The Court of Special Appeals has reinstated more than $29 million in tax assessments and penalties against two subsidiaries of W.L. Gore Associates Inc., reversing a ruling by a Cecil County judge.
The decision is a win for Maryland Comptroller Peter Franchot, who claimed that the subsidiaries — Gore Enterprise Holdings Inc. (GEH) and Future Value Inc. — were taxable in Maryland even though they were patent holding companies based in Delaware that did not do any business independently here.
The comptroller claimed the companies were taxable because they were part of a unitary business with Newark, Del.-based W.L. Gore, maker of the trademarked Gore-Tex fabrics and other high-tech products.
According to Thursday’s opinion, Gore is taxed in Maryland on a portion of income based on its local product sales and manufacturing facilities, which employ more than 2,000 people in this state.
In 2006, the comptroller audited Gore, GEH and Future Value and determined that GEH and Future Value should also apportion income to Maryland.
Including taxes, interest and penalties, the comptroller assessed more than $26.4 million against GEH and more than $2.6 million against Future Value.
The companies appealed to the Maryland Tax Court, an administrative agency, which affirmed those assessments.
In 2011, however, a judge in Cecil County Circuit Court reversed the Tax Court’s ruling and canceled the assessments. The judge ruled that the companies were not taxable because they were not, in fact, a unitary business with Gore.
The Court of Special Appeals reversed, noting that Gore takes deductions for its payments to GEH and Future Value as expenses, apportioned on its Maryland tax returns.
“[A]s a practical matter, the tax treatment that [GEH and Fair Value] seek would have us ignore the fact that the ‘expenses’ Gore deducts in Maryland are simultaneous gains to assets on its own balance sheets, namely, GEH and FVI,” Judge Albert Matricciani wrote for the Court of Special Appeals. “As such, it would defy logic to argue that those expenses are incurred in Maryland and yet the corresponding gains are somehow not realized in Maryland as part of a unitary business.”
The opinion was posted on the court’s website late Thursday afternoon. The companies’ law firm, Sutherland, Asbill & Brennan of Washington, did not respond to requests for comment before press time. The comptroller’s office declined to comment, while a spokesman for the Office of the Attorney General, which represented the comptroller on appeal, said they were in the process of reviewing the opinion.
The court also rejected GEH’s claim that “general notions of due process” should prevent the comptroller from assessing the taxes in 2006 because it had not assessed them in its audits of Gore Inc. between 1983, when GEH was formed, and 1996, when Fair Value was formed.
“If Gore and GEH had wanted to settle these issues when they first arose, they could have sought the Comptroller’s opinion,” Matricciani wrote. “By not doing so, it was they who deprived themselves of the opportunity to timely address the issues, not the Comptroller.”
GEH and Fair Value fared no better with their challenge to the Tax Court’s calculation of their tax obligations. The companies said the Tax Court should not have used the same apportionment factor that W.L. Gore uses in calculating its Maryland tax liability.
“But if Gore’s apportionment reasonably reflects its expenses in Maryland, and those expenses are GEH’s and FVI’s income, then the same apportionment factor reasonably reflects the proportion of income generated in Maryland as part of Gore’s unitary business,” the court concluded.
Daily Record Legal Affairs Writer Beth Moszkowicz contributed to this article.
WHAT THE COURT HELD
Comptroller v. Gore Enterprise Holdings Inc., No. 1696, Sept. Term 2011, consolidated with Comptroller v. Future Value, Inc. No. 1697, Sept. Term 2011. Decided Jan. 24, 2012. Reported. Opinion by Matricciani, J.
Did the lower court err canceling tax assessments and penalties against two Delaware-based holding-company subsidiaries of a Delaware-based company that does extensive business in Maryland?
Yes, reversed. The companies were taxable in Maryland because they were part of a unitary business with the parent company.
Asst. AG Michael J. Salem for appellant; Jeffrey A. Friedman, Washington, D.C., for appellee.
RecordFax #13-0124-00 (20 pages).