ConAgra Brands v. Comptroller

ConAgra Foods RDM, Inc. v. Comptroller of the Treasury, No. 1940, September Term, 2015. Opinion by Woodward, J. TAXATION – INCOME TAX – CORPORATION INCOME TAX – TAXATION OF NON-DOMICILIARY CORPORATION – CONSTITUTIONAL REQUIREMENTS For a state to tax a non-domiciliary corporation, such taxation must withstand constitutional scrutiny under both the Due Process and Commerce Clauses of the United States Constitution. Although these clauses have different purposes and requirements, they have significant parallels. The Due Process Clause requires that (1) there be a minimal connection between the interstate activities of the non-domiciliary corporation and the taxing state, and (2) there be a rational relationship between the income attributed to the taxing state and the intrastate values of the enterprise being taxed.

The Commerce Clause requires that the tax in question (1) apply 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 the taxing state provides. TAXATION – INCOME TAX – CORPORATION INCOME TAX – TAXATION OF NON-DOMICILIARY CORPORATION – CONSTITUTIONAL REQUIREMENTS – LACK OF ECONOMIC SUBSTANCE AS A SEPARATE ENTITY In Gore Enter. Holdings, Inc. v. Comptroller, 437 Md. 492 (2014), the Court of Appeals held that the constitutional requirements for taxation of out-of-state wholly owned subsidiary corporations are satisfied where the subsidiaries “ha[ve] no real economic substance as separate business entities” from their parent corporations that do business in Maryland. (quoting Comptroller v. SYL, Inc., 375 Md. 78, 106 , cert. denied, 540 U.S. 984 and cert. denied, 540 U.S. 1090 (2003)).

After reviewing the Court of Appeals’ opinions in Gore and SYL, the Court articulated the four factors that courts should look to in determining whether a foreign wholly owned subsidiary lacks economic substance as a business entity separate and apart from its parent corporation that does business in Maryland. First, a court should consider how dependent the subsidiary is on its parent company for income. Second, a court should consider whether there is a circular flow of money from the parent company to the subsidiary and then back to the parent. Third, a court should consider how much the subsidiary relies on the parent for its core functions and services.

Fourth, a court should consider whether the subsidiary engages in substantive activity that is in any meaningful way separate from the parent. Applying these factors to the instant case, which involved a foreign wholly owned subsidiary, Brands, and Brands’s parent corporation, ConAgra, the Court held that there was substantial evidence to support the Tax Court’s findings of (1) Brands’s dependence on ConAgra and its other subsidiaries for the “vast majority” of its income, (2) the circular flow of money from ConAgra and its subsidiaries to Brands and back to ConAgra, (3) Brands’s reliance on ConAgra for its core functions, and (4) Brands’s lack of any meaningful substantive activity separate from ConAgra. The Court rejected Brands’s argument that third-party income received by Brands gave it economic substance as a separate entity, noting that Brands received the vast majority of its income from ConAgra and the latter’s subsidiaries. The Court also rejected Brands’s argument that, because Brands did not pay dividends or make loans to ConAgra, there was no circular flow of money between them, emphasizing that the cash management system utilized by ConAgra and its subsidiaries achieved the same functional result.

The Court additionally rejected Brands’s argument that the Tax Court, in affirming the Comptroller’s assessment against it, should have given more weight to the non-tax business reasons for the establishment of Brands. The Court noted that the motivation behind creating Brands was not dispositive. TAXATION – INCOME TAX – CORPORATION INCOME TAX – APPORTIONMENT OF MARYLAND MODIFIED INCOME – 3-FACTOR FORMULA – MODIFICATION BY COMPTROLLER – USE OF BLENDED APPORTIONMENT FORMULA The Tax General Article provides that, where a corporation does business both within and outside of the state, the corporation shall allocate to Maryland the part of the corporation’s Maryland modified income that is derived from or reasonably attributable to the part of its trade or business carried on in Maryland. TG § 10-402(a)(2) (now §10-402(b)(2)).

Although the Tax General Article lays out a 3-factor apportionment formula, the Article also empowers the Comptroller to modify elements of the formula “[t]o reflect clearly the income allocable to Maryland[.]” TG § 10-402(e). The Court held that, because utilizing the traditional 3-factor formula would have resulted in an apportionment factor of zero for Brands’s payroll, property, and sales in Maryland, the Comptroller had adequately demonstrated the need to alter the 3-factor formula. The Court further held that the Comptroller did not err or abuse its discretion in utilizing a “blended apportionment factor” that was derived from the apportionment factors used by ConAgra and its subsidiaries. TAXATION – INCOME TAX – INTEREST – WAIVER OF INTEREST AND PENALTIES BY THE TAX COURT The authority to abate interest owed on unpaid taxes vests both in the tax collector and the Tax Court.

When reviewing the Comptroller’s decision not to abate interest, the Tax Court must consider whether the taxpayer has demonstrated with affirmative evidence that reasonable cause exists for abatement or that the tax Comptroller’s decision was an obvious error. Noting that “reasonable cause” is not defined in the Tax General Article, and that courts give great weight to the legal conclusions of administrative agencies regarding the statutes that they administer, the Court held that the Tax Court may properly find that reasonable cause exists for abatement of interest where there is uncertainty in the state of the caselaw when applied to the circumstances of a particular taxpayer. Circuit Court for Anne Arundel County Case No. C-02-CV-15-000993 REPORTED IN THE COURT OF SPECIAL APPEALS OF MARYLAND No. 1940 September Term, 2015 ______________________________________ CONAGRA FOODS RDM, INC. v. COMPTROLLER OF THE TREASURY ______________________________________ Arthur, Leahy, *Woodward, JJ. ______________________________________ Opinion by Woodward, J. ______________________________________ Filed: June 27, 2019 *Woodward, Patrick L., J., now retired, participated in the hearing of this case while an active member of this Court; after being recalled pursuant to the Constitution, Article IV, Section 3A, he also participated in the decision and the preparation of this opinion. Pursuant to Maryland Uniform Electronic Legal Materials Act (§§ 10-1601 et seq. of the State Government Article) this document is authentic. **Fader, C.J. and Kehoe, J., did not participate 2019-10-22 12:18-04:00 in the Court’s decision to designate this opinion for publication pursuant to Md. Rule 8-605.1.

Suzanne C. Johnson, Clerk Appellant, ConAgra Foods RDM, Inc., formerly known as ConAgra Brands, Inc. (“Brands”),1 is an intellectual property holding company and a direct and indirect wholly owned subsidiary of ConAgra Foods, Inc., formerly known as ConAgra, Inc. (“ConAgra”). Brands was incorporated in 1996 in Nebraska and has a principal office in Omaha, Nebraska. During the time period of 1996 through 2003, ConAgra conducted business operations in Maryland and filed corporation income tax returns in Maryland. For the same time period, Brands did not file any Maryland corporation income tax returns.

Because Brands received royalties from ConAgra,2 appellee, the Comptroller of the Treasury (“Comptroller”), on August 30, 2007, assessed Brands $2,768,588 in back taxes, interest, and penalties for the tax years of 1996 through 2003. Brands appealed this assessment, and the Comptroller affirmed by issuing a Notice of Final Determination on January 23, 2009. On February 23, 2009, Brands appealed to the Tax Court. After a hearing, the Tax Court ruled, in a Memorandum of Grounds for Decision dated February 24, 2015, that Brands lacked economic substance as a business entity separate from ConAgra and thus allowed the Comptroller to impose the tax assessment.

The Tax Court, however, abated the interest accrued from the date of the appeal to that court to the date of its decision, and all penalties. Brands and the Comptroller filed petitions for judicial review in the Circuit 1 Throughout this opinion, we will refer to ConAgra Foods RDM, Inc. as Brands. It is undisputed that ConAgra Brands, Inc., a Nebraska corporation, and ConAgra Foods RDM, Inc., a Delaware corporation, merged in 2007. 2 Brands also received royalties from other wholly owned subsidiaries of ConAgra who filed corporation income tax returns in Maryland. Court for Anne Arundel County, which resulted in the court affirming the Tax Court’s decision, except for the latter’s abatement of interest accruing from March 24, 2014 to February 24, 2015.

Brands then filed this timely appeal. Brands presents eight questions for our review, which we have rephrased and condensed into three:3 3 Brands’s questions, as set forth in its brief, are as follows: 1. Did the Tax Court commit error when it confirmed the Comptroller’s assessment against Brands even though Brands had economic substance as a separate business entity? 2. Did the Tax Court commit error when it failed to find that the Comptroller’s assessment against Brands violated the Due Process Clause of the United States Constitution because Brands did not purposefully avail itself of the Maryland marketplace and had no other contacts with the state? 3.

Did the Tax Court commit error when it failed to confirm that the Comptroller’s assessment against Brands violated the Commerce Clause of the United States Constitution because Brands lacked a substantial nexus with the state? 4. Did the Tax Court commit error when it confirmed the Comptroller’s assessment against Brands even though the Comptroller failed to follow the Sec. 10-402(c) standard statutory apportionment formula? 5. Did the Tax Court commit error when it confirmed the Comptroller’s assessment against Brands even though the Comptroller, in adopting an apportionment methodology[,] failed to establish that the statutory apportionment formula did not fairly represent the extent of Brands’[s] business activities in the state? 6. Did the Tax Court commit error when, in violation of the Due Process and Commerce Clauses of the United States Constitution, it confirmed the Comptroller’s adoption of an alternative apportionment formula that failed to reasonably reflect Brands’[s] business activities in the state? 7.

Did the Tax Court commit error by confirming the Comptroller’s assessment against Brands in finding that Brands lacked economic substance and, as a result, essentially did not, for tax purposes, exist as a separate legal entity? 8. Did the Tax Court abuse its discretion when it partially waived interest on the tax assessment against Brands? 2 1. Was there substantial evidence to support the Tax Court’s ruling that Brands lacked economic substance as a business entity separate from ConAgra and thus had the constitutionally required nexus and minimum contacts with Maryland to subject Brands to income taxation by Maryland for the royalties received by Brands from ConAgra and its subsidiaries arising out of the latters’ business activities in Maryland? 2. Was there substantial evidence to support the Tax Court’s ruling that the Comptroller had the statutory authority to use a blended apportionment formula to determine Brands’s Maryland income and that the blended apportionment formula clearly reflected Brands’s income allocable to Maryland? 3.

Did the Tax Court properly interpret the tax statute when it waived interest on the income tax due from Brands that accrued from the date of the filing of its appeal to the Tax Court (February 23, 2009) to the date of the issuance of that court’s decision (February 24, 2015)? For the reasons set forth below, we uphold the decision of the Tax Court in all respects and thus affirm in part and reverse in part the judgment of the circuit court. BACKGROUND ConAgra is a conglomerate known for its agricultural products and products in the processed food industry including, but not limited to, Hunts, Orville Redenbacher, Butterball Turkey, and ACT II. In the late 1990s, ConAgra had multiple wholly owned subsidiaries (also known as independent operating companies), including Swift-Eckrich, Inc., Hunt-Wesson, Inc., and Beatrice Cheese, Inc. The multitude of ConAgra’s wholly owned subsidiaries began to present management problems for ConAgra, and in 1996, ConAgra began a program focused on corporate centralization.

One such centralization initiative occurred in April 1996 when ConAgra decided to 3 centralize management of the intellectual property owned by it and its subsidiaries. To effectuate this goal, ConAgra incorporated Brands in Nebraska. Brands issued 2,207 shares of common stock, distributing 1,000 shares to ConAgra, 594 shares to Swift- Eckrich, Inc, 560 shares to Hunt-Wesson, Inc., and 53 shares to Beatrice Cheese, Inc. In exchange, Brands acquired forty-six initial trademark groups and subsequently acquired numerous other trademark groups from these entities. Brands then entered into license agreements for the trademark groups with ConAgra and the three subsidiaries, under which ConAgra and these subsidiaries paid Brands royalties.4 From 1996 to 2003, Brands did not file Maryland tax returns, but ConAgra and some of its subsidiaries did file Maryland tax returns.

After an audit, the Comptroller sent Brands a “Notice and Demand to File Maryland Corporation Income Tax Returns” in 2007. When Brands did not respond to the Comptroller’s notice and demand, the Comptroller issued a “Notice of Assessment” for the tax years of 1996 to 2003 for a total of $2,768,588 in back taxes, interest, and penalties as of August 30, 2007. Upon Brands’s request, an administrative appeal was held on December 4, 2007, concerning the Comptroller’s assessment. On January 23, 2009, the Comptroller issued a “Notice of Final Determination[,]” concluding that Brands then owed $3,053,222 in back taxes, interest, and penalties.

Brands filed a timely Petition of Appeal to the Tax Court on February 23, 2009. 4 Although not clear from the record, it appears that during the tax years in question, royalties were paid to Brands by ConAgra and either the three subsidiaries or their respective successors. 4 After a two-day hearing concluding on October 7, 2010, the Tax Court issued its opinion upholding the Comptroller’s assessment on February 24, 2015. The Tax Court stated that the “initial inquiry [was] to determine whether [Brands] had real economic substance as a business separate from ConAgra.” Citing to Comptroller v. SYL, Inc., 375 Md. 78 , cert. denied, 540 U.S. 984 and cert. denied, 540 U.S. 1090 (2003) and Gore Enter. Holdings, Inc. v. Comptroller, 437 Md. 492 (2014), the Tax Court observed that, under the economic substance doctrine set forth in those cases, an out-of-state subsidiary “must have economic substance as a separate entity from its parent to avoid nexus and taxation.” After a review of the evidence before it, the court concluded that Brands lacked any economic substance separate from ConAgra. Because a portion of Brands’s income was produced from the business of ConAgra and its subsidiaries in Maryland, the court held that there was sufficient nexus to support the income taxation of Brands.

The Tax Court then considered whether the Comptroller applied an appropriate apportionment formula in calculating the income tax that Brands owed to Maryland. The Tax Court determined that the Comptroller’s blended apportionment formula was permissible, because “the Comptroller effectively utilized ConAgra’s own apportionment figures in constructing the blended apportionment factor used in this case.”5 Finally, the Tax Court abated the interest accruing after the date of filing the appeal to the Tax Court (February 23, 2009) to the date of the Tax Court’s decision (February 24, 2015), and all 5 The record revealed that the apportionment factor was calculated using the apportionment factors of ConAgra and its subsidiaries that filed corporation income tax returns in Maryland. 5 penalties.6 On March 17, 2015, Brands filed a petition for judicial review in the circuit court challenging the Tax Court’s ruling that it was subject to Maryland tax, as well as the Comptroller’s apportionment formula. The Comptroller filed a cross-petition for judicial review challenging the Tax Court’s decision to abate all interest accruing from the date of filing the appeal with the Tax Court to the issuance of that court’s decision. After a hearing on September 21, 2015, the circuit court issued an opinion and order on October 30, 2015, affirming the Tax Court in all respects, except for the latter’s abatement of interest accruing from March 24, 2014 to February 24, 2015.7 Brands filed this timely appeal.

Additional facts will be set forth below as they become necessary to the resolution of the questions presented in this appeal. STANDARD OF REVIEW The Tax Court is an adjudicatory administrative agency; “our review looks through the circuit court’s . . . decision[ ] . . . and evaluates the decision of the agency.” Gore, 437 6 The Tax Court also concluded that the assessment, which was issued in 2007, was not barred by the statute of limitations, because the “three-year statute of limitations for assessments does not apply when a taxpayer does not file a required return,” and Brands did not file a return for any of the tax years at issue. That ruling is not at issue before this Court. 7 The circuit court viewed the instant case “to be substantially similar to the factual situation in Gore, and as such, the [c]ourt finds that the interest in the instant case should be treated in the same way as it was treated in Gore.” In Gore, the Court of Appeals did not disturb the Comptroller’s assessment of interest. Gore, 437 Md. at 503 .

The circuit court held that the Tax Court abused its discretion by abating the interest “collected after the date of issuance of the Gore decision on March 24, 2014.” 6 Md. at 503 (some alterations in original) (internal quotation marks omitted). The Court of Appeals has further explained our review of a decision of the Tax Court as follows: An administrative agency’s findings of fact must meet the substantial evidence standard. Frey [v. Comptroller,] 422 Md. [111,] [ ] 137, 29 A.3d [475,] [ ] 490 (citations omitted). Thus, we determine “‘whether a reasoning mind reasonably could have reached the factual conclusion the agency reached.’” Frey, 422 Md. at 137, 29 A.3d at 490 (quoting State Ins.

Comm’r v. Nat’l Bureau of Cas. Underwriters, 248 Md. 292, 309 , 236 A.2d 282, 292 (1967)). It is not our place to “make an independent original estimate of our decision on the evidence.... [or determine for ourselves], as a matter of first instance, the weight to be accorded to the evidence before the agency.” In Ramsay Scarlett & Co., Inc. v. Comptroller of the Treasury, 302 Md. 825, 838 , 490 A.2d 1296, 1303 (1985) (citations omitted), we cautioned: [T]hat a reviewing court may not substitute its judgment for the expertise of the agency; that we must review the agency’s decision in the light most favorable to it; that the agency’s decision is prima facie correct and presumed valid; and that it is the agency’s province to resolve conflicting evidence and where inconsistent inferences can be drawn from the same evidence it is for the agency to draw the inferences. Ramsay, 302 Md. at 834–35, 490 A.2d at 1301 (citations omitted). “[T]he interpretation of the tax law can be a mixed question of fact and law, the resolution of which requires agency expertise.” Comptroller of the Treasury v. Citicorp Int’l Commc’ns, Inc., 389 Md. 156, 164 , 884 A.2d 112 , 116–17 (2005) (citing NCR Corp. v. Comptroller, 313 Md. 118 , 133–34, 544 A.2d 764, 771 (1988)).

In reviewing mixed questions of law and fact, “we apply ‘the substantial evidence test, that is, the same standard of review [we] would apply to an agency factual finding.’” Comptroller of the Treasury v. Science Applications Intern. Corp., 405 Md. 185, 193 , 950 A.2d 766, 770 (2008) (quoting Longshore v. State, 399 Md. 486 , 522 n. 8, 924 A.2d 1129 , 1149 n. 8 (2007)). 7 The legal conclusions of an administrative agency that are “premised upon an interpretation of the statutes that the agency administers” are afforded “great weight.” Frey, 422 Md. at 138, 29 A.3d at 490 (citations omitted). Agency decisions premised upon case law, however, are not entitled to deference. Frey, 422 Md. at 138, 29 A.3d at 490 (“When an agency’s decision is necessarily premised upon the ‘application and analysis of caselaw,’ that decision rests upon ‘a purely legal issue uniquely within the ken of a reviewing court.’” (quoting [People’s Counsel for Baltimore Cty. v.] Loyola College [in Md.], 406 Md. [54,] [ ] 67–68, 956 A.2d [166,] [ ] 174 [2008])).

Id. at 504-05 (some alterations in original). DISCUSSION I. Taxation and the United States Constitution For a state to tax a non-domiciliary company, like Brands, such taxation must withstand constitutional scrutiny under the Due Process and Commerce Clauses of the United States Constitution. Gore, 437 Md. at 506-07 . The satisfaction of these constitutional restrictions on government action have different purposes and requirements, but these clauses also have “significant parallels.” South Dakota v. Wayfair, Inc., 138 S. Ct. 2080, 2093 (2018).

The Due Process Clause imposes restrictions on the government to act in a fair manner and provide “fair warning.” Gore, 437 Md. at 507 . Under the Due Process Clause, there are “two requirements: [1] a ‘minimal connection’ between the interstate activities and the taxing State, and [2] a rational relationship between the income attributed to the State and the intrastate values of the enterprise.” Mobil Oil Corp. v. Comm’r of Taxes of Vermont, 445 U.S. 425, 436-37 (1980). 8 The Commerce Clause, on the other hand, was designed to prevent States from engaging in economic discrimination so they would not divide into isolated, separable units. See Philadelphia v. New Jersey, 437 U.S. 617, 623 , 98 S. Ct. 2531 , 57 L.Ed.2d 475 (1978). But it is “not the purpose of the [C]ommerce [C]lause to relieve those engaged in interstate commerce from their just share of state tax burden.” Complete Auto [Transit, Inc. v. Brady, 430 U.S. 274, 288 (1977)] (internal quotation marks omitted).

Wayfair, 138 S. Ct. at 2093-94 (alterations in original). The Commerce Clause requires that a tax “(1) appl[y] 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 the State provides.” Id. at 2091 . The first prong of the Commerce Clause “test simply asks whether the tax applies to an activity with a substantial nexus with the taxing State. [S]uch a nexus is established when the taxpayer [or collector] avails itself of the substantial privilege of carrying on business in that jurisdiction.” Id. at 2099 (alterations in original) (internal citation and quotation marks omitted). In holding that such nexus can be satisfied through “economic and virtual contacts,” the Court overturned its previous precedent of requiring that a company have physical presence within the State imposing taxation, and in so doing, moved the nexus requirement in the Commerce Clause and the Due Process Clause requirement of minimal contacts into closer alignment.

See id. at 2092-93 (“This nexus requirement is closely related to the due process requirement that there be some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.” (internal citation and quotation marks omitted)). 9 II. Lack of Economic Substance as a Separate Entity In the instant case, Brands is an out-of-state direct and indirect wholly owned subsidiary of ConAgra. During the tax years in question, Brands received royalties under the trademark license agreements from ConAgra and its subsidiaries, a portion of which was derived from the business activities of ConAgra and its subsidiaries in Maryland. In SYL and Gore, the Court of Appeals held that the constitutional requirements for state taxation of out-of-state wholly owned subsidiary corporations are satisfied where the subsidiaries “‘had no real economic substance as separate business entities.’” Gore, 437 Md. at 513 -14 (quoting SYL, 375 Md. at 106 ) (bold emphasis in Gore).

In other words, the Due Process Clause requirement of “minimum contacts” and the Commerce Clause requirement of “nexus” are satisfied for such subsidiaries “‘based upon their parent corporations’ Maryland business[.]’” Gore, 437 Md. at 514 (alteration in original) (quoting SYL, 375 Md. at 109 ). Therefore, the central issue raised in the instant case is whether Brands had real economic substance as a business entity separate from ConAgra. To resolve this issue, we must begin with a close examination of SYL and Gore. A. SYL In SYL, the Court of Appeals consolidated two cases in which the Comptroller assessed Maryland taxes against foreign intellectual property holding companies that were wholly owned subsidiaries of parent companies doing business in Maryland. 375 Md. at 80-81, 92 .

The first case involved the clothing company Syms, Inc. (“Syms”). Id. at 81 . Syms created a wholly owned subsidiary, SYL, Inc. (“SYL”), and incorporated this subsidiary in 10 Delaware. Id.

Syms then transferred all of its intellectual property to SYL, and “SYL granted to Syms a license to manufacture, use and sell the products covered by the trade names and trademarks in [Syms]’s business[.]” Id. SYL received royalties pursuant to its license agreement with Syms, and SYL, in turn, would issue dividends to Syms — the owner of all of SYL’s stock. Id. at 81, 86 . Although Syms filed Maryland corporation income tax returns, SYL did not, and in 1996, the Comptroller issued an assessment against SYL “for the years 1986 through 1993 [in the] amount of $637,362 in corporate income taxes, including interest and penalties.” Id. at 81 .

The companion case involved Crown Cork & Seal Company (Delaware) (“Crown Delaware”). Id. at 92 . Crown Delaware was a wholly owned subsidiary of Crown Cork & Seal Company, Inc. (“Crown Parent”), which was “a corporation engaged in the manufacturing and sale of metal cans, crowns, and closures for bottles, can-filling machines, and plastic bottles and containers, world-wide, including in the State of Maryland.” Id. (internal quotation marks omitted).

Crown Delaware was a Delaware corporation created by Crown Parent to manage its intellectual property, and Crown Delaware acquired “thirteen domestic patents and sixteen trademarks” from Crown Parent. Id. “Crown Delaware then granted to Crown Parent an exclusive license . . . [and] Crown Parent agreed to pay Crown Delaware a royalty based on Crown Parent’s sales.” Id. at 94 . Then, Crown Delaware would provide Crown Parent with loans, sometimes the same day as it received royalties from Crown Parent. Id. at 96 .

Like SYL and Syms, Crown Delaware did not file corporation income tax returns in Maryland, but Crown Parent did. 11 Id. at 92 . The Comptroller issued an assessment against Crown Delaware for $1,421,034 in back taxes including interest and penalties, for the years 1989 through 1993. Id. SYL and Crown Delaware took separate appeals to the Tax Court.

Id. at 84, 93 . In separate decisions, the Tax Court concluded that Maryland did not have the authority to tax SYL and Crown Delaware, because both companies were not completely shell corporations and neither had a sufficient nexus with Maryland. Id. at 88-90, 98-99 . The Comptroller appealed both cases, and the circuit court upheld the Tax Court in separate rulings.

Id. at 91, 99 . Again, the Comptroller appealed, but before the appeals were heard by this Court, the Court of Appeals granted the petitions for a writ of certiorari. Id. On appeal, the Court of Appeals examined this Court’s opinion in Comptroller v. Armco Exp.

Sales Corp., 82 Md. App. 429 , cert. denied, 320 Md. 634 (1990), and cert. denied, 498 U.S. 1088 (1991). SYL, 375 Md. at 103-05 . In that case, this Court considered whether Maryland had the authority to tax three subsidiaries created by Armco, Inc., General Motors, and Thiokol. Id. at 103 .

These subsidiaries were known as “Domestic International Sales Corporation[s] or DISC[s,]” and their sole purpose was to buy goods from their respective parents and then resell the goods to overseas customers, incurring for the parent a federal tax benefit. Id. at 103-04 . This Court held that Maryland could tax the income of the DISCs. Id. at 105 .

We noted that the parent companies conducted business in Maryland. Id. at 104 . We also noted that the DISCs relied completely on their respective parent corporations, because each DISC had “no tangible property or employees and c[ould] only conduct its activity and do business through branches of its unitary affiliated parent.” Id. (internal quotation marks omitted). 12 The Court of Appeals adopted our Armco reasoning and applied it to SYL and Crown Delaware.

Id. at 106 . The Court noted that SYL and Crown Delaware resembled the DISC corporations in Armco, “except that SYL and Crown Delaware had a touch of ‘window dressing’ designed to create an illusion of substance.” Id. The Court continued: Neither subsidiary had a full time employee, and the ostensible part time “employees” of each subsidiary were in reality officers or employees of independent “nexus-service” companies. The annual wages paid to these “employees” by the subsidiaries were minuscule.

The so-called offices in Delaware were little more than mail drops. The subsidiary corporations did virtually nothing; whatever was done was performed by officers, employees, or counsel of the parent corporations. The testimony indicated that, with respect to the operations of the parents and the protections of the trademarks, nothing changed after the creation of the subsidiaries. Although officers of the parent corporations may have stated that tax avoidance was not the sole reason for the creation of the subsidiaries, the record demonstrates that sheltering income from state taxation was the predominant reason for the creation of SYL and Crown Delaware.

Id. (Emphasis added). Indeed, the undisputed record revealed that SYL was completely dependent on Syms for income, and all income was returned to Syms in the form of dividends. Id. at 84, 86 .

SYL’s Board of Directors were all officers of Syms, except that one Board member, Edward Jones, was an accountant employed by the firm Gunnip and Company — a firm SYL hired to provide services, such as a mailing address, and to establish a presence in Delaware. Id. at 86-87 . Daily expenses at SYL were minimal, the record indicating that SYL only spent $2,400 a year for services provided by Gunnip and Company, which included $1,200 a year for the “salary” of Jones, SYL’s sole employee. Id. at 87 .

No expenses were for the protection of any trademarks, and SYL’s license agreement with 13 Syms provided Syms with full control over the trademarks and the protection of the marks. Id. at 87-88 . As to Crown Delaware, the undisputed record revealed that Crown Parent held the exclusive license to Crown Delaware’s intellectual property. Id. at 94 .

Crown Delaware and Crown Parent’s circular flow of money was evidenced by Crown Parent paying Crown Delaware royalties and Crown Delaware loaning money back to Crown Parent, sometimes on the same day. Id. at 96 . The day to day operations of Crown Delaware were handled by Organization Services, Inc. (“OSI”). Id. at 94-95 .

For $100 a month, OSI provided office space, a mailing address, and nine part-time employees who were paid a total of $843.66 in wages for 1993. Id. at 95-96 . In short, Crown Delaware’s revenues “averaged around thirty-seven million dollars annually” but only spent on average just over two thousand dollars annually in expenses — none of which were for legal fees. Id. at 97 .

The record was devoid of any indication that Crown Delaware performed any function to promote or preserve the intellectual property it had acquired from Crown Parent. Id. at 97- 98. The Court of Appeals concluded that “SYL and Crown Delaware had no real economic substance as separate business entities.” Id. at 106 . Accordingly, the Court held “that a portion of SYL’s and Crown Delaware’s income, based upon their parent corporations’ Maryland business, is subject to Maryland income tax.” Id. at 109 .

B. Gore Gore is the most recent case involving the taxation of a foreign intellectual property holding company that is a wholly owned subsidiary of a corporation doing business in 14 Maryland. 437 Md. 492 . In Gore, W.L. Gore & Associates, Inc. (“Gore”) was a manufacturing company of “fabrics, medical devices, electronics, and industrial products” that operated factories in several states, including Maryland. Id. at 499-500 . In 1983, Gore incorporated Gore Enterprise Holdings, Inc. (“GEH”) in Delaware to manage its patents.

Id. at 500 . Gore assigned to GEH all of its patents and certain other assets in exchange for GEH’s entire stock. Id. GEH then licensed the patents back to Gore for a royalty fee on all products sold by Gore.

Id. GEH also entered into a licensing agreement with Gore that allowed Gore’s attorneys to control the legal defense to patent infringement, licensing activities, and patent applications. Id. In addition, GEH did not have any employees until 1995, when it hired one employee to manage the patent portfolio.

Id. at 500-01 . In 1996, Gore incorporated Future Value, Inc. (“FVI”) in Delaware to manage Gore’s excess capital. A Gore-employed attorney incorporated it, and two members of the Gore Board, along with GEH’s Vice President, comprised the FVI Board. Upon FVI’s formation, GEH transferred all of its investment securities to FVI, in exchange for all of the shares of FVI.

GEH then declared a dividend to its sole shareholder, Gore, in the form of the FVI stock. This made Gore the sole owner of FVI. FVI was founded primarily to perform investment management functions, but has also extended Gore a line of credit when Gore experienced negative cash flow. As of 2008, FVI had three employees that handled, monitored, and recorded the various activities performed by FVI.

Id. at 501 (footnote omitted). In 2006, the Comptroller assessed back income taxes, interest, and penalties in the amount of $26,436,315 against GEH for the years 1983 through 2003. Id. Concurrently, the Comptroller assessed FVI $2,608,895 in back income taxes, interest, and penalties for the years 1996 through 2003.

Id. The Tax Court upheld the Comptroller’s tax assessment, 15 ruling that GEH and FVI lacked economic substance separate from Gore, but the circuit court reversed. Id. at 501-02 . The Comptroller appealed to this Court, and we upheld the Tax Court’s ruling that GEH and FVI were subject to Maryland tax.

Id. at 502 . GEH and FVI petitioned the Court of Appeals for a writ of certiorari, which was granted. Id. The Court of Appeals began its analysis by agreeing with the Tax Court that the threshold issue on appeal was whether GEH and FVI lacked economic substance as business entities separate from Gore.

The Court observed that the Tax Court marshaled numerous factual findings, supported by substantial record evidence. These included the following: • There were no outside Directors of GEH or FVI and prior to 1996 the W.L. Gore family dominated the Officer list. • FVI was simply an intentional depository for assets built up through royalties paid to the patent company, GEH. • In effect, GEH does not create, invent or make anything and must rely on W.L. Gore employees to invent the new process or product. Thus, an idea generated by a technologist with W.L. Gore is prepared by GEH through an application for filing with the patent office. In most cases, the employees of W.L. Gore review the patent application and determine whether it should be pursued. • The testimony in the case suggests that GEH relied on W.L. Gore for a continuing stream of inventions and discoveries as set forth in the materials that make up the patent application. • The manufacture or sale of the product by W.L. Gore obligates the payment of royalties to GEH under the License Agreement. • GEH as licensor to W.L. Gore, Inc., licensee, is dependent on the licensee’s activities to obtain consideration for grants of the license.

Although GEH has separate corporate status, the inter- dependence reflected in the third party License Agreements 16 suggests that the patent committee of GEH strongly considers the interest of W.L. Gore in making its decisions. • One witness for GEH who described herself as a Patent Administrator confirmed that W.L. Gore employees would prepare patent applications at no cost to GEH and that payments were made for GEH in accordance with the Service Agreement with W.L. Gore. • [An economist for Petitioners] agreed that W.L. Gore and GEH had globally integrated goals and that a synergy existed between W.L. Gore and GEH due to the relationship between patents and products. • Testimony from [ ] Petitioners’ witnesses consistently suggested that nearly all of the third-party licenses came about in order to produce benefits for W.L. Gore or for the “W.L. Gore family of companies.” • In 1996, W.L. Gore was experiencing some negative cash flow when W.L. Gore asked FVI for a line of credit to meet current operating needs which continued through 1999. The inter- company loans reflected the intercompany dependence of FVI. • The audits reflected through the inter-corporate transactions and Service Agreement that the Delaware Holding Companies relied on W.L. Gore for revenues and services. Id. at 516-17 (alterations in original) (footnote omitted). The Court then summarized the four primary factual conclusions that led the Tax Court to properly rule that GEH and FVI lacked economic substance as business entities separate from Gore: [1] the subsidiaries’ dependence on Gore for their income, [2] the circular flow of money between the subsidiaries and Gore, [3] the subsidiaries’ reliance on Gore for core functions and services, and [4] the general absence of substantive activity from either subsidiary that was in any meaningful way separate from Gore.

Id. at 517 . 17 According to GEH and FVI, however, SYL was distinguishable, because GEH and FVI “engaged in more substantive activities than those in SYL.” Id. at 519 . Specifically, “GEH acquired patents from third parties, licensed patents to third parties, and paid substantial fees for outside legal counsel and other services.” Id. The Court characterized these activities as “more ‘window dressing’ than the SYL subsidiaries,” but concluded that “these additional trappings do not imbue GEH and FVI with substance as separate entities.” Id. (Emphasis in original).

The Court elaborated: “Indeed, Gore permeates the substantive activities of both GEH and FVI. Petitioners’ employees and operations are so intertwined with Gore as to be almost inseparable, as the ‘Legal Services Consulting Agreement,’ and reliance on Gore—for everything from professional services, to things like office space—so indicate.” Id. at 519-20 . C. Synopsis of SYL and Gore As previously stated, under SYL and Gore a nexus or minimal contacts with the State of Maryland that satisfies the constitutional requirements for income taxation by Maryland can be established when a foreign wholly owned subsidiary lacks economic substance as a business entity separate and apart from its parent company that does business in Maryland. See Gore, 437 Md. at 517-18 ; SYL, 375 Md. at 106 .

Whether a subsidiary lacks economic substance as a separate business entity is to be determined on a case by case basis, by considering four general factors.8 Gore, 437 Md. at 517 . 8 The Court of Appeals did not indicate in Gore that these factors were exhaustive. See Gore, 437 Md. at 517 . 18 First, a court should consider how dependent a subsidiary is on its parent company for income. Id. at 519 . Gore and SYL instruct that a court should consider the amount of income a subsidiary receives from its parent company or other companies owned by the parent company.

Id. at 515, 517 ; SYL, 375 Md. at 84, 86, 94 . A court also should consider how much income is generated from third parties and how that income may compare with other sources of the subsidiary’s income. See Gore, 437 Md. at 517 . Second, a court should consider whether there is a circular flow of money from the parent company to the subsidiary and then back to the parent.

Id. at 515 ; SYL, 375 Md. at 84, 86, 96 . SYL and Gore teach us that the flow of money back to the parent can be evidenced in several different ways, such as dividends and loans. See Gore, 437 Md. at 515 . At its core, this inquiry is whether the parent is the one who controls the flow of money and ultimately receives back the money paid to the subsidiary, subject to any expenses incurred by the subsidiary.

Third, a court should consider how much the subsidiary relies on the parent for its core functions and services. Included in the core functions utilized by the subsidiary are office space and equipment, personnel, and corporate services. Id.; SYL, 375 Md. at 86 - 88, 96. The corporate services provided by the parent can include cash management, marketing, purchasing, accounting, payroll, tax services, research and development, and human resources.

Gore, 437 Md. at 515 ; SYL, 375 Md. at 95-96 . The last factor is a “catch all” to the rest—whether the subsidiary has substantive activity that is “in any meaningful way separate from” its parent. Gore, 437 Md. at 517 (emphasis added). Here, a court should consider whether the subsidiary creates, invents, 19 or makes anything that is independent of the parent company.

Id. at 516 ; SYL, 375 Md. at 106 . Also important is whether there exists functional integration and control by the parent through stock ownership, as well as common officers, directors, and employees. See Gore, 437 Md. at 515 ; SYL, 375 Md. at 98 . In sum, a court should consider the subsidiary’s overall dependence on the parent in the former’s structure and operations.

See Gore, 437 Md. at 521 ; SYL, 375 Md. at 106 . D. Tax Court’s Ruling in the Instant Case After a two-day hearing that consisted of factual stipulations, testimony, and thousands of pages of exhibits, the Tax Court issued a Memorandum of Grounds for Decision. In considering whether Brands had economic substance as a business entity separate from ConAgra, the court made the following factual findings: In April, 1996, ConAgra incorporated Brands to hold and enforce trademarks, conduct central advertising for corporate brands, and achieve other corporate efficiencies, including tax savings. Brands was capitalized by ConAgra[ ], which also provided its board of directors and officers from among the corporate executive corps.

In late 1996, the parent and three ConAgra subsidiaries – Beatrice Foods, Inc., Hunt-Wesson, and Swift-Eckrich contributed 46 trademark groups to Brands in exchange for 2,207 shares of [Brands’s] common stock. Thereafter, Brands held the 46 initial trademark groups and subsequently acquired numerous others from these entities. Brands was physically housed on the ConAgra corporate campus in Omaha. It rented space and equipment from the corporate parent.

Brands had its own officers, who were actually paid by Brands, although their payroll was serviced by corporate. Brands gradually acquired several employees, and had as many as 23 employees in the latter part of the period in question. Brands licensed the ConAgra trademarks back to the ConAgra subsidiaries from which they had been acquired, although in a few 20 cases, Brands also licensed ConAgra trademarks to third-party corporations. Brands[’s] most significant activity was conducting national advertising campaigns for the trademark brands.

Brands’[s] employees performed quality control for the licensed brands, and monitored trademark infringements over the time periods in question. In exchange for the licensed trademarks, the licensees paid annual royalties to Brands, which was the primary source of Brands’[s] income, all of which was paid back to the ConAgra parent in the form of inter-company payments of various types. Brands was organized in part to obtain a reduction in taxes. One of the advantages of organizing and using [Brands] to own and manage trademarks for the ConAgra family of companies was a potential royalty deduction from income taxes that would be claimed by ConAgra companies in those states that did not require combined income tax reporting.

Brands was entirely owned, directly and indirectly, by ConAgra [ ], the parent corporation. ConAgra itself held 1,000 shares of Brands (45%), while the remaining 1,207 shares were owned by three of ConAgra’s wholly owned subsidiaries, Swift-Eckrich, Inc., Hunt-Wesson, Inc., and Beatrice Cheese, Inc. In its fiscal year ending May, 1997 through May, 2004, [Brands] received millions of dollars of royalty income from ConAgra companies doing business and filing tax returns in Maryland. The evidence suggests during the entire period at issue, ConAgra utilized centralized legal services, tax services, human resources (including payroll), treasury functions, cash management, marketing, corporate relations, information services, research & development, purchasing, accounting, and general corporate management. In fact, Brands itself was organized for the purpose of centralizing control over trademarks and conducting centralized national advertising ConAgra-wide.

ConAgra corporate executives were routinely assigned to interlocking directors’ boards of the several subsidiary corporations; officers were assigned to various subsidiaries from an existing central pool of executives; and many corporate officers were assigned as special portfolio officers to numerous subsidiaries. ConAgra [ ] had a vice-president for taxes. That officer was simply assigned as the vice president for taxes to Brands and to many 21 other subsidiaries. Likewise, ConAgra[ ]’s corporate secretary was cross-assigned as the corporate secretary for Brands, Hunt-Wesson, Swift-Eckrich, and Beatrice Foods.

Kenneth DiFonzo testified by deposition that he was assigned as an officer and director to so many different subsidiaries that he could only recall the names of a few of the subsidiaries to which he was assigned. The annual assignment of officers to subsidiaries [was] effectively carried out by the ConAgra [ ] corporate secretariat, which circulated “consents in lieu of” annual meetings and boards of the various entities signed the consents. From a revenue standpoint, Brands depended for the vast majority of its annual revenue on royalty payments from ConAgra and its subsidiaries. All profits from its operation were transferred back to ConAgra in annual payments called “cost of capital” payments and through other internal financial arrangements.

The payments to and from ConAgra and its subs, and to and from Brands in particular, were entirely circular. Brands could not have functioned as a corporate entity without the support services its received from “corporate.” All of Brands’[s] everyday support services – ranging from its physical housing to payroll, accounting, cash management, tax services, funding of legal services, capital requirements, financing, executive staffing, and information services – were supplied by its corporate parent. The facts indicate functional integration and control through stock ownership, as well as common employees, directors and officers. The functional source of Brands[’s] income is derived from the ideas and discoveries generated by ConAgra Corporate.

The circular flow of money is traced by and through the valuable trademarks. In addition, the facts also indicate Brands’[s] reliance on ConAgra corporate personnel, office space and corporate services. The tax returns and other financial data reflect the lack of separate substantial activity of Brands. (Emphasis added). 22 From the above facts, the Tax Court concluded that Brands was sufficiently similar to the subsidiary companies in SYL and Gore, and thus “lacked any economic substance separate from its parent(s).”