NIHC, Inc. v. Comptroller of the Treasury
No. 63, September Term 2013




Taxation - Income Tax - Corporations - Tax Assessment of Subsidiary without
Economic Substance Separate from Parent Corporation on Income Shifted from Parent
to Subsidiary. In Comptroller v. SYL, Inc., 375 Md. 78, 825 A.2d 399 (2003), the Court of
Appeals held that a corporate subsidiary that lacked economic substance as a business entity
separate from its parent corporation had a sufficient nexus with Maryland such that its
income was taxable in Maryland to the same extent as the parent corporation’s income. In
the instant case, a parent corporation created several subsidiaries, which then engaged in a
series of transactions among themselves and with the parent corporation concerning licensing
rights to the parent corporation’s trademarks, the net effect of which was to shift part of the
parent’s income to the subsidiaries. The Comptroller assessed the subsidiaries for Maryland
income tax on the shifted income. Applying SYL, the Maryland Tax Court found that the
subsidiaries lacked economic substance separate from their parent corporation, that they had
a nexus with Maryland through the parent’s business activities, and that their income was
taxable in Maryland to the same extent as the parent corporation’s income. One of the
subsidiaries contested the assessment on the ground that it had mistakenly reported income
on its 2002 and 2003 Maryland tax returns – although it had apportioned none of that income
to Maryland – and, under a Maryland statute requiring the filing of separate corporate returns,
should have reported the income on its 1999 return, which was now outside the period of
limitations. The Tax Court rejected that argument. In the circumstances of this case, where
the Tax Court found that the income reported on the 2002 and 2003 returns of the subsidiary
related to activities of the parent corporation in Maryland during those tax years and that the
subsidiary lacked economic substance apart from its parent, and where the subsidiary had not
filed amended returns to reflect its new view of how it should have reported that income, the
Maryland requirement of separate corporate tax returns did not prohibit the Comptroller from
assessing a tax on the income reported on the subsidiary’s 2002 and 2003 Maryland tax
returns.
Circuit Court for Baltimore County
Case No. 03-C-10-9151
Argued: March 7, 2014



                                       IN THE COURT OF APPEALS
                                             OF MARYLAND

                                                  No. 63

                                           September Term, 2013


                                                NIHC, INC.

                                                     v.

                                     COMPTROLLER OF THE TREASURY


                                                  Barbera, C.J.
                                                  Harrell
                                                  Battaglia
                                                  Greene
                                                  Adkins
                                                  McDonald
                                                  Watts,

                                                           JJ.


                                          Opinion by McDonald, J.


                                           Filed: August 18, 2014
       Once upon a time, before the advent of the shot clock, some basketball teams

employed a maneuver known as the “four corners offense.” This strategy involved a series

of passes among team members that seemingly did not advance the ultimate purpose of

putting the ball in the hoop, but had the separate purpose of depriving the opposing team of

possession of the ball. In a somewhat analogous enterprise, corporate tax consultants devised

a strategy that involved a series of transactions passing licensing rights between related

corporations and that was motivated by a desire, not to directly enhance corporate profits, but

to keep a portion of those profits out of the hands of state tax collectors. Much as the shot

clock led to the demise of the four corners offense, judicial decisions during the past two

decades have limited the utility of this tax avoidance strategy.1

       This case illustrates a variation on that theme. Nordstrom, Inc. (“Nordstrom”) created

several subsidiary corporations, including Petitioner NIHC, Inc. (“NIHC”), which then

engaged in a series of transactions with Nordstrom and with each other, involving the

licensing rights to Nordstrom’s trademarks.       When the dust settled, the rights to use

Nordstrom’s trademarks ended up where they had begun – with Nordstrom. But Nordstrom’s

Maryland taxable income was significantly reduced. NIHC, although it had engaged in no

value-creating business activity itself, recognized a significant gain – putatively beyond the

reach of Maryland taxation – that was ultimately related to the reduction in Nordstrom’s

Maryland taxable income.       From the perspective of the Respondent Comptroller, the


       1
       See, e.g., Comptroller v. SYL, Inc., 375 Md. 78, 825 A.2d 399, cert. denied, 540 U.S.
984 and 540 U.S. 1090 (2003); Geoffrey, Inc. v. South Carolina Tax Commission, 437 S.E.2d
13 (S.C.), cert. denied, 510 U.S. 992 (1993).
transactions appeared to be an effort to shift income from Nordstrom – where a portion of

it would be taxable by Maryland – to subsidiaries that arguably had no nexus to Maryland –

where the income would escape Maryland taxation. The Comptroller did not accept that

conclusion and issued tax assessments against the subsidiaries’ income. The Tax Court

concluded, and the Circuit Court and the Court of Special Appeals affirmed, that the

subsidiaries, including NIHC, lacked economic substance separate from Nordstrom and,

applying a recent decision of this Court, that their income had a nexus with Maryland through

Nordstrom’s business activities and was therefore taxable by Maryland.

       There is an additional feature that makes this case distinctive: NIHC (actually,

Nordstrom, on behalf of NIHC) contends that it misunderstood the differences in the ways

in which corporations must file returns federally and in Maryland and that it made a mistake

in reporting income on its Maryland returns for 2002 and 2003 – a mistake which, it argues,

should absolve it from paying the assessed tax. In particular, federal law provides for the

filing of a consolidated return by related corporations while Maryland law requires the filing

of separate returns by related corporations. NIHC asserts that, under Maryland’s separate

reporting requirement, it should have reported – and thus paid Maryland income tax – on the

entire gain it recognized as a result of the transactions with Nordstrom and the other

subsidiaries in 1999, a tax year now outside the statute of limitations, and that it instead

mistakenly reported a portion of that income on its Maryland returns for the tax years in

question – tax years 2002 and 2003. The Tax Court held that the separate reporting



                                              2
requirement in Maryland did not prohibit Maryland taxation of the income actually reported

on the 2002 and 2003 NIHC returns. The Circuit Court held otherwise, but the Court of

Special Appeals reversed.

       We agree with the Court of Special Appeals that the decision of the Tax Court should

be upheld on judicial review. There appears to be no question that income recognized by

NIHC from these transactions has a connection to business activities of Nordstrom in

Maryland during 2002 and 2003, that a portion of that income was reported on NIHC’s

Maryland returns for 2002 and 2003 (which were never amended to reflect its current

theory), and that the income is taxable by Maryland. The fact that NIHC may have made a

series of mistakes in the preparation of its Maryland tax returns, as a result of transactions

apparently devised to avoid state taxation, does not entitle it to escape its tax liability on that

income.

                                          Background

       Corporate Family Portrait

       The underlying facts are not in dispute. Nordstrom is a nationally known retailer with

its principal place of business in Seattle, Washington. During the time period relevant to this




                                                3
case, it operated stores in 27 states, including Maryland.2 During that time, Nordstrom filed

consolidated federal income tax returns with its domestic subsidiary corporations.3

       In the mid-1990s, Nordstrom decided to transfer its trademarks to a subsidiary for tax

purposes, according to a plan labeled the “anti-Geoffrey strategy” by its tax consultant.4 To


       2
       During that time, Nordstrom operated four department stores, two discount stores,
and one distribution center in Maryland.
       3
       The Internal Revenue Code permits an affiliated group of corporations, consisting
of a parent corporation and more than 80 percent-owned domestic subsidiaries, to file
consolidated returns. 26 U.S.C. §1504(a).
       4
        A representative of Nordstrom testified at the Tax Court hearing in this case that the
transfer was motivated by the company’s desire to avoid a personal property tax on
intangibles in Washington state that might be extended to its trademarks. Documents
admitted in evidence in the Tax Court indicated that the corporate structure and transactions
were also part of a strategy devised by Nordstrom’s tax consultant, Deloitte & Touche LLP,
to circumvent state court rulings that permitted states to tax the income of foreign
subsidiaries created with the purpose of holding intangible assets and shifting income beyond
reach of the tax collector. Deloitte & Touche referred to the plan as an “anti-Geoffrey
strategy” – a reference to a South Carolina Supreme Court decision that held that South
Carolina could tax royalties received by an out-of-state subsidiary holding the trademarks of
its parent. Geoffrey Inc. v. South Carolina Tax Commission, 437 S.E.2d 13 (S.C.), cert.
denied, 510 U.S. 992 (1993). In Geoffrey, the retailer Toys R Us created a second-tier
subsidiary (Geoffrey, Inc.), to which it transferred trademarks and trade names; the subsidiary
then licensed them back in return for royalties paid by the parent, which had the net effect
of shifting income from the parent to a subsidiary that arguably did no business in South
Carolina. The South Carolina Supreme Court held that the royalty income of Geoffrey, Inc.
had a nexus with South Carolina through the use of the trademarks in that state by Toys R
Us, and was subject to taxation in South Carolina without offending the Commerce Clause
or Due Process Clause of the federal constitution.

       While the Nordstrom representative acknowledged that the company had carried out
the anti-Geoffrey strategy proposed by Deloitte & Touche, she insisted that the holding
company structure was motivated primarily by a desire to avoid the Washington state
personal property tax. In any event, there appears to be no dispute that the creation of the
                                                                              (continued...)

                                              4
carry out that plan, in late 1996, Nordstrom created subsidiary corporations called NTN, Inc.

(“NTN”) and NIHC, Inc. (“NIHC”) in Colorado; a few months later, in March 1997, it

created a third subsidiary in Colorado called N2HC, Inc. (“N2HC”). Nordstrom owned the

stock of all three subsidiaries.

       During the relevant time period, all of the officers of NIHC and N2HC were officers

or employees of Nordstrom. Both corporations occupied rented office space in Portland,

Oregon, staffed by a paralegal employed by N2HC. The operating expenses of the affiliates

were relatively minimal. NIHC and N2HC had little income or expense other than that

related to the trademark transactions described below.

       Passing the Trademark Rights around the Corporate Family

       Nordstrom transferred its trademarks to NTN in March 1997, and NTN in turn gave

Nordstrom a license to continue to use the trademarks. In April 1997, Nordstrom transferred

its stock in NTN and NIHC to N2HC for cash. Thus, relevant to the discussion below,

N2HC became the sole shareholder of NIHC.

       On January 31, 1999, the license agreement between NTN and Nordstrom was

terminated. NTN then entered into a license agreement with NIHC that granted NIHC a non-

exclusive license to use and sublicense the Nordstrom trademarks.5 On the same day, NIHC



       4
        (...continued)
subsidiaries and the ensuing inter-company transactions originated as an effort to avoid state
taxes, as opposed to an effort to enhance the retailer’s revenue or profits.
       5
           NTN eventually assigned the trademarks to NIHC in January 2001.

                                              5
distributed to N2HC, its parent corporation, the license agreement with NTN. Thus, as of

the end of January 1999, N2HC had the right to license Nordstrom’s trademarks and the right

to any income generated through the exercise of that right.

       The next day – February 1, 1999 – N2HC entered into a license agreement with

Nordstrom under which N2HC granted Nordstrom a license to use the trademarks for an

arms-length royalty.6 Nordstrom paid N2HC royalties during the relevant time period. For

the tax years 2002, and 2003, Nordstrom paid N2HC royalties in the amount of

$197,802,386, and $212,284,273, respectively.7       N2HC in turn made loans back to

Nordstrom in slightly lesser amounts during the same period.8

       At the conclusion of these transactions, Nordstrom continued to have the right to use

the trademarks; the trademarks were the property of NIHC; and N2HC had the right to

license the trademarks and receive royalties from Nordstrom. During the relevant period,

trademarks were licensed only to Nordstrom, NIHC conducted no business other than owning



      6
       NIHC passed the right to license Nordstrom trademarks from NTN to N2HC on the
same day that it received the licensing right from NTN. NIHC did not directly license the
trademarks to Nordstrom or directly receive a royalty from Nordstrom.
      7
       Deloitte & Touche appraised the value of the trademarks and determined an
appropriate royalty rate to be paid by Nordstrom. As of October 31, 1998, the value of the
trademarks was determined to be approximately $2.8 billion. Deloitte & Touche did not
determine the value of the licensing agreements.
      8
          N2HC made loans back to Nordstrom of approximately two-thirds of the royalties
in each of those years, which Nordstrom used for operating capital. Nordstrom paid N2HC
interest, but paid back only small percentages of the principal of the loans. According to
testimony at the Tax Court hearing, N2HC did not make loans to other entities.

                                             6
the trademarks, and both NIHC and N2HC had no earnings other than those resulting from

the transactions among the affiliates described above. The net effect was to shift income

from Nordstrom to the subsidiaries which, considered in isolation from their parent, had no

connection to Maryland.9

       Accounting of the Trademark Transactions for Federal Tax Purposes

       According to the analysis of Nordstrom’s tax consultant, under the federal tax code,

the distribution of the license agreement from NIHC to N2HC was considered the

distribution of appreciated property that would be recognized as a gain to NIHC under

§311(b) of the Internal Revenue Code, 26 U.S.C. §311(b).10 According to that analysis,


       9
        The Comptroller’s final determination letter later summarized the effect of these
transactions:
              ... These transactions ensured that licensing expenses were
              incurred by Nordstrom and made payable to N2HC, an entity
              operating outside of Maryland. By setting up NIHC, Nordstrom
              indirectly created licensing expenses attributable to inter-
              company intangible property transfers, where previously, none
              would have existed. By doing so, a significant portion of
              Nordstrom’s income was moved out of Maryland.
       10
        That statute states an exception to the general rule set forth in 26 U.S.C. §311(a) that
a corporation is not to recognize a gain or loss when it distributes stock or property to
shareholders. It provides in pertinent part:

              (b) Distributions of Appreciated Property. –

                      (1) In General. – If –

                            (A) a corporation distributes property ... to a
              shareholder in a distribution to which subpart A applies, and

                                                                                 (continued...)

                                               7
NIHC was required under federal tax law to recognize a gain to the extent that the market

value of the licensing agreement exceeded the book value of the dividend.11 In addition, the

dividend created a basis in N2HC that was subject to amortization under federal tax law.12

Accordingly, Nordstrom was required to report the value of the distribution as a gain by

NIHC, as well as the amortization of N2HC’s basis, on Nordstrom’s consolidated federal tax

return for the fiscal year that ended on January 31, 1999.

       As indicated above, Nordstrom filed a consolidated federal return with its subsidiaries,

including NIHC and N2HC. Under federal regulations relating to consolidated returns, the

gain from the license distributed by NIHC to N2HC was to be deferred over 15 years,13




       10
            (...continued)
                                (B) the fair market value of such property exceeds
                 its adjusted basis (in the hands of the distributing corporation),

                 then gain shall be recognized to the distributing corporation as
                 if such property were sold to the distributee at its fair market
                 value.                      ....
       11
         In footnotes to its brief, the Comptroller contends that Nordstrom and NIHC made
“improper use” of §311(b) and suggests that recognition of the gain at that time was not
mandatory under federal law. We need not resolve these questions of federal tax law to
decide this case.
       12
            See 26 U.S.C. §197.
      13
          See 26 CFR §1-1502-13. The 15-year period corresponded to N2HC’s amortization
of the value of the right to license the trademarks under 26 U.S.C. §197. This reporting of
income and amortization deduction in the consolidated return for the transaction between two
affiliates resulted in no income from the transaction for federal purposes.

                                                 8
because the transaction was between affiliated corporations.14 For example, for tax years

2002 and 2003, Nordstrom’s consolidated federal returns reported income to NIHC in the

amount of $186,133,333, and a deduction for amortization expense for N2HC in an identical

amount.

       NIHC’s Maryland Tax Returns

       Under Maryland law, a corporation is subject to tax on income derived from or

reasonably attributable to its business activities in Maryland. Maryland Code, Tax-General

Article (“TG”), §10-402. Any corporation with Maryland taxable income during a tax year

must file an income tax return for that year. TG §10-810. Each member of an affiliated

group of corporations is to file a separate income tax return. TG §10-811.

       During the relevant years, NIHC and N2HC filed separate income tax returns in

Maryland that showed no income apportioned to Maryland from the transactions involving

the Nordstrom trademarks. In its Maryland returns for 2002 and 2003, NIHC reported the

deferred gain shown on the consolidated federal returns. In particular, NIHC reported

Maryland modified income of $186,240,824 and $186,128,851 for 2002 and 2003

respectively, but, as indicated above, did not apportion any of that income to Maryland.15


       14
         Under the tax consultant’s “anti-Geoffrey strategy,” see footnote 4 above, the use of
an additional entity (NIHC) was intended to convert the stream of royalty income into a one-
time transfer of appreciated property that made its income-shifting purpose less obvious than
the strategies used in Geoffrey and SYL, which involved royalty payments from a parent to
a subsidiary holding company.
       15
            N2HC’s Maryland returns reported Maryland modified income of $18,375,611 and
                                                                            (continued...)

                                              9
Although NIHC subsequently took the position before the Tax Court that it had concluded

in 2005 that its 2002 and 2003 Maryland returns should not have reported the deferred gain

at all, it did not file amended returns for those years.

       Assessment by the Comptroller following Audit of the Maryland Returns

       In September 2006, the Comptroller issued Notices of Assessment against Nordstrom,

NIHC, and N2HC, based on the position that income-shifting in the form of trademark

royalty expenses had resulted in an underpayment of the companies’ Maryland income tax.

Nordstrom and its subsidiaries appealed the assessments to the Comptroller’s Hearings and

Appeals Section, which upheld the assessments in Final Determination Letters issued in May

2007. The total tax assessment against NIHC for 2002 and 2003, including the unpaid tax,

interest, and a 25 percent penalty, amounted to $1,949,048; the total tax assessment against

N2HC for 2002 and 2003, including unpaid tax, interest, and penalty, amounted to $228,007.

In both instances, the assessment was based on the amount of income shifted from Nordstrom

to the two subsidiaries through the trademark transactions. An alternative assessment was

made against Nordstrom related to the same income; the Comptroller stated that it would not

be enforced if the assessments of the subsidiaries were upheld on appeal.




       15
        (...continued)
$33,307,237, respectively for those years, but did not apportion any of that income to
Maryland.

                                               10
       First Visit to Tax Court and Judicial Review

       The companies appealed the assessments to the Maryland Tax Court. The Tax Court

conducted a hearing at which it received testimony and documentary evidence concerning

the trademark transactions. Pertinent to the issue before us, Greta Sedlock, Nordstrom’s

former Vice President of Tax, testified concerning the companies’ returns for 2002 and 2003

that included the income that was subject of the Comptroller’s tax assessment. Ms. Sedlock

testified that she would have completed those returns differently based upon a letter she had

received from tax authorities in New Jersey in 2005, a state that, like Maryland, requires

separate company reporting. She said that she had come to the view that, because NIHC filed

separate returns from its affiliated corporations, it should have reported the entire gain from

the inter-company transactions on its 1999 Maryland return when the §311(b) gain was

recognized. According to Ms. Sedlock, she now believed that deferral of the gain over 15

years was only appropriate for the consolidated returns filed under federal law. She

apparently believed that she had made a mistake in how she had reported the NIHC’s income

on the 1999 and subsequent Maryland returns.

       The Tax Court issued its decision in October 2008. It viewed the “dispositive issue”

as whether there was a sufficient nexus between the two subsidiaries and Maryland, such that

imposition of the State income tax on the income of the subsidiaries would not offend the

Commerce Clause or the Due Process Clause of the federal Constitution. It viewed the case




                                              11
primarily as requiring an application of this Court’s decision in Comptroller v. SYL, Inc., 375

Md. 78, 825 A.2d 399, cert. denied, 540 U.S. 984 and 540 U.S. 1090 (2003).

       SYL concerned two instances where companies subject to the Maryland corporate

income tax each created a wholly owned subsidiary in another jurisdiction and transferred

intangible assets to that subsidiary. In each case, the parent company then entered into a

licensing agreement with the subsidiary under which the parent company paid royalties to the

subsidiary for the use of the intangible assets. The parent companies each deducted the

royalty payments in computing income subject to the Maryland income tax and, as a result,

were able to reduce their tax liability in Maryland. The respective subsidiaries, which had

no assets or employees in Maryland, did not file corporate income tax returns in Maryland.

375 Md. at 80-99. In each case, the Court of Appeals held that the subsidiary lacked

economic substance as a business entity separate from its parent and also had a substantial

nexus with Maryland. Thus, a portion of each subsidiary’s income was subject to the

Maryland income tax, based on the extent of its parent company’s business in Maryland. Id.

at 106-09.

       The “anti-Geoffrey strategy” adopted by Nordstrom had attempted to circumvent the

rationale ultimately adopted in SYL and similar decisions by using several subsidiaries and

a series of transactions between the parent corporation and the various subsidiaries. The Tax

Court concluded that, while the transactions involving the Nordstrom subsidiaries were more

complicated than those in SYL, the results were much the same. “Fundamentally, the



                                              12
subsidiaries did not act independently, although the financial structure creates an illusion of

substance ... NIHC and N2HC lack real economic substance as separate business entities.”

Accordingly, the Tax Court held that the activities of the subsidiaries must be considered the

activities of Nordstrom, which has a nexus with Maryland. It therefore affirmed the

assessments against the two subsidiaries. Because the assessments against the subsidiaries

were affirmed, the Tax Court rescinded the alternative assessment against Nordstrom.

       NIHC sought judicial review in the Circuit Court for Baltimore County, which

rendered a decision in August 2009 based on memoranda submitted by the parties.16 The

Circuit Court noted that the sole issue decided by the Tax Court was whether there was a

sufficient nexus between Maryland and NIHC to allow taxation of NIHC’s income by

Maryland under the federal Constitution. The Circuit Court held that the fact that NIHC

lacked economic substance did not by itself resolve the question whether there was a

sufficient constitutional nexus between its income and the State to satisfy the federal

Constitution. It remanded the case to the Tax Court to address whether there was a




       16
       N2HC did not seek judicial review of the Tax Court’s decision affirming the
assessment against it.

       The Comptroller sought judicial review of the Tax Court’s direction to rescind the
alternative assessment against Nordstrom. The Circuit Court later issued an order directing
the Tax Court to determine whether Nordstrom had claimed a deduction for any income
reported by NIHC. On remand, the Tax Court indicated that it had not found any indication
of such a deduction in the record and reiterated its decision to rescind the alternative
assessment against Nordstrom. That issue is not before us, as the Comptroller is no longer
pursuing the alternative assessment against Nordstrom.

                                              13
constitutionally sufficient nexus between the §311(b) gain realized by NIHC and business

activities in Maryland. If that question were answered in the affirmative, the Circuit Court

directed the Tax Court to analyze two additional questions: (1) whether the §311(b) gain

constituted taxable income under Maryland tax law; and (2) whether the Maryland

requirement of separate entity reporting would prevent taxation of the deferred §311(b) gain

in the 2002 and 2003 tax years.

       Second Visit to Tax Court and Judicial Review

       In July 2010, the Tax Court again upheld the assessment against NIHC and issued an

Amended Memorandum of the grounds for its decision. The Tax Court held that Maryland’s

taxation of the reported income was constitutional as it was not possible to separate the value

of the trademarks, their licensing, and the gain recognized by NIHC from Nordstrom’s

business activities in Maryland.     The Tax Court stated that “but for the activities of

Nordstrom and its use of the trademarks in Maryland, the gain of NIHC would not have been

recognized. Nordstrom’s business activities and the use of the intellectual property rights

obtained through its agreement with N2HC produced the gain income reported by NIHC.”

In addition, the Tax Court held that, because Nordstrom’s nexus was attributed to NIHC, the

income was taxable under Maryland law. Finally, the Tax Court concluded that Maryland’s

requirement of separate entity income tax returns did not prohibit the taxing of the §311(b)

gain “when the income is attributed to the activity of the parent Nordstrom and its use of the




                                              14
marks in Maryland for the subject years.” The Tax Court stated: “NIHC reported the

deferred gains as Maryland modified income and the substance of the transaction does not

prevent the taxing of income earned in the assessment years because of separate reporting

requirements.”

        NIHC again sought judicial review of the Tax Court decision. In December 2011, the

Circuit Court affirmed in part and reversed in part the Tax Court decision. The court agreed

with the Tax Court that “the §311(b) gain was the result, in part, of the projected use of the

trademarks in Maryland” and that, therefore, there was substantial evidence of a sufficient

nexus of the reported income with Maryland. It also concluded that the gain income was

“reasonably attributable” to activities in Maryland and therefore taxable under the Maryland

income tax law, as that law had been construed to allow taxation “to the bounds permitted

by the Constitution.”17 However, the court concluded that Maryland’s separate reporting

requirement prohibited the Comptroller from assessing the deferred gain reported by NIHC

for 2002 and 2003, which the court believed should have been reported with the rest of the

gain when it was recognized in 1999. The court therefore reversed the assessment against

NIHC.




        17
             Hercules, Inc. v. Comptroller, 351 Md. 101, 110, 716 A.2d 276 (1998).

                                               15
       Court of Special Appeals Decision

       The Comptroller appealed the Circuit Court decision to the Court of Special Appeals.

NIHC did not cross-appeal. In an unreported decision, the Court of Special Appeals reversed

the Circuit Court judgment. The intermediate appellate court noted that the only issue before

it was whether Maryland’s separate reporting requirement prevented the taxation of the gain

reported on NIHC’s 2002 and 2003 returns. The Court of Special Appeals stated that the

Circuit Court had incorrectly focused on how the §311(b) gain should have been reported

instead of whether it was taxable in the way it had in fact been reported.18 The court noted



       18
            The Court of Special Appeals explained:

                 The Tax Court concluded that Maryland’s separate entity
                 reporting requirement did not preclude Maryland’s taxing of the
                 §311(b) deferred gain as reported by NIHC on its 2002 and 2003
                 Maryland tax returns. The circuit court, however, did not
                 address this issue in its review of the Tax Court’s decision.
                 Instead, the circuit court focused on the proper way in which the
                 §311(b) gain should be reported, given the conflict between the
                 IRS regulations governing consolidated federal returns (which
                 require the recognition of the gain on a deferred basis over
                 fifteen (15) years), and the Maryland requirement of separate
                 entity returns (which may require the recognition of the gain in
                 its entirety, in the year that the gain was realized). Thus, in the
                 instant case, the circuit court held “[i]f the rules relating to
                 deferral of gain on the federal consolidated return were
                 disregarded and [if] NIHC reconstructed its federal taxable
                 income as if it filed a separate federal income tax return, the
                 §311(b) gain would not have been reported in 2002 and 2003.”

                 What NIHC should (or should not) have done in the instant case
                 is not determinative of the issue presented in this appeal. The
                                                                                       (continued...)

                                                 16
that it had not been presented with any law or other authority “that precludes Maryland from

taxing income that is constitutionally taxable by Maryland and that is reported by the

corporate taxpayer as Maryland modified income on its Maryland income tax return.” The

Court of Special Appeals found no error in the Tax Court’s decision to uphold the assessment

against NIHC. Accordingly, it reversed the Circuit Court decision.

       The Court of Special Appeals stated that it was expressing no opinion on “the broader

issue of whether a corporation’s §311(b) gain, which is constitutionally subject to taxation

by Maryland, is reportable as Maryland modified income on a deferred basis under

Maryland’s requirement of separate entity income tax returns, where such deferred gain is

reported on the corporation’s consolidated federal income tax return.”

       Petition for Certiorari

       NIHC sought a writ of certiorari, which we granted to review the merits of the Tax

Court’s amended decision in this case.




       18
            (...continued)
                  key is what NHIC did, in fact, do. The uncontradicted evidence
                  before the Tax Court was that NIHC reported the §311(b)
                  deferred gain as Maryland modified income in its 2002 and 2003
                  Maryland tax returns. In other words, whether the deferred
                  §311(b) gain should or should not have been reported for the tax
                  years of 2002 and 2003 has been rendered moot by the fact that
                  NIHC reported such gain on its 2002 and 2003 Maryland tax
                  returns.

                                                17
                                           Discussion

       Standard of Review

       As the Tax Court is an adjudicative administrative body of the executive branch, its

decisions are subject to the same standards of judicial review as adjudicatory decisions of

other administrative agencies. Gore Enterprise Holdings, Inc. v. Comptroller, 437 Md. 492,

503, 87 A.3d 1263 (2014); see TG §13-532(a)(1). A reviewing court may uphold a Tax

Court decision only on the findings and reasons given by the Tax Court. Gore Enterprise,

437 Md. at 503. Findings of fact are reviewed on a deferential “substantial evidence”

standard – i.e., whether the record contains evidence that reasonably supports the agency’s

conclusion. Id. at 504. A reviewing court also accords great weight to the Tax Court’s

interpretation of the tax laws, but reviews its application of case law without special

deference. Id. at 504-5.

       Deciding What Question is Before Us

       Before we can venture an answer to the question before us, we must decide what that

question is. As is sometimes the case in appellate litigation, the parties’ briefs debate the

wording, number, and nature of the question(s) presented.19 Regardless of the preferred



       19
          For example, NIHC contends that the Court of Special Appeals incorrectly rephrased
the question raised by the Comptroller, and exceeded the limits of judicial review by basing
its decision on a ground not addressed by the Tax Court. The Comptroller argues otherwise
and asserts that, even if we address the question preferred by NIHC, the outcome of this
appeal is no different. The Comptroller also notes that, while NIHC presented three
questions in its petition for certiorari, it has included four questions in its brief, two of which
                                                                                      (continued...)

                                                18
wording of the parties, the issues before us are constrained by the facts found and the legal

conclusions drawn in the decision of Tax Court under review, and by the issues preserved

by the parties in seeking review of that decision in the courts below.

       The present case involves judicial review of a decision of the Tax Court pursuant to

TG §13-532. In that context, it is often said that we “look through” the decision of the Court

of Special Appeals and the Circuit Court to review directly the agency decision. See Frey

v. Comptroller, 422 Md. 111, 136-37, 29 A.3d 475 (2011). Thus, our review focuses on the

issues addressed by the Tax Court and its reasoning. As indicated above, our review is also

limited in another way. As a general rule, we address only issues that have been preserved

for review.

       In its amended decision, the Tax Court determined that the §311(b) gain recognized

by NIHC had a nexus with Maryland through Nordstrom’s business activities in Maryland

during the pertinent years and was subject to Maryland income taxation for those tax years.

The Circuit Court affirmed those holdings. NIHC did not cross appeal as to those issues.20


       19
         (...continued)
did not appear in its certiorari petition. NIHC responds that the two questions were
subsumed in one of the questions it originally presented. We need not referee this debate to
identify the question before us.
       20
         If we were to address those issues, we would have little trouble coming to the same
conclusions as the Tax Court and the Circuit Court. As recounted above, the record
demonstrates that the corporate structure and inter-company transactions were designed to
shift income away from states like Maryland through the use of entities that, as the Tax Court
found, had no economic substance as business entities apart from Nordstrom. Indeed, the
consulting firm that designed the transactions for Nordstrom labeled it the “anti-Geoffrey
                                                                                 (continued...)

                                              19
Thus, in the posture of the case before us, there is no question that the income reported on

NIHC’s Maryland returns for 2002 and 2003 related to Nordstrom’s business activities in

Maryland during those years and that a portion of that income was subject to taxation in

Maryland. A third issue addressed by the Tax Court, at the direction of the Circuit Court,

was whether the Maryland statutory requirement that corporate affiliates file separate returns

prohibited the Comptroller from taxing the portion of that gain reported on NIHC’s 2002 and

2003 returns. The Circuit Court reversed the Tax Court decision on that ground, the

Comptroller sought review of only that part of the Circuit Court’s decision in its appeal to

the Court of Special Appeals, and, following reversal of that issue in the intermediate

appellate court, NIHC requested our review of the issue. That is the only portion of the Tax

Court decision that has been preserved for review.

       Deciding the Question Before Us

       The critical holding of the Tax Court appears near the end of its amended decision.

After recounting its prior findings and conclusions, including that a portion of NIHC’s gain

– equivalent to the deferred gain on the federal tax return – had been reported on the




       20
         (...continued)
strategy.” See footnote 4 above. This strategy, although more convoluted than the scheme
devised in the Geoffrey case, also relied on transactions with subsidiaries without economic
substance separate from the parent corporation to argue that income lacked a nexus with the
taxing state. See also Gore Enterprise Holdings, Inc. v. Comptroller, 437 Md. 492, 87 A.3d
1263 (2014) (holding that nexus for taxation by Maryland existed when two corporate
subsidiaries created to hold intangible assets of the parent corporation lacked economic
substance as separate entities).

                                             20
pertinent Maryland tax returns, the Tax Court addressed whether the Maryland requirement

that related corporations file separate tax returns would prohibit taxation of that income. It

stated:

               ...The Court finds that there is no such prohibition when the
               income is attributed to the activity of the parent Nordstrom and
               its use of the marks in Maryland for the subject years. NIHC
               reported the deferred gains as Maryland modified income and
               the substance of the transaction does not prevent the taxing of
               income earned in the assessment years because of separate
               reporting requirements.

The Court of Special Appeals reached the same conclusion on the facts of this case,21

although it explicitly declined to decide the more abstract question of whether a corporation’s

§311(b) gain is required to be reported as Maryland modified income on a deferred basis on

separate Maryland returns when it is reported on a deferred basis on a consolidated federal

return. In limiting its holding in that manner, the intermediate appellate court wisely adhered

to a maxim of judicial decision-making that counsels against addressing questions abstracted

from the facts before the court. Garner v. Archers Glen Partners Inc., 405 Md. 43, 46, 949

A.2d 639 (2008) (“an appellate court should use great caution in exercising its discretion to

comment gratuitously on issues beyond those necessary to be decided”).




          21
         In arguing that the intermediate appellate court decided a “different question” from
the abstract question it favors, NIHC focuses on the first sentence of the excerpt of the Tax
Court decision quoted above, discounts the second sentence which referred to NIHC’s
reporting of the deferred gain on its 2002 and 2003 returns, and ignores the context of that
paragraph in the rest of the Amended Memorandum of Grounds for Decision.

                                              21
       The separate reporting requirement is set forth in TG §10-811, which provides simply

that “[e]ach member of an affiliated group of corporations shall file a separate income tax

return.” A regulation adopted by the Comptroller elaborates that “each separate corporation

shall report its taxable income without regard to any consolidation for federal income tax

purposes.” COMAR 03.04.03.03B(1). The regulations further provide:

              Use of Federal Figures. The starting point for the Maryland
              return is the taxable income as defined in the Internal Revenue
              Code and developed on the federal return. Corporations
              included in a consolidated filing for federal purposes shall file
              separate Maryland returns and compute separate taxable income.

COMAR 03.04.03.05B. Neither the statute nor the corresponding regulations explicitly

address the treatment of §311(b) deferred gain, much less its treatment in the context of a

subsidiary corporation that lacks economic substance apart from its parent.

       We agree with the Court of Special Appeals that the Tax Court’s determination that

Maryland’s separate reporting requirement for corporations did not prohibit the

Comptroller’s assessment taxing NIHC’s §311(b) gain on a deferred basis should be upheld

on judicial review. We start from the premise that the Comptroller’s assessment of a tax is

presumed to be correct. TG §13-411. The burden is on the taxpayer to show that the

assessment is wrong. Fairchild Hiller Corp. v. Supervisor of Assessments, 267 Md. 519, 523,

298 A.2d 148 (1973); TG §13-528(b). In computing the assessment, the Comptroller used

the figures for Maryland taxable income reported on NIHC’s Maryland returns, which

correlated with the figures for its federal taxable income reported on NIHC’s federal returns



                                             22
for those years – the “starting point” for computation of its tax liability. The Tax Court

found that the ongoing activities of Nordstrom in Maryland, including during the 2002 and

2003 tax years, were responsible for the §311(b) gain reported on NIHC’s Maryland tax

returns for those years22 and that NIHC lacked any economic substance apart from

Nordstrom.

       During the course of this case, NIHC has suggested that the Comptroller should have

reached that income in other ways,23 its preferred method – an application of the separate

reporting requirement – being conveniently outside the period of limitations. NIHC argues

that Nordstrom should have re-computed a separate federal return for each of the affiliated

companies for each of the years in question – called a “pro forma” federal return – and based

its Maryland return for each year on the income shown on the corresponding pro forma

federal return. NIHC argues that its pro forma federal returns – and thus its Maryland return

as well – would have reported the entire §311(b) gain as income in 1999 and that NIHC


       22
         It is incontrovertible that the §311(b) gain was derived from the value of the
licensing agreement that NIHC transferred as a dividend to N2HC. The value of the
licensing agreement ultimately depends on Nordstrom’s commercial activities using those
trademarks, part of which occur in Maryland. In sum, there is no question at this juncture
that the §311(b) gain is related to activities in Maryland, and that a properly apportioned
share of it is taxable by Maryland.
       23
         In addition to arguing the NIHC’s §311(b) gain should have been assessed as to
NIHC’s 1999 return, which would have been in advance of the Nordstrom business activities
that provided the nexus to Maryland, NIHC’s counsel also suggested in the Circuit Court that
the Comptroller should have disregarded the amortization deduction of N2HC rather than tax
the deferred §311(b) gain actually reported by NIHC. As noted above, the annual amount
of the N2HC amortization deduction was identical to the annual amount of the deferred
§311(b) gain of NIHC assessed by the Comptroller.

                                             23
should have reported no income from that gain on its pro forma federal returns and Maryland

returns for 2002 and 2003. But NIHC never completed any pro forma federal returns, did

not amend its Maryland returns in that manner, and, based on the record in this case, did not

embrace this manner of reporting its income until tax was assessed by the Comptroller, even

though the corporate official in charge of its tax returns claimed to have come to a different

conclusion as to how to report its income within the period for amending the returns.

        As the Court of Special Appeals held, whether NIHC could have, or should have,

reported the entire gain as income subject to Maryland income tax in 1999 – in advance of

the business activities of Nordstrom in Maryland in 2002 and 2003 that established the nexus

with the income shifted to NIHC– is a separate question from whether the Comptroller could

assess income actually reported by NIHC for those years. NIHC complains that the Court

of Special Appeals in effect held that it was “bound” by the returns it had filed that it now

says were mistaken. It would seem more accurate to say that it is bound by the record in this

case.

        The separate reporting requirement does not contradict any of the key facts on which

the Comptroller’s assessment was based:

        •      the taxpayer lacked economic substance apart from its parent
               corporation

        •      the income recognized by the taxpayer was related to the business
               activities of its parent

        •      the parent corporation conducted business activities in Maryland during
               the tax years in question

                                             24
       •      the taxpayer reported a portion of the income related to its parent’s
              activities on its Maryland tax returns

       •      that income was not otherwise taxed by Maryland

       •      the taxpayer never filed amended returns nor did it submit pro forma
              federal returns adopting a different method of reporting that income,
              although it became aware of a different method of filing within the
              period of limitations

       There is no question at this juncture that the transactions carried out under the “anti-

Geoffrey strategy” shifted income related to Nordstrom’s activities in Maryland to NIHC.

In essence, NIHC argues that requirement of separate reporting in TG §10-811, together with

the statute of limitations, negates the fact that it actually reported part of the income for the

tax years in which Nordstrom had business activity in Maryland and absolves it of that tax

liability altogether. While the failed anti-Geoffrey strategy was an effort to shift income

beyond the geographical reach of a state tax collector, NIHC’s current argument seeks to

shift income to a time period beyond the reach of a state tax collector. It may be that

appellate judges are not well-versed in concepts that bend time and space, but we believe this

argument is without merit on the facts of this case.

                                          Conclusion

       There is no question that the income related to Nordstrom’s activities in Maryland

during 2002 and 2003 tax years was shifted in part to NIHC. The Comptroller assessed tax

on that income as NIHC reported it on its tax returns for those years. However, neither

NIHC nor its affiliated corporations has amended their returns to reflect another way of



                                               25
reporting that income. Essentially, NIHC asks that, because it mistakenly neglected to report

its entire gain and pay the appropriate tax on its 1999 Maryland return, it should be forgiven

any tax liability on that income, even though it reported a portion of that income on its 2002

and 2003 returns. On the facts of this case, the separate reporting requirement does not

eliminate the tax liability for the income reported, properly subject to tax, and not previously

taxed. We hold that, on the record before the Tax Court, NIHC did not carry its burden of

showing that the Comptroller’s assessment was wrong.




                                                   J UDGMENT OF THE C OURT OF S PECIAL
                                                   A PPEALS A FFIRMED. C OSTS TO BE P AID
                                                   BY P ETITIONER.




                                              26
