Last week, in ConAgra Brands, Inc. v. Maryland Comptroller of the Treasury, No. 09-IN-00-0150 (Md. Tax Ct., Feb. 24, 2015), the Maryland Tax Court issued an opinion perpetuating the state’s erroneous Gore decision from 2014, essentially holding that a corporate subsidiary had nexus in Maryland because its corporate parent had nexus there. The Tax Court was constrained by the Maryland Supreme Court’s decision in Gore Enterprise Holdings, Inc. v. Comptroller, 437 Md. 492 (2014), so perhaps it is not surprising that the Tax Court issued an opinion that is a continuation of that very confused and misguided decision.
This case concerned the taxability in Maryland of ConAgra Brands, which is the intangible holding company (IHC) for the ConAgra group. The Tax Court acknowledged that Brands had no presence in Maryland and seemed to acknowledge its substance (at least under traditional “veil-piercing” rules), noting that it had its own offices and employees and describing its corporate activities, which were geared toward protecting and promoting the group’s IP—including some licensing of the group’s intellectual property to third parties for a fee.
However, based largely on the facts that Brands (1) relied on other corporate “support services” and (2) ultimately transferred its income up to its parent, the Tax Court held that Brands lacked “economic substance” and was therefore subject to nexus in Maryland because of its parent’s activities there. This “finding” was not well supported: the court did not perform anything close to a traditional analysis under a corporate “piercing the veil” theory and only made a generic reference to other Maryland economic substance cases without closely comparing and contrasting the cases. If this were a “true” economic substance case, it’d be pretty unremarkable; however, it is not, and it is unlikely that a plaintiff could, consistent with Due Process, rely on this decision to assert personal jurisdiction over Brands in Maryland. Instead, the opinion suggests that Maryland applies some kind of bizarre “economic substance for tax purposes” concept that Maryland has invented to find nexus over corporate subsidiaries that otherwise satisfy corporate formalities.
If a separate-reporting state wishes to deny the benefits of an IHC to an affiliated group, it has a number of options at its disposal – e.g., combined reporting, add-back statutes – to seek to deny those benefits. Those options (among others), while debatable from a policy standpoint, at least have the benefit of being transparent and consistent, while having provided the opportunity for public input through the legislative process. On the other hand, the haphazard application of an “economic substance for tax purposes” doctrine on audit has none of those virtues. If Maryland wishes to achieve the outcome of Gore and ConAgraon a broad basis, it has a number of defensible, transparent options to pursue that goal; however, its current practice offends all notions of fairness, good tax administration, and common sense, and Maryland should put a stop to it immediately.
For practitioners, the best take-away from the case (in addition to being prepared for anything from the Maryland courts) is to note that Brands’ case may have been undercut by the poor deposition performance of its officer, who the court singled out as being unable to recall the names of the subsidiaries to which he had been assigned. This serves as a reminder that even a great case can be undone by an imperfect presentation of otherwise good facts.