Corporate Close Up: Maryland Finds ConAgra Brands Lacked Economic Substance Separate from Parent


The Maryland Tax Court upheld a corporate income tax assessment against ConAgra Brands Inc., finding that the subsidiary lacked economic substance separate from its parent. In order to avoid nexus, and thus taxation, a subsidiary must have economic substance as a separate entity, the court said Feb. 24 in ConAgra Brands, Inc. v. Comptroller of the Treasury (No. 09-IN-OO-0150).

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,” Alexandra Sampson, an associate with Reed Smith LLP, said in a March 2 e-mail to Bloomberg BNA.

ConAgra Brands Inc. (Brands) is a Nebraska corporation that is a wholly owned subsidiary of ConAgra Foods Inc (ConAgra). According to the facts of the decision, Brands was created to hold and enforce trademarks, conduct central advertising and for other corporate efficiencies. ConAgra and some of its other subsidiaries contributed trademarks for shares of common stock in Brands. Brands licensed the trademarks back to the subsidiaries and in return, was paid annual royalties. Brands' primary source of income was the royalties, which were then paid back to its parent as various intercompany payments.

The Maryland Comptroller of the Treasury assessed corporate income taxes against Brands, along with interest and penalties. Brands protested, arguing that it lacked nexus with the state because it didn't purposefully direct its activities toward the state and also didn't have a physical presence in the state. Brands also said it didn't have an economic presence because it didn't exploit the state's marketplace.

The Maryland Tax Court upheld the comptroller's assessment based on the unitary business principle. Maryland courts have found nexus sufficient for taxation if the parent's business in Maryland is what produced the income of the subsidiary, the court said. The first step in this analysis was to determine whether ConAgra Brands has real economic substance apart from ConAgra, its parent.

Brands argued that it didn't have nexus with Maryland because it had real and economic substance outside the state. The Maryland Tax Court disagreed.

In concluding that Brands lacked real economic substance, the court said that:

  • Brands couldn't have functioned as a corporate entity without the support services it received from corporate;
  • functional integration and control existed through stock ownership, common employees, directors and officers;
  • Brands relied on ConAgra corporate personnel, office space and corporate services; and
  • the tax returns and financial data reflected a lack of separate substantial activity of Brands.

Brands' income comes from its parent's business in Maryland, and as a result, establishes the nexus needed to impose tax, the court concluded. 

Additionally, the court upheld the comptroller's use of a blended apportionment factor because the statutory three-factor apportionment formula would have resulted in a zero apportionment factor since Brands didn't have any Maryland sales, property or payroll. 

“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,” Sampson said.

For additional discussions of the ConAgra decision, see…

By: Priya Nair

Continue the discussion on Bloomberg BNA’s State Tax Group on LinkedIn: Do you think the Maryland Tax Court reached the correct decision in ConAgra Brands, Inc. v. Comptroller of the Treasury?