The Maryland Tax Court recently issued its decision in ConAgra Brands Inc. v. Comptroller of the Treasury, 09-IN-OO-0150 (Md. Tax Ct., Feb. 24, 2015). The case involved the Comptroller’s assertion of nexus over ConAgra Brands, an intangible holding company, based on ConAgra Brands’ licensing of intangibles to various operating companies that did business in Maryland. Many observers considered ConAgra Brands to have more economic substance than any of the intangible holding companies that were the subject of prior Maryland Court decisions—it engaged in substantial activity other than the licensing of intangibles as the responsible entity for the ConAgra group’s multimillion-dollar national marketing and advertising program. Nonetheless, the Tax Court decided the case in favor of the Comptroller.
Despite the substantial activities engaged in by ConAgra Brands, the Tax Court determined that it lacked economic substance as a separate business entity from its parent. The court cited ConAgra Brand’s use of centralized ConAgra-wide services (such as legal, treasury function, and information services), shared corporate executives, and the circular flow of funds that resulted from the royalty payments to ConAgra Brands, as proof that it could not have functioned as a corporate entity without the support services it received from its parent.
ConAgra Brands is the first Maryland intangible holding company decision after last year’s decision by the Maryland Court of Appeals (the highest court in Maryland) in Gore Enterprise Holdings, Inc. v. Comptroller of the Treasury, 87 A.3d 1263 (Md. 2014). In Gore, the Court of Appeals confirmed that a subsidiary must have economic substance as a separate entity from its parent to avoid nexus and taxation. In addition, in Gore, the Court of Appeals noted that although the unitary business principle cannot be used to establish nexus over an entity, there’s no reason why factors that indicate the existence of a unitary business cannot also be relevant in determining whether a subsidiary has real economic substance separate from its parent.
The Tax Court decision in ConAgra Brands confirms the fears of many in the taxpayer and practitioner communities—that the Maryland Court of Appeals’ blessing to consider unitary business factors in nexus assessments would result in exactly what the Court of Appeals stated was not permissible—the usage of the unitary business principle to establish nexus.
One positive aspect of the decision was the Tax Court’s decision to abate six years’ worth of interest and all penalties, noting that the law in Maryland on this issue has evolved through various court decisions, and that the taxpayer’s challenge was in good faith and was supported by a reasonable basis.