-Another Victory In Delaware Holding Company Action -
Annapolis, MD (November 17, 2010) –Comptroller Peter Franchot announced another victory today in his pursuit to make sure large corporations pay their fare share as the Maryland Tax Court upheld the agency’s tax assessments in the case of W.L. Gore, et al. v. Comptroller. Gore vigorously contested two separate assessments totaling more than $25 million in a case with hundreds of exhibits, several experts and more than five days of hearings. Ultimately, the Tax Court accepted the Comptroller’s argument that Gore’s Delaware Holding Companies (DHC) are taxable by Maryland because of the direct connection between the intangible royalties at issue and Gore’s Maryland activities, such as manufacturing, sales, and continuing research and development of new products.
“Today’s victory speaks to the continued efforts of our agency and the Office of the Attorney General to aggressively crack down on corporations attempting to avoid paying taxes through Delaware Holding Company tax schemes,” said Comptroller Franchot.
Gore Enterprises, Inc. and Future Value, Inc., both DHC s and subsidiaries of W.L. Gore and Associates, Inc., appealed the income tax assessments for the taxable periods of 1983 through 2003 and 1996 through 2003. The Comptroller’s Office contended that both companies had substantial connections to the state of Maryland under the unitary business principle, but neither company had ever filed Maryland income tax returns or paid tax on royalty and interest income. The Gore DHCs argued that patent royalties were different from trademark royalties and were therefore exempt from the DHC analysis adopted by the Maryland Court of Appeals in the landmark 2003 case against SYL, Inc. In that case, the court found that Maryland had the right to tax a unitary subsidiary earning intangible royalties if the parent company did business in Maryland, and the royalties were directly connected to Maryland activity.
The issue in W.L. Gore was whether the two DHCs, which are wholly-owned subsidiaries of Gore and lack a physical presence in Maryland, can be constitutionally required to pay state income taxes on its income when W. L. Gore maintains a physical presence in this state. The Tax Court found that multiple connections between the companies and their reliance on one another created a unitary business with substantial connection to Maryland, and therefore Maryland had a right to tax a fair share of the intangible income.
During Comptroller Franchot’s first term, the agency made a hard-line effort to aggressively crack down on large corporations using tax avoidance strategies such as “captive” Real Estate Investment Trusts and Delaware Holding Company ploys. To date, these efforts have generated more than $110 million in money owed the state.
“This was an extensive trial involving one of the largest total assessments ever to come before the Tax Court,” said Franchot. “My agency took the lead in closing this tax loophole and is committed to ensuring that everyone pays their fair share.”