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Gore Enter. Holdings, Inc. v. Comptroller of the Treasury

Court of Appeals of Maryland

March 24, 2014


Argued December 6, 2013.

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[Copyrighted Material Omitted]

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In the Matter of Future Value, Inc. Circuit Court for Cecil County. Case No. 07-C-10-000434. In the Matter of Gore Enterprise Holdings, Inc. Circuit Court for Cecil County. Case No. 07-C-10-000435.

Robert F. Reklaitis (Cynthia Fleming Crawford, LeClairyRyan, Washington, DC; Jeffrey A. Friedman, G. Brendan Ballard, Sutherland, Asbill & Brennan, Washington, DC) on brief FOR PETITIONERS.

Michael J. Salem, Assistant Attorney General (Douglas F. Gansler, Attorney General of Maryland, Baltimore, MD) on brief FOR RESPONDENT.

Barbera, C.J., Harrell, Battaglia, Greene, Adkins, McDonald, Raker, Irma S. (Retired, Specially Assigned), JJ. Opinion by Adkins, J.


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[437 Md. 499] Adkins, J.

Benjamin Franklin once wrote that " nothing can be said to be certain, except death and taxes." [1] But Mr. Franklin did not promise certainty about what could be taxed or by whom. This case allows us to bring such certainty to a particular

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creature in the modern corporate landscape. To that end, we examine the Comptroller of Maryland's (" Comptroller" ) authority to tax the income of two out-of-state subsidiary corporations based on the subsidiaries' relationship with their Maryland parent, the subsidiaries' substance as corporations, and all the entities' activity in Maryland.


W.L. Gore & Associates, Inc. (" Gore" ) is a specialty manufacturing company headquartered in Newark, Delaware. Incorporated [437 Md. 500] in Delaware in 1959, Gore is known for its patented " ePTFE" material, which it uses to manufacture fabrics, medical devices, electronics, and industrial products. Gore operates factories in several states, including Maryland. Gore has actively enforced patents that protect its numerous inventions since 1979.

On July 13, 1983, Gore created Gore Enterprise Holdings, Inc. (" GEH" ) as a wholly-owned subsidiary to manage a portfolio of Gore patents. GEH was organized in Delaware as a holding company. Shortly after GEH's incorporation, Gore assigned GEH its entire patent portfolio, a nominal sum of cash, and 1,000 shares in a domestic international sales corporation (" DISC" ), in exchange for all of GEH's stock. GEH then licensed back its patent portfolio to Gore in exchange for a 7.5% royalty of the sales price of all products that Gore sold in the United States.

In 1995, GEH executed a " Legal Services Consulting Agreement" with Gore. Under this agreement, GEH pays Gore attorneys to perform the following work for GEH:

o Prosecution of patent applications, domestic and foreign.

o Conduct or manage litigation or defense of patents against infringement.

o Provide advice with respect to utilization of outside counsel.
o Counsel, conduct or manage applications to foreign patents and applications.
o Counsel with respect to patent infringement, domestic and foreign.
o Counsel with respect to interferences with pending patents.
o Counsel with respect to licensing negotiations and activities.

Gore employees generate research and ideas that are sent to GEH for patent application filing. Until GEH hired one employee and began to pay Gore rent for use of its office space in 1995, GEH had almost no substantial annual expenses. [437 Md. 501] This employee was hired as a Patent Administrator to manage the patent portfolio, implement decisions of the GEH Board of Directors, and report on GEH activities to its Board of Directors. These activities include the licensing of GEH patents to Gore and to third parties, the acquisition of patents from third parties, and the enforcement of GEH's patent portfolio.

In January of 1996, Future Value, Inc. (" FVI" ) was incorporated 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[3] 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

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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.

The Comptroller audited Gore, GEH and FVI in 2006. On July 3, 2006, the Comptroller issued the following assessments of tax, interest and penalties: $26,436,315 against GEH for tax years 1983 to 2003; $2,608,895 against FVI for tax years 1996 to 2003; and $193,178 against Gore for tax years 2001 to 2003. A hearing officer in the Comptroller's office upheld the assessments, plus interest for the time between the Comptroller's assessment and the hearing, in separate decisions entitled " Notice of Final Determination" filed on January 5, 2007. GEH and FVI (together, " Petitioners" ), along with Gore, appealed to the Maryland Tax Court (" the Tax Court" ).

After hearings in October 2008 and May 2009, the Tax Court affirmed the assessments of tax and interest against GEH and FVI, but abated the penalties. Additionally, the [437 Md. 502] Tax Court dismissed the alternative assessment against Gore. Petitioners appealed to the Circuit Court for Cecil County, arguing that Maryland's taxation of GEH and FVI violated the Due Process and Commerce Clauses of the U.S. Constitution. The Circuit Court agreed, reversing the Tax Court. The Comptroller appealed to the Court of Special Appeals, which reversed the Circuit Court, thereby upholding the Comptroller's assessments. See Comptroller of the Treasury v. Gore Enterprise Holdings, Inc ., 209 Md.App. 524, 60 A.3d 107 (2013).

GEH and FVI then petitioned this Court for a writ of certiorari, which we granted to answer the following questions:[4]

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[437 Md. 503] 1) Did the Tax Court err in holding that the Comptroller had authority to tax GEH and FVI under this Court's holding in Comptroller of the Treasury v. SYL, Inc ., 375 Md. 78, 825 A.2d 399 (2003)?

2) Did the Tax Court err in upholding the apportionment formula used by the Comptroller in its assessment of GEH and FVI?

For the reasons discussed below, we agree with the Tax Court, and consequently answer both questions in the negative. We therefore affirm the judgment of the Court of Special Appeals.


The Maryland Tax Court is " 'an adjudicatory administrative agency[.]'" Frey v. Comptroller of the Treasury, 422 Md. 111, 136, 29 A.3d 475, 489 (2011) (quoting Furnitureland S., Inc. v. Comptroller of the Treasury, 364 Md. 126, 137 n.8, 771 A.2d 1061, 1068, n.8 (2001)). Thus, decisions of the Tax Court receive the same judicial review as other administrative agencies. Id. (Citations omitted). In this context, " our review looks 'through the circuit court's and intermediate appellate court's decisions . . . and evaluates the decision of the agency.'" Frey, 422 Md. at 136-37, 29 A.3d at 489 (quoting People's Counsel for Baltimore Cnty. v. Surina, 400 Md. 662, 681, 929 A.2d 899, 910 (2007)). We cannot uphold the Tax Court's decision " on grounds other than the findings and reasons set forth by [the Tax Court]." Frey, 422 Md. at 137, 29 A.3d at 489-90 (citing Evans v. Burruss, 401 Md. 586, 593, 933 A.2d 872, 876 (2007); Dep't of Health & Mental Hygiene v. Campbell, 364 Md. 108, 123, 771 A.2d 1051, 1060 (2001)). Indeed, our review is narrow, and we will not " 'substitute [437 Md. 504] [our] judgment for the expertise of those persons who constitute the administrative agency.'" Frey, 422 Md. at 137, 29 A.3d at 490 (quoting People's Counsel for Baltimore Cnty. v. Loyola College in Md ., 406 Md. 54, 66, 956 A.2d 166, 173 (2008)).

An administrative agency's findings of fact must meet the substantial evidence standard. Frey, 422 Md. at 137, 29 A.3d at 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 or 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." Ramsay, Scarlett & Co., Inc. v. Comptroller of the Treasury, 302 Md. 825, 838, 490 A.2d 1296, 1303 (1985) (citations omitted). In Ramsay, 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,

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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 [437 Md. 505] 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)).

The legal conclusions of an administrative agency that are " premised upon an interpretation of the statues 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 Loyola College, 406 Md. at 67-68, 956 A.2d at 174)).

I. Maryland's Authority to Tax GEH and FVI

Petitioners argue that Maryland does not have the authority to tax GEH and FVI. Specifically, Petitioners deny that GEH and FVI have sufficient " nexus" with Maryland for the Comptroller's assessment of taxes to be constitutional under the Due Process and Commerce Clauses. Petitioners first argue that it was legal error for the Tax Court to find nexus between Maryland and GEH and FVI based on the unitary business principle.[5] Additionally, while acknowledging that our holding in Comptroller of the Treasury v. SYL, Inc .[6] allows the Comptroller and the Tax Court to find nexus when a subsidiary lacks economic substance, Petitioners contend that both GEH and FVI have such substance. Petitioners contend that [437 Md. 506] to hold otherwise would wrongfully expand SYL 's ambit from the " phantom entities" and " mail drops" at issue in that case.

Petitioners also present three peripheral arguments. The first is that the Tax Court improperly usurped a legislative function because treating Gore and its subsidiaries as a unitary business transformed Maryland from a " separate" to a " combined" reporting state. Second, Petitioners contend that Maryland's efforts to tax GEH and FVI violated the State's long-held doctrine of respect for the corporate form. Finally, Petitioners argue that the Tax Court's holding that GEH's patents were used in Maryland by virtue of Gore manufacturing or selling products in the State is contrary to federal patent law, and wrongly blurs a long-held distinction between patents and trademarks.

Respondent rejoins that the Tax Court did not rely solely on the unitary business principle to establish GEH's and FVI's nexus with Maryland. Rather, Respondent contends that the Tax Court found that nexus was " established by the economic reality that the parent's business in Maryland produced the subsidiaries' apportioned income." Essentially, Respondent alleges that although the Gore subsidiaries were not identical to the companies at issue in SYL, they were sufficiently dependent on their parent (Gore) for the

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subsidiaries to fit within the SYL framework.

Respondent also counters Petitioners' three peripheral arguments. First, Respondent fails to see the connection between recognizing the lack of distinction between Gore and its subsidiaries--for purposes of establishing nexus--and Maryland's separate reporting requirements. Second, Respondent finds inapposite Petitioners' argument concerning Maryland taxation and the respect for corporate form enshrined in Maryland precedent. Finally, Respondent disclaims the import of the functional distinction between patents and trademark for purposes of establishing nexus in this case.

We begin by examining the bedrock constitutional principles that must be satisfied before an entity is subject to Maryland income tax. " Under both the Due Process and the [437 Md. 507] Commerce Clauses of the Constitution, a state may not, when imposing an income-based tax, 'tax value earned outside its borders.'" Container Corp. of America v. Franchise Tax Bd ., 463 U.S. 159, 164, 103 S.Ct. 2933, 2939, 77 L.Ed.2d 545 (1983) (quoting ASARCO Inc. v. Idaho State Tax Comm'n, 458 U.S. 307, 315, 102 S.Ct. 3103, 3108, 73 L.Ed.2d 787 (1982)). " [B]oth the Due Process and Commerce Clauses [require] that there be 'some definite link, some minimum connection, between a state and the person, property or transaction it seeks to tax.'" Allied-Signal, Inc. v. Dir., Div. of Taxation, 504 U.S. 768, 777, 112 S.Ct. 2251, 2258, 119 L.Ed.2d 533 (1992) (quoting Miller Bros. Co. v. Maryland, 347 U.S. 340, 344-45, 74 S.Ct. 535, 539, 98 L.Ed. 744 (1954)). Lest the shared elements of the two inquiries spawn confusion, we ...

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