Conagra Foods RDM, Inc. v. Comptroller of the Treasury

241 Md.App. 547

211 A.3d 611

CONAGRA FOODS RDM, INC.

v.COMPTROLLER OF the TREASURY

No. 1940, Sept. Term, 2015

Court of Special Appeals of Maryland.

June 27, 2019

Argued by: Fred O. Marcus (David S. Ruskin, Jennifer A. Zimmerman, Horwood, Marcus & Berk Chartered of Chicago, IL and Harry D. Shapiro, Saul Ewing, LLP, Baltimore, MD), all on the brief, for Appellant.

Argued by: Michael J. Salem (Brian E. Frosh, Attorney General, on the brief), Annapolis, MD, for Appellee.

Panel: Arthur, Leahy,^* Woodward, JJ.

Woodward, J. 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 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

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 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.

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, 825 A.2d 399, cert. denied , 540 U.S. 984, 124 S.Ct. 478, 157 L.Ed.2d 375 and cert. denied , 540 U.S. 1090, 124 S.Ct. 961, 157 L.Ed.2d 795 (2003) and Gore Enter. Holdings, Inc. v. Comptroller , 437 Md. 492, 87 A.3d 1263 (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 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 Md. at 503, 87 A.3d 1263 (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

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