in Maryland, the standard formula would produce an apportionment factor of zero. Maryland law allows the Comptroller the discretionary authority to alter the apportionment formula to clearly reflect the income attributable to the state.11 The Comptroller used a blended apportionment formula derived directly from the income tax returns of the five ConAgra entities that filed in Maryland. After determining that the Comptroller effectively used the ConAgra entities’ own apportionment figures in constructing the blended apportionment factor, the Tax Court concluded that there was no clear and convincing evidence that the Comptroller’s blended apportionment factor was unfair.

Interest and Penalties Waived

The Tax Court waived the interest and penalties because Brands had a reasonable basis for challenging the law and acted in good faith. The Comptroller unsuccessfully argued that the state of the law was clear to the taxpayer at the time of the assessments. The Tax Court noted that the state of the law has evolved through a series of court decisions.


This case provided the Tax Court with its first opportunity to apply the analysis from the controversial Gore decision that was decided by the Maryland Court of Appeals last year. Gore was a ground-breaking decision that attempted to clarify the analysis to be used when determining whether Maryland can tax the income of out-of-state holding companies. According to the Maryland Court of Appeals in Gore, the economic substance analysis is the key in determining whether out-of-state subsidiaries have nexus with the taxing state. However, the Court of Appeals’ reliance on a distinctive economic substance test required to be met for a subsidiary to be treated as a separate entity calls into question what level of economic substance a subsidiary must have to be considered an independent entity.

An argument could be made that Brands had more economic substance than the subsidiaries in the prior Maryland cases where nexus was found to exist. 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, although ConAgra serviced the payroll. 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, Brands had some economic substance apart from ConAgra. However, the Tax Court’s reading of Gore resulted in a finding that fails to clarify what level of economic substance might be required.

The Tax Court’s decision to waive the imposition of interest and penalties, based on the fact that Brands had reasonable cause not to file corporation income tax returns in Maryland, is curious. While this decision signals that similarly situated businesses who took these positions prior to the development of Maryland case law in this area may be enough to thwart the imposition of interest and penalties, the lack of overall success in proving economic substance in Maryland should be of concern to these businesses. It should be noted that the advent of Maryland’s related-party intangible and interest expense addback rules after the tax years at issue in this case likely served to eliminate much of the Maryland corporation income tax benefits derived by the corporate structure created by ConAgra and other large multistate corporations.12 Moreover, the economic substance doctrine that appears to be followed by all of Maryland’s courts can be applied outside of the intangible holding company context.

The Tax Court’s approval of the Comptroller’s use of a blended apportionment factor also is a cause for concern. The Comptroller has broad discretionary authority to make adjustments in the area of apportionment when the existing apportionment factor regime does not clearly reflect a taxpayer’s income. However, the Comptroller’s adjustment in this case produced a result similar to the combined reporting on a unitary basis required in many states. Despite numerous attempts in the state legislature, including a pending bill currently being considered,13 Maryland has not adopted combined reporting to date.