Comptroller of the Treasury v. SYL, Inc.

ELDRIDGE, J. These cases concern the liability for Maryland income taxes of two corporations that do no business in Maryland, and own no tangible property in Maryland, but are subsidiaries of parents that do business in Maryland. The dispositive issue is whether there is a sufficient nexus between the State of Maryland and each subsidiary corporation so that the imposition of Maryland income tax does not violate either the Commerce Clause of the United States Constitution, Art. 1, Section 8, cl. 3, or principles of due process. I. This opinion encompasses two cases; consequently, we shall set forth the facts of each case separately. ⁸¹ A. No. 76, Comptroller of the Treasury v. SYL SYL, Inc. is a Delaware corporation and a wholly owned subsidiary of Syms, Inc. SYL owns intellectual property assets used by Syms, specifically trademarks, trade names and advertising slogans. 1 SYL’s primary function is to manage and control these intellectual property assets. Syms is a New Jersey corporation that sells men’s, women’s and children’s clothing in numerous states, including Maryland.

Syms incorporated SYL in December 1986, and upon its formation, Syms assigned the above-described intellectual property assets to SYL. In return, SYL granted to Syms a license to manufacture, use and sell the products covered by the trade names and trademarks in its business throughout the United States. In consideration for these intellectual property rights, Syms agreed to pay SYL a royalty based on the parent corporation’s sales. At the same time that Syms created SYL, it also created another wholly owned subsidiary named SYI, Inc., the purpose of which was to give SYL investment advice.

For the tax years 1986 through 1993, SYL did not file corporate income tax returns in Maryland. Throughout this period, SYL did not own or lease tangible property in Maryland, had no employees in Maryland, and maintained no bank accounts in Maryland. Nor did SYL directly sell or lease goods or services in Maryland through advertising, mailings, or in-person solicitations. Syms, however, did have extensive business contacts in Maryland during this time period through its ownership and operation of retail stores in Maryland.

Syms regularly filed Maryland corporate income tax returns. In 1996, the Comptroller issued a Notice of Assessment to SYL, indicating that SYL owed for the years 1986 through 1993 an amount of $637,362 in corporate income taxes, including interest and penalties. SYL timely protested the Comptroller’s Notice of Assessment. After a hearing, the ⁸² Comptroller, by a hearing officer, issued a Notice of Final Determination that sustained the Notice of Assessment.

The hearing officer, inter alia, found as follows: “In general, the Comptroller’s Office assessed SYL, Inc., a tax-haven entity earning substantial related party income, based on the position that SYL, Inc. (‘SYL’) was a phantom entity that did not have substantial economic substance. The Comptroller’s audit section concluded that SYL’s lack of . substantial substance and its dependence on Syms Corporation (‘Syms’) for its earnings required SYL to file returns with Maryland based on the apportionment factor of its parent company Syms. The Comptroller’s audit section relied upon Comptroller v. Armco, 82 Md.App. 429 , 572 A.2d 562 (1990) (cert.denied); Comptroller v. Atlantic Supply Co., 294 Md. 213 , 448 A.2d 955 (1982). The Comptroller’s Office believes these decisions are consistent with Tax-General Article, Section 10-402 which generally requires that the income reasonably and fairly attributable to carrying on business in Maryland be taxable by Maryland.

In short, the Comptroller’s section found SYL to be a phantom or bookkeeping entity and taxed it based on economic reality and the true source of its income.” * * * “In December, 1986, Syms incorporated SYL in Delaware and putatively assigned to SYL its ownership in trademarks. As part of an overall plan, SYL licensed back to Syms the trademarks and ostensibly assumed (at least on paper) all obligations for management and administration of the marks. Just as before the assignment and simultaneous license back of the marks, Syms continued to utilize the marks in its retail clothes stores in Maryland and other states. SYL charged Syms a 4% royalty pursuant to a license agreement which was apparently entered into on December 18, 1986 (though dated July 1986).

The 4% royalties were charged from October 1, 1986 even though the formal assignment of the intangibles was not effectuated until December 19, 1986. Moreover, the valuation of the arm’s length royalty rate was provided by a company which ⁸³ was engaged by a consultant (Coventry Financial Corp.) which apparently was provided a financial stake in the tax savings obtained. “At least one significant objective of forming SYL was to generate state income tax benefits. See memorandum of Karen Artz Ash dated July 22, 1986 at p. 6. See also Rosen, ‘Use of a Delaware Holding Company To Save State Income Taxes’, 20 Tax Advisor 180 (1989).

Significant state income tax savings were generated from SYL in Maryland and other separate return states because (a) Syms deducted the substantial royalty payments of roughly $12 million each year to SYL and (b) SYL did not report its royalty income as taxable in Maryland or other separate return states other than Delaware. Since Delaware does not generally tax income from intangibles, SYL generated very substantial state income tax benefits. It appears from one document (finally obtained after repeated requests) that Syms paid a third party — Coventry Financial Corp. — a percentage of the early year state tax savings for its consulting efforts in setting up SYL. See the Richard Diamond to Sy Syms memorandum dated December 12, 1986 entitled ‘State Income Tax Savings — Coventry Financial Corp.’ ” “While by no means exhaustive, I find some of the salient and controlling facts as follows: “(1) SYL was a thinly constituted entity with very little if any true economic or operational activity in that: “(a) It paid out very little in wages and the $1,200 or so of yearly wages paid were to employees of third party ‘nexus service providers’ which are in the business of providing tax-haven entities with ‘apparent substance’.

SYL contracted with one such ‘nexus service provider’ which provides mail forwarding, shared office space and shared employees for numerous other taxpayers. At least some nexus sendee providers promote their services to potential clients at tax seminars, and it is understood ⁸⁴ that hundreds, if not thousands, of taxpayers enter into arrangements with these nexus service providers. “(b) SYL had no separate office or employees other than the shared space and purported employees of nexus service providers and the officers of Syms who were compensated solely by Syms. “(c) SYL had no phone listing, phone service or office signage. “(d) SYL apparently did not license its marks (or attempt to license) to third parties. “(e) SYL officers did not have business cards, job descriptions, job evaluations or other indicia of a true employment relationship. “(f) Though requested, SYL could not produce invoices issued to Syms pursuant to the royalty agreement (beyond the initial billing period). “(g) Though requested, SYL could not produce travel reports showing business activity in Delaware. “(h) Though requested, SYL failed to produce a person at the informal hearing who could speak to any activities being conducted by SYL.” “From a legal standpoint, it is difficult to find fault in the Comptroller’s assessment. As in Armco , the Comptroller’s Office appropriately determined that the factors and attributes of Syms should determine how SYL’s income should be taxed. Since SYL was found to be a phantom, it was clearly appropriate to look to the true underlying source of its income.

SYL’s booked income was in reality generated from Syms’ sales, property and payroll. “It was Syms’ use of the marks, its goodwill and its efforts in Maryland and elsewhere which gave the marks value and generated the income ‘booked’ in SYL.” SYL appealed the assessments to the Maryland Tax Court, with its “Petition of Appeal” headed “SYL, INC. c/o Syms Corporation!;,] Syms Way[,] Secaucus, New Jersey 07094 v. ⁸⁵ Comptroller of the Treasury.” SYL’s petition alleged, inter alia, that it was a Delaware corporation “organized in 1986 by its parent, Syms Corp. ... to hold certain registered trademarks and trade names,” that SYL had “as a valid business purpose the protection, maintenance and management of valuable intangible assets,” that SYL maintains an office in Delaware, a separate bank account, and has its own corporate officers and board of directors who meet regularly, that SYL “is a bona fide corporation with substantial corporate substance” and with “a valid business purpose,” that the taxation of SYL’s income is not authorized by Maryland Code (1988, 1997 Repl.Vol., 2002 Supp.), § 10-402 of the Tax-General Article, or by any other Maryland statute, and that the Comptroller’s assessments violate the Fourteenth Amendment’s Due Process Clause and the Commerce Clause of the United States Constitution. The Comptroller’s answer denied SYL’s allegations concerning its viability, valid business purpose, substance, etc., as well as SYL’s legal conclusions under the Maryland statutes and the federal Constitution. The parties thereafter entered into a stipulation setting forth the procedural history of the case, the basic facts concerning Syms’s operations in Maryland, the fact that SYL is a wholly-owned subsidiary of Syms, and SYL’s lack of property, employees, or bank accounts in Maryland. The stipulation also agreed upon the introduction into evidence of twenty-eight exhibits which were attached.

In addition to the numerous exhibits which were introduced, the Tax Court held a hearing extending over two days during which several witnesses testified. The administrative record discloses the following information about the creation and operation of SYL. The suggestion to create SYL for tax benefit reasons originated from Coventry Financial, a consulting firm which approached Syms Corp. in June of 1986. Upon the creation of SYL as a trademark holding company, and SYI, Inc., as a second wholly-owned subsidiary which would act as an investment advisor to SYL, Syms Corp. was to assign the trademarks to SYL and SYL was to license the trademarks back to Syms.

Then, Syms was to pay SYL a royalty for the use of the ⁸⁶ trademarks, which SYL was to keep temporarily before the funds were sent back to Syms as a dividend payment. In the interim, SYL was to invest the funds, with SYI controlling the investment decisions. Coventry Financial’s fee was directly tied to the total amount of tax savings generated from the implementation of its so-called “program.” One of Syms’s inter-company documents stated that, once SYL received the royalty payments, SYL was to hold the payments in Delaware for “at least a couple of weeks.” The document went on to explain that the payments would later be sent back to Syms in the form of a dividend in the same quarter to “avoid any variances on the financial statements which may alert a state auditor to this transaction.” Furthermore, a memorandum outlining the Syms-SYL transaction, written by Richard Diamond, Syms’s Secretary-Treasurer, to Syms’s Chief Executive Officer, Sy Syms, stated that, while the royalty payment funds were being held temporarily in Delaware, it was “necessary” for SYI to be the investment advisor. The memorandum further stated that “it is necessary that it do[es]n’t appear that the investment decisions are being made by Syms Corp.” Notwithstanding this statement, three of the four officers of SYI were officers of Syms.

On cross-examination, Mr. Diamond acknowledged that this “was one of Coventry’s ideas to sort of distance SYL from Syms Corp. in terms of investing the money; to help in terms of the tax aspects of this transaction.” He further acknowledged: “Q. So would you agree that it was an idea that was designed to keep tax auditors from realizing what was going on? “A. From — yes. From the tax part of it, yes.” Mr. Diamond later reiterated that, “just from a tax point of view ... I felt it was advantageous to create some distance between Syms Corp. and SYL.” SYL used the services of Gunnip & Company to establish a presence in Delaware. Among other things, Gunnip offered SYL a “Delaware address” and “mail forwarding.” Additionally, a letter from Gunnip to Mr. Diamond advises that the ⁸⁷ total $2400 per year fee paid to Gunnip “could be billed to [SYL] as rent monthly $100.00 and ... as salary quarterly $300.00.” Actually, SYL’s Delaware “office” lacked a phone listing, had no office sign, and no business cards.

SYL’s Board of Directors consisted of four people: (1) Sy Syms who, as previously mentioned, was Syms’s Chief Executive Officer; (2) Marcy Syms who was Syms’s Chief Operating Officer; (3) Richard Diamond who was Syms’s Secretary-Treasurer and Chief Financial Officer; and (4) Edward Jones who was an accountant with Gunnip. Jones also was SYL’s only “employee,” and, out of the $2400.00 annual fee paid to Gunnip, $1200 annually was designated as Jones’s “salary.” Mr. Diamond testified that SYL hired outside trademark counsel to handle the protection of the trademarks. Nonetheless, on SYL’s financial statements, no legal expenses were listed on any of the unaudited profit and loss statements submitted. Mr. Diamond explained that they “were probably paid for by Syms Corp.” and that “[i]t didn’t make a difference overall.” In fact, nothing substantial appears to have changed with respect to the management and administration of the trademarks after the formation of SYL.

During the cross-examination of Karen Ash, Syms’s and SYL’s outside trademark counsel, the following ensued: “Q. Was there any difference whatsoever in the work performed by your law firm prior to and subsequent to the assignment of these marks from Syms to SYL? “A. No. “Q. You continued to do the same thing? “A. Yes. “Q. If a mark needed to be registered you took to registering it? If an infringement was suspected, your firm would take the appropriate action, correct? “A. Correct.” Although the business purpose alleged for the formation of SYL was the “maintenance and management of valuable intangible assets,” the license agreement between Syms and SYL ⁸⁸ authorized Syms to take charge of such maintenance and management. It stated: “Licensor [SYL] shall have the right (but not the obligation) to take charge of the defense of any [infringement] claim, action or proceeding.... If licensor declines ... to defend any such claim, action or proceeding, licensee may do so.” The license agreement did impose some affirmative duties upon SYL, as licensor, in the area of quality control of the trademarks.

Nevertheless, there is no indication in the record that Edward Jones, SYL’s sole “employee,” performed any of these duties. Nor are the quality control duties mentioned in the letter memorializing the services that Mr. Jones was to provide to Syms or SYL. Instead, according to the testimony, these duties were assumed by Syms’s officers when they were wearing their SYL “hats.” Additionally, the license agreement imposed upon Syms the duty to “deliver to Licensor a statement certified by the financial officer of Licensee showing a computation of Net Sales and the amount of royalty payable hereunder.” The record discloses that no certified financial statements were ever provided to SYL. SYL’s cash receipts and disbursement journals fail to reveal any evidence of the economic substance of that corporation.

In the relevant time period, SYL paid no costs associated with the protection of the trademarks, i.e., no costs to register the trademarks, no legal fees associated with the trademarks, and no telephone expenses associated with any discussion of the trademarks, since SYL apparently did not have a telephone. A study of SYL’s financial statements reveals that, in some years, the royalties owed were never received. Finally, although “facilitating the franchising of the Syms trade name to third parties” was one of the primary reasons for the formation of SYL, the trademarks were never licensed to anyone but Syms Corp. The Maryland Tax Court, which is an administrative agency, 2 in April 1999 issued an order reversing the assessments levied by the Comptroller. In an accompanying opinion, the ⁸⁹ Tax Court incorporated by reference and quoted extensively from its opinion in another case, MCIIT v. Comptroller, Tax Court No. C-96-0028-01 (1999), stating that the analysis and applicable law in the two cases were the same. 3 The Tax Court pointed out that the parent corporation and the subsidiary were operating as a “unitary” business, that the Comptroller, relying upon Comptroller v. Atlantic Supply Co., 294 Md. 213 , 448 A.2d 955 (1982), and Comptroller v. Armco, 82 Md.App. 429 , 572 A.2d 562 , cert. denied, 320 Md. 634 , 579 A.2d 280 (1990), cert. denied, 498 U.S. 1088 , 111 S.Ct. 966 , 112 L.Ed.2d 1052 (1991), asserted that the subsidiary lacked “substantial economic substance,” and that, therefore, the subsidiary had a “sufficient nexus” with Maryland through the operations of the parent in Maryland so that Maryland could constitutionally tax an appropriate portion of the subsidiary’s income.

The Tax Court then stated that the Atlantic Supply and Armco holdings applied only when the subsidiary had no economic substance whatsoever, and that “we conclude that Petitioner [SYL] is an entity of substance and not a ‘phantom.’ The Tax Court continued: “In the instant case, the evidence clearly indicates that Petitioner is not just a book entry corporation. Petitioner maintains an office in Delaware. That office contains office furniture and corporate and financial records are kept there. Mail is received at the Delaware office location.

It has its own bank account and has an employee. Legal counsel was retained by Petitioner for purposes of protection its ‘marks’. The requisites for corporate existence were met; i.e., the drafting of by-laws, the election of a board of directors and corporate officers, the holding of regular and annual meetings, the recording of corporate minutes, and the ratification of dividends. “Respondent claims that Petitioner ‘was little more than a corporate vehicle designed to reduce state income taxes’, ⁹⁰ (Respondent’s Memorandum, p. 40), and points to the minimal expenses, the one employee, the mere formality of the corporate existence of Petitioner, and the timing of inter-entity transactions as support that petitioner was creating the ‘illusion of substance’, (Respondent’s Memorandum, p. 81). In short, Respondent assessed on the basis that the Petitioner was a sham entity for the sole purpose to avoid Maryland taxes. “Even if that were true, Armco and Atlantic Supply only apply to entities with no substance whatsoever.

In addition, it is well settled that tax avoidance (rather than tax evasion) is a legitimate business purpose. If Petitioner was legally created with a tax avoidance purpose, absent authority and in a separate return environment, the Respondent cannot tax it. However, the evidence presented leads to the conclusion that Petitioner was established for non-tax reasons, among them: • To hold and manage intangible assets in a separate corporation; • To protect the transferred intangibles from the claims of Syms’ creditors and from liabilities of Syms; • To incorporate in a favorable corporate jurisdiction; • To avert hostile take-overs; and • To protect and enhance the value of Syms’ name and its borrowing and business acquisition ability. These facts easily distinguish the Petitioner from the phantom taxpayers in Armco and Atlantic Supply.

Nexus cannot be attributed to it for Maryland taxation purposes.” Later the Tax Court concluded: “Focusing solely on Petitioner, we find that its lack of instate activity precludes the imposition of the tax. Petitioner is not doing business in Maryland. Its income producing activity all occurs outside’ of Maryland. Petitioner has no offices, employees, agents or property in Maryland.

Its only Maryland contact is an affiliation with an entity with a ⁹¹ Maryland presence. This affiliation is hardly enough to satisfy substantial nexus. “Respondent relies on Armco and Atlantic Supply as support for the application of nexus due to the presence of Syms in Maryland. That reliance has been shown above to be erroneous. Respondent then points to the decision of Geoffrey, Inc. v. South Carolina Tax Commission, 313 S.C. 15 , 437 S.E.2d 13 (1993) as precedent in the taxing of a Delaware holding company licensing trademarks and trade names to its parent in-state company.

The Geoffrey Court concluded that the use of intangible property (the ‘marks’) by the in-state affiliate was sufficient to pass the constitutional nexus requirements in order to tax the out-of-state entity. * * * [A]s indicated above, we differ in our conclusions as to whether the substantial nexus requirement of the Commerce Clause was met. Geoffrey focused on the use of the marks by the in-state affiliate of the unitary group in order to determine the nexus of the foreign corporation. We disagree that that activity constitutes ‘substantial’ nexus. “In addition, the unitary relationship between entities does not automatically establish nexus on all of the corporate entities in the unitary group.” The Tax Court also addressed an alternative argument by SYL, although pointing out that the court’s constitutional holding rendered the issue moot. The court agreed with SYL that, under CBS v. Comptroller, 319 Md. 687 , 575 A.2d 324 (1990), the Comptroller should have promulgated a regulation before attempting to tax a portion of the income of subsidiaries like SYL.

The Comptroller filed in the Circuit Court for Baltimore City an action for judicial review of the Tax Court’s decision, and the Circuit Court affirmed the decision. The Comptroller took an appeal to the Court of Special Appeals. Before argument in the intermediate appellate court, this Court issued a writ of certiorari. Comptroller v. SYL, 360 Md. 485 , 759 A.2d 230 (2000). ⁹² B. No. 80, Crown Cork & Seal Company (Delaware), Inc. v. Comptroller of the Treasury Crown Cork & Seal (Delaware) (hereafter referred to as “Crown Delaware”), is a Delaware corporation and a wholly-owned subsidiary of Crown Cork & Seal Company, Inc., (hereafter referred to as “Crown Parent”), also a Delaware corporation.

Crown Delaware is the owner of certain intellectual property assets, namely thirteen domestic patents and sixteen trademarks. Crown Delaware’s purported function is to manage and control these patents and trademarks. As set forth in a stipulation of facts filed in the Maryland Tax Court, Crown Parent is a corporation “engaged in the manufacturing and sale of metal cans, crowns, and closures for bottles, can-filling machines, and plastic bottles and containers, worldwide, including in the State of Maryland.” For the tax years 1989 through 1993, Crown Delaware did not file corporate income tax returns in Maryland. Crown Delaware did not directly own or lease tangible property in Maryland, had no employees in Maryland, and maintained no bank accounts in Maryland.

It did not sell or lease goods or services in Maryland, did not advertise in Maryland, and engaged in no mailings or solicitations to persons or entities in Maryland. As both parties agreed in the stipulation filed with the Tax Court, Crown Parent did engage in extensive business in Maryland during this time period, as it operated manufacturing plants in Baltimore City, Harford County and Wicomico County, and marketed its products in Maryland. Crown Parent timely filed Maryland corporate tax returns for this period. In 1996, the Comptroller of Maryland issued a Notice of Assessment to Crown Delaware, stating that Crown Delaware owed for the years 1989 through 1993 Maryland corporate income taxes, including interest and penalties, in the amount of $1,421,034.

Crown Delaware timely protested the Comptroller’s Notice of Assessment. On February 25, 1997, the Comptroller issued a Notice of Final Determination that sustained the Notice of Assessment. The Notice of Final Deter ⁹³ mination was similar to the previously quoted notice in the SYL case. To summarize, the Comptroller upheld the assessment on the grounds that Crown Delaware was a “phantom company,” a mere corporate shell with little economic substance and no independent source of income.

According to the Comptroller, Crown Delaware was an alter ego of Crown Parent, designed to help Crown Parent avoid Maryland corporate income taxes. The Comptroller asserted that Crown Parent’s royalty payments to Crown Delaware on intellectual property rights were a means of shifting income out of Maryland and into Crown Delaware’s home State of Delaware. The Comptroller stated that, by piercing the corporate veil of this “bookkeeping entity,” and taxing Crown Delaware based on the apportionment factor of Crown Parent, the State of Maryland would recover the income taxes to which it was entitled. Crown Delaware took an appeal to the Maryland Tax Court, challenging the Comptroller’s assessment.

As in the SYL case, Crown Delaware argued that the Comptroller was prohibited under the Commerce Clause of the United States Constitution, Art. 1, Section 8, cl. 3, from taxing it because Crown Delaware lacked a substantial nexus with the State of Maryland. Relying on the principle set forth in Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279 , 97 S.Ct. 1076, 1079 , 51 L.Ed.2d 326, 331 (1977), that under the Commerce Clause a state tax is permitted when, inter alia, “the tax is applied to an activity with a substantial nexus with the taxing State,” Crown Delaware asserted that there was no nexus in this case because it had no tangible property or business presence within Maryland. Crown Delaware also contended that the Comptroller erred in treating it as a “phantom corporation,” asserting that it had employees, office space, and other corporate attributes that imbued it with sufficient economic substance, and that it was formed for the valid business purpose of protecting its parent’s intellectual property assets. Finally, like the subsidiary in the SYL case, Crown Delaware contended that the Comptroller’s attempt to tax it represented ⁹⁴ a change in policy which should have been accomplished by the promulgation of a regulation.

The Comptroller’s arguments were essentially the same as in the SYL case. The Comptroller contended that there was a nexus between Crown Delaware and the State of Maryland, based on Crown Delaware’s licensing of intangible property rights to its parent for use in products that were sold in Maryland. The Comptroller argued that Crown Delaware relied upon its unitary parent for its entire source of income, as Crown Parent’s marketing to consumers of products based on Crown Delaware’s licensed patents and trademarks was Crown Delaware’s exclusive source of royalty fees. In addition, the Comptroller analogized Crown Delaware to the “sham” subsidiaries involved in Armco and in Comptroller v. Atlantic Supply Co. The Comptroller pointed out that Crown Delaware lacked a separate office and employees from Crown Parent, did not exert a direct involvement in the control of the intellectual property assets which it was assigned, and did not conduct business activities on its own but, instead, relied on the business activities of Crown Parent.

The Comptroller also asserted that the assessments did not represent a change in policy so as to require promulgation by a regulation. The evidence before the Tax Court disclosed the following. Crown Delaware was incorporated in 1989, and Crown Parent assigned its intellectual property assets to Crown Delaware in exchange for all of Crown Delaware’s issued stock. Crown Delaware then granted to Crown Parent an exclusive license, to continue from year to year unless terminated by either party, to manufacture, use and sell the products covered by these assets.

In consideration for Crown Delaware’s licensing of these intellectual property rights, Crown Parent agreed to pay Crown Delaware a royalty based on Crown Parent’s sales. In attempting to create a Delaware presence, Crown Delaware employed a third party, Organization Services, Inc. (“OSI”), “to facilitate the establishment of its business operations.” OSI’s brochure stated that it provided “complete services for corporations to minimize state taxes” through the ⁹⁵ use of various suggested subsidiaries. George P. Warren, the founder and president of OSI, described his company’s function as “providing nexus services to Delaware Investment Holding Companies.” Among these “nexus services,” the OSI brochure listed “discretionary mail forwarding.” Additionally, the OSI brochure warned prospective customers as follows: “Caution! “A Delaware subsidiary must have substance to satisfy other states as to its situs within Delaware. This will include, but is not limited to, the following evidence of Delaware activity: Employees Personal income tax withholding Unemployment tax reporting Bank accounts and other assets Office space Furniture and equipment Stationery and business cards Books and records Director and stockholder meetings” OSI provided these “nexus services” for about 400 other companies like Crown Delaware.

Mr. Warren’s duties as an “employee” of Crown Delaware were described by Crown Parent’s general counsel as “doting] everything necessary basically in Delaware to comply with the law and regulations to give substance to this company as a viable and good company in Delaware.” Crown Delaware leased its corporate office space from OSI at the rate of up to $100.00 per month. In return, OSI provided “desk space” on a “part-time or full-time basis” as well as conference rooms for meetings. Under the sublease agreement between OSI and Crown Delaware, OSI was to list Crown Delaware’s name on one of the telephone numbers assigned to OSI in the Wilmington, Delaware “white pages” directory. OSI’s address is listed on Crown Delaware’s company checks. ⁹⁶ Additionally, Crown Delaware hired OSI employees to manage its daily operations.

Each of the nine part-time employees from OSI had a written employment agreement with Crown Delaware and was paid directly by Crown Delaware, which also withheld and remitted withholdings to