Case Title: Comptroller v. Gannett

Citation: 356 Md. 699

Docket Number: 49/99

State: maryland

Court: Maryland Supreme Court

Date: 1999-12-09T00:00:00Z

Document:
Circuit Court for Montgomery County
Case: C/C Civil No. 179812
IN THE COURT OF APPEALS OF MARYLAND
No. 49
September Term, 1999
COMPTROLLER OF THE TREASURY
v.
GANNETT CO., INC.
Bell, C. J.
Eldridge
Rodowsky
Raker
Wilner
Cathell
Harrell,
JJ.
Opinion by Cathell, J.
Filed:   December 9, 1999
 The four intercompany accounts were labeled and described functionally by Gannett
1
as follows:  Corporate (the most significant financially of the four, this account was used
principally as a cash management program wherein the subsidiaries would make daily
transfers of any excess cash into the account and Gannett would transfer cash out to any
subsidiary needing additional cash; a large portion of the balance in this account at any given
time also included amounts reflecting accounting adjustments related to the asset value of
previously unrelated companies acquired by Gannett), Gannett Supply (this account was used
for the centralized purchasing of newsprint and other supplies and their transfer to the
respective subsidiary or to Gannett as needed), USA Today (composed principally of receipts
from the sale of USA Today newspapers by Gannett’s publisher/subsidiary to Gannett or
other subsidiaries), and Other (generally reflecting transfers of property between Gannett and
its consolidated subsidiaries; this account was the only one reflecting negative balances for
the period 1990-92).
The Comptroller of the Treasury, appellant, appeals a ruling from the Circuit Court
for Montgomery County that appellant lacked the authority to assess additional income tax
against Gannett Company, Inc., appellee, by imputing interest income from certain
intercompany debt not reported on appellee’s federal income tax returns.  We agree with the
circuit court and, accordingly, affirm the lower court.
I. Background
Appellee is a Delaware corporation, headquartered in Virginia, with computer support
facilities in Silver Spring, Maryland.  A leading corporation in the media industry, appellee
is the parent company to many wholly-owned subsidiary media companies.  Appellee
maintains four centralized, intercompany accounts with its subsidiaries.   The subsidiaries
1
deposit their proceeds in the appropriate account and then draw on that account to pay their
related individual expenses.  If a subsidiary deposits more proceeds than it withdraws,
appellee maintains an interest-free debit with the subsidiary.  If the subsidiary spends more
money than it deposits, appellee maintains an interest-free credit with the subsidiary.  For
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the tax years 1990-92, appellee maintained with its subsidiaries a credit in three of the four
intercompany accounts.  The parties stipulated to the Maryland Tax Court below, in writing,
that these credits were a form of interest-free debt.  Appellant claims that, under two federal
tax code provisions, it may assess income tax against these credits by imputing interest
income from them.
The first provision, I.R.C. § 482 (1999), states in relevant part:
§ 482.  Allocation of income and deductions among taxpayers
In any case of two or more . . . businesses (whether or not incorporated,
whether or not organized in the United States, and whether or not affiliated)
owned or controlled directly or indirectly by the same interests, the Secretary
may distribute, apportion, or allocate gross income, deductions, credits, or
allowances between or among such . . . businesses, if he determines that such
distribution, apportionment, or allocation is necessary in order to prevent
evasion of taxes or clearly to reflect the income of any of such . . . businesses.
The second provision, I.R.C. § 7872 (1999), states in relevant part:
§ 7872.  Treatment of loans with below-market interest rates
(a) Treatment of gift loans and demand loans. — 
(1) In general. — For purposes of this title, in the case
of any below-market loan to which this section applies and
which is a gift loan or a demand loan, the foregone interest shall
be treated as — 
(A) transferred from the lender to the borrower,
and
(B) retransferred by the borrower to the lender as
interest.
. . . .
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(b) Treatment of other below-market loans. —
(1) In general. — For purposes of this title, in the case
of any below-market loan to which this section applies and to
which subsection (a)(1) does not apply, the lender shall be
treated as having transferred on the date the loan was made (or,
if later, on the first day on which this section applies to such
loan), and the borrower shall be treated as having received on
such date, cash in an amount equal to the excess of— 
(A) the amount loaned, over
(B) the present value of all payments
which are required to be made under the
terms of the loan.
(2) Obligation treated as having original issue
discount. — For purposes of this title — 
(A) In general. — Any below-market loan
to which paragraph (1) applies shall be treated as
having original issue discount in an amount equal
to the excess described in paragraph (1).
(B) Amount in addition to other original issue
discount. — Any original issue discount which a loan is
treated as having by reason of subparagraph (A) shall be
in addition to any other original issue discount on such
loan (determined without regard to subparagraph (A)).
(c)
Below-market loans to which section applies. —
(1) In general. — Except as otherwise provided . . . this
section shall apply to —
. . . .
(C) Corporation-shareholder loans. — Any
below-market loan directly or indirectly between a
corporation and any shareholder of such corporation.
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(D) Tax avoidance loans. — Any below-market
loan 1 of the principal purposes of the interest
arrangements of which is the avoidance of any Federal
tax.
(E) Other below-market loans. — To the extent
provided in regulations, any below-market loan which is
not described in subparagraph (A), (B), (C), or (F) if the
interest arrangements of such loan have a significant
effect on any Federal tax liability of the lender or the
borrower.
. . . .
(h)
Regulations. —
(1) In general. — The Secretary shall prescribe such
regulations as may be necessary or appropriate to carry out the
purposes of this section, including —
. . . . 
(C) regulations exempting from the application of
this section any class of transactions the interest
arrangements of which have no significant effect on any
Federal tax liability of the lender or the borrower.
For the tax years in question, 1990-92, appellee, as it was allowed to do, filed a
consolidated federal tax return on behalf of itself and all of its subsidiaries with the Internal
Revenue Service (IRS).  Appellee did not report the intercompany account credits on its
federal tax return because any interest income that could have been imputed from the credits
under I.R.C. §§ 482 and 7872 would have been offset by the reciprocal imputed interest
deduction attributed to each subsidiary.  In other words, any interest income appellee would
 The parties debate the effect of the IRS audit.  The audit is irrelevant to the case sub
2
judice for two reasons.  First, the IRS was concerned with an I.R.C. provision different from
the provisions involved in this case.  Second, as noted, supra, the parties submitted a written
stipulation to the Maryland Tax Court in which appellee admitted the intercompany credits
constituted debt for the purposes of assessing Maryland income tax.  In that stipulation,
appellee reserved the right to appeal appellant’s authority to impute taxable interest income
from those debts, but bound itself not to appeal whether the credits constituted debt.  What
is relevant to this case, as explained, infra, is the final taxable income figure accepted by the
IRS on the federal tax return.
 All statutory references shall be to the 1997 Replacement Volume of the Tax-
3
General Article, as amended in the 1998 Cumulative Supplement, unless otherwise indicated.
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have had to report on its consolidated federal tax return would presumably have been
eliminated by any interest expense deduction that appellee could have claimed on behalf of
its subsidiaries.  The IRS, which conducted an audit on other grounds, accepted the returns
as filed.2
The Maryland income tax code bases “the Maryland modified income of a
corporation” on “the corporation’s federal taxable income for the taxable year as determined
under the Internal Revenue Code . . . .”  Md. Code (1988, 1997 Repl. Vol.), § 10-304(1) of
the Tax-General Article.   The Maryland Code, however, does not allow related corporations
3
to file consolidated returns.  See id. § 10-811.  The Maryland income tax code thus required
appellee to base its Maryland modified income on the portion of its reported federal
consolidated taxable income earned by it in Maryland.  Because appellee did not report the
three intercompany account credits on its consolidated federal return, it did not report them
on its individual Maryland tax form. 
Appellant alleges that not reporting the intercompany credits allowed appellee to
 Not all of the subsidiaries benefitting from the interest-free debts filed tax returns
4
in Maryland.  As a result, appellee’s failure to impute interest from its credits on its
Maryland tax return produced a net loss of taxable income for the State.
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understate its portion of the consolidated federal taxable income on its separate Maryland
income tax return.   Believing that I.R.C. §§ 482 and 7872 allowed it to impute interest
4
income from appellee’s intercompany credits, appellant recalculated appellee’s Maryland
modified income.  It originally assessed $2,216,066 in additional income tax against
appellee.  Appellee sought a revision of the assessment before an administrative hearing
officer, who upheld the assessment but reduced it to $1,279,785.  Appellee appealed that
ruling to the Maryland Tax Court, arguing that the intercompany account credits were not
debt and that, if they were, appellant had no authority to impute interest income from that
debt unless the IRS had required it on appellee’s federal tax return.  The Maryland Tax Court
disagreed and affirmed.  Appellee sought judicial review in the Circuit Court for
Montgomery County, which reversed, ruling that appellant did not have the authority to
impute interest income based on the I.R.C. provisions.  Appellant appealed that ruling to the
Court of Special Appeals and this Court granted a writ of certiorari prior to that court’s
hearing the matter.  Appellant presents the following question:
Does the Maryland requirement of a separate corporate tax return
require a restatement of federal taxable income from the amount that appears
on a consolidated return to the amount required by I.R.C. §482 or §7872 for
taxpayers that file a separate federal return?
Appellee presents a slightly different version of the question:
Did the Circuit Court for Montgomery County correctly rule that the
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Tax Court erred as a matter of law in holding that [appellant] had authority
under Maryland’s tax laws to impute interest income on intercompany account
balances that [appellee] maintained with its subsidiaries?
II. Discussion
A. Standards of Review
The facts of this case generally are not in dispute; the issue before us is strictly a
question of law.  “The lower court’s interpretations of law enjoy no presumption of
correctness on review: the appellate court must apply the law as it understands it to be.”
Rohrbaugh v. Estate of Stern, 305 Md. 443, 447 n.2, 505 A.2d 113, 115 n.2 (1986) (citing
Elza v. Elza, 300 Md. 51, 55-60, 475 A.2d 1180 (1984); Davis v. Davis, 280 Md. 119,
124-31, 372 A.2d 231, cert. denied, 434 U.S. 939, 98 S. Ct. 430, 54 L. Ed. 2d 299 (1977);
Sica v. Retail Credit Co., 245 Md. 606, 611-21, 227 A.2d 33 (1967)); see also Cassell v.
Pfaifer, 243 Md. 447, 453, 221 A.2d 668, 672 (1966) (“The trial court’s conclusions of law
based upon the facts . . . are reviewable by this Court.”); Pallace v. Inter City Land Co., 239
Md. 549, 558, 212 A.2d 262, 266 (1965) (“The conclusions of law based upon the facts are
reviewable by this Court.”); Porter v. Schaffer, 126 Md. App. 237, 259, 728 A.2d 755, 766
(“[P]ure conclusions of law are not entitled to any deference.” (quoting Oliver v. Hays, 121
Md. App. 292, 306, 708 A.2d 1140 (1998)) (alteration in original)), cert. denied, 355 Md.
613, 735 A.2d 1107 (1999).  Regarding questions of law answered by the Maryland Tax
Court, we have said that “a reviewing court is under no statutory constraints in reversing a
Tax Court order which is premised solely upon an erroneous conclusion of law.”  Ramsay,
Scarlett & Co. v. Comptroller, 302 Md. 825, 834, 490 A.2d 1296, 1301 (1985) (citing
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Supervisor of Assessments v. Carroll, 298 Md. 311, 469 A.2d 858 (1984); Comptroller v.
Mandel, Lee, Goldstein, Burch Re-election Comm., 280 Md. 575, 374 A.2d 1130 (1977)).
When ambiguities arise in construing tax statutes, Maryland courts must interpret tax
code provisions that aid in determining taxable income in the taxpayer’s favor.  We noted
in Comptroller v. John C. Louis Co., 285 Md. 527, 539, 404 A.2d 1045, 1053 (1979), that
when . . . the applicability of a tax statute and not a tax exemption is being
construed, it is the established rule not to extend the tax statute’s provisions
by implication, beyond the clear import of the language used, to cases not
plainly within the statute’s language, and not to enlarge the statute’s operation
so as to embrace matters not specifically pointed out.  In case of doubt, tax
statutes are construed “most strongly against the government, and in favor of
the citizen.”  Comptroller of the Treasury v. Mandel Re-Election Comm., 280
Md. 575, 580, 374 A.2d 1130, 1132 (1977); Comptroller of the Treasury v. M.
E. Rockhill, Inc., 205 Md. 226, 234, 107 A.2d 93, 98 (1954).
See also Scoville Serv., Inc. v. Comptroller, 269 Md. 390, 396, 306 A.2d 534, 538 (1973)
(“[W]here there is doubt as to the scope of the statute, . . . it should be construed most
strongly in favor of the citizen and against the state.” (citing F. & M. Schaefer Brewing Co.
v. Comptroller, 255 Md. 211, 257 A.2d 416 (1969); McConihe v. Comptroller, 246 Md. 271,
228 A.2d 432 (1967); Fair Lanes, Inc. v. Comptroller, 239 Md. 157, 210 A.2d 821 (1965);
M.E. Rockhill, Inc., 205 Md. 226, 107 A.2d 93).  We noted this distinction further in Xerox
Corp. v. Comptroller, 290 Md. 126, 136-37, 428 A.2d 1208, 1214 (1981):
The determination of whether Xerox’s interest income is taxable under [former
Article 81,] § 280A [(currently § 10-304)] necessitates consideration of
whether § 280A(c)(4) is a “definition” of taxable income, and therefore to be
construed strictly against the State, or an “exemption” from taxable income,
to be construed in favor of the State.
In Balto. Foundry v. Comptroller, 211 Md. 316, 127 A.2d 368 (1956),
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. . . the Court said:
“It may be observed that the exclusion of tangible personal
property purchased for the purpose of resale in its original form,
or for the purpose of incorporation into a finished product, is by
force of the definition and not by inclusion in the exemptions set
out in sec. 322.  Sales in the categories mentioned are simply
not within the scope of the taxing statute.  Thus the rule of strict
construction of an exemption does not apply, but the rule is
applicable, that, where there is doubt as to its scope, a tax
statute should be construed most strongly in favor of the citizen
and against the State.”  211 Md. at 319-20, 127 A.2d at 369.
B. Authority to Impute Income Under I.R.C. § 482
Appellee’s main argument is that “[t]he Maryland Tax Code does not expressly
authorize [appellant] to impute interest income” and that appellant “is not granted that
discretionary authority by Federal law.”  Further, appellee contends that if appellant wishes
to have such authority, appellant should seek it from the Legislature, not this Court.
Appellant argues that section 10-304’s equation of Maryland modified income to federal
taxable income and section 10-811’s requirement of separate returns for each affiliated
corporation together “mandate a restatement of taxable income from the number that appears
on the federal consolidated return” to determine the Maryland modified income of each
separate business entity.  It implies that its statutory mandate empowers it to utilize the
income-determining provisions of the I.R.C. in their entirety, as necessary.
The Legislature, however, has not bestowed such authority upon appellant.  Appellant
correctly notes that, under section 10-304, the Maryland modified income is equal to the
federal taxable income.  Appellant’s error, however, is in assuming that section 10-304
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provides it with the full panoply of powers provided to the IRS by the I.R.C. to help define
federal taxable income.  Our previous interpretations of section 10-304 reflect that the
legislative intent behind the provision was for appellant to accept the taxable income figure
reported on the federal return as the Maryland modified income, subject to certain statutorily
prescribed modifications; namely, the additions and subtractions listed in sections 10-305
through 10-308.
Comptroller v. American Satellite Corp., 312 Md. 537, 540 A.2d 1146 (1988),
provides a strong argument for interpreting such an intent behind the state tax code.  In
American Satellite, appellant argued that a state tax statute allowed it to allocate, as taxable
income, certain capital gains earned in Maryland to a corporation that had filed a
consolidated federal return reporting no taxable income.  This Court disagreed, holding that
the state capital gains provision in question could not increase the state modified income
figure, because only sections 10-305 through 10-308 authorize appellant to adjust the federal
taxable income figure.  In doing so, we discussed the legislative intent behind this system of
Maryland income tax reporting:
[L]egislative committee reports clearly indicate that the purpose in enacting ch.
142 in 1967 [, the current tax code,] was to bring the State taxation system in
conformity with the federal scheme.  Report of the Committee on Taxation and
Fiscal Reform (Report) (February 1, 1967).  See also Katzenberg v.
Comptroller, 263 Md. 189, 204-05, 282 A.2d 465[, 473] (1971); Evans v.
Comptroller, 273 Md. 172, 175, 328 A.2d 272[, 274] (1974); Marco Assoc.
v. Comptroller, 265 Md. 669, 674, 291 A.2d 489[, 492] (1972); 66 Op. Att’y
Gen. 242, 247 (1981); 52 Op. Att’y Gen. 451, 452-53 (1967).  As the report
indicates, such conformity was thought to foster enforcement.  Report at 8.
This effort to simplify the taxation system might not fulfill its purpose if, after
using federal taxable income as the base for determining State tax liability, the
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Maryland statutes then imposed additional adjustments which significantly
altered the base, other than the simple modifications provided by [Article 81,]
§ 280A(b) and (c) [now embodied in sections 10-305 through 10-308].
Id. at 545, 540 A.2d at 1150 (emphasis added).
We have interpreted the state tax code in a similar manner in cases where taxpayers
sought to modify their income based on federal tax provisions.  For instance, in Marco
Associates, Inc. v. Comptroller, 265 Md. 669, 291 A.2d 489 (1972), the taxpayer corporation
had paid no federal income tax on a large portion of its reported income because it filed with
the IRS as a “Subchapter S” corporation.  It subsequently deducted that portion of its income
on its Maryland tax return.  Maryland, at the time, did not recognize Subchapter S corporate
filings.  We agreed with appellant that it was the total federal taxable income figure upon
which Maryland income tax was based, not the portion of that income that was actually taxed
after the federal tax break.
Since our Act does not accord Subchapter S treatment to a corporate
taxpayer which elects to be treated as such for federal tax purposes, it follows
that such a taxpayer is looked upon for purposes of the Maryland tax as if it
were an ordinary business corporation, and its Maryland stockholders as if
they were the holders of shares in such a corporation, see § 280(b)(5), §
280(c)(2).  This may not be fair, but it is a fact of life.
Id. at 675-76, 291 A.2d at 493 (citation omitted).  Marco Associates further argued that its
having to report the untaxable federal income was because of “a technical requirement of the
Internal Revenue Code, rather than because of any real change in the situation of the parties.”
Id. at 678, 291 A.2d at 494.  We replied:
This argument . . . overlooks the manner in which the Maryland income
tax is structured.  Its focus is on the taxable income of a corporation, or the
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adjusted gross income of an individual, as the same is developed in the
taxpayer’s federal income tax return, subject to the modifications permitted
by the Act, whether a federal tax is or is not generated by the federal return.
The fact that a gain recognized by a Subchapter S corporation and
reflected in its taxable income may be attributed to the corporation’s
shareholders under federal law does not alter the fact that it remains within the
concept of taxable income under the Act — a figure upon which the Maryland
tax is based.
Id. (emphasis added).  In other words, the portion of Marco Associates’ income earned in
Maryland was derived from the taxable income figure provided on its federal income tax
return regardless of how that income was actually taxed under the I.R.C.
We reached a similar conclusion in NCR Corp. v. Comptroller, 313 Md. 118, 544
A.2d 764 (1988).  In that case, the taxpayer had claimed on its 1976 federal tax return a
credit for certain foreign income taxes paid on foreign-earned dividends.  I.R.C. § 78
required that the company “gross-up” the income reported on its federal return by the amount
of the credit.  Prior to 1977, the Maryland Code did not allow the company to subtract that
gross-up amount from its Maryland income, even though the gross-up served no relevant
state income tax purpose.  We nonetheless held that appellant could tax NCR based on the
grossed-up figure reported on its federal income tax form.  In doing so, we stated:
As we have seen, § 280A(a) instructs, as it did in 1976, that “[t]he net
income of a corporation shall be the taxable income of such taxpayer as
defined in the laws of the United States . . . for the corresponding taxable
period. . . .”  The purpose of that provision is “to bring the State taxation
system in conformity with the federal scheme.”  Comptroller v. American
Satellite Corp., 312 Md. 537, 545, 540 A.2d 1146, 1150 (1988).  Since NCR’s
1976 federal taxable income included the gross-up, and since the Maryland
statutes applicable to 1976 contained no authority to adjust or deduct that
figure, it should, one would think, be included in Maryland taxable income.
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Id. at 123, 544 A.2d at 766 (emphasis added) (alteration in original).
Finally, in Katzenberg v. Comptroller, 263 Md. 189, 282 A.2d 465 (1971), we
reviewed the effect of the 1967 overhaul of the Maryland income tax code on capital gains
taxes.  Prior to 1967, capital gains were not taxed in Maryland as income.  When the
Legislature adopted the federal taxable income figure as the Maryland modified income,
capital gains, which were taxed by the federal government, became taxable in Maryland.
The taxpayers in Katzenberg argued that the new tax provisions did not apply to their 1967-
68 capital gains because they were earned on pre-1967 investments.  Examining the use of
the federal taxable income figure, we reasoned:
[T]he whole thrust of the Maryland Act is to impose a tax on the amount
determined under the Internal Revenue Code as the adjusted gross income of
an individual or the taxable income of a corporation.  This is a formula or
yardstick objectively derived which initially takes no account of the source,
nature or composition of the funds; it is simply a figure developed by the
federal return.
Id. at 204-05, 282 A.2d at 473.  We added:
It is undoubtedly true that the General Assembly, had it seen fit to do so, could
have imposed a tax on a taxpayer’s gross income, without considering the
source from which it came, whether it be earnings, investment income or
profits realized from the sale of capital assets, and without granting
exemptions, allowing deductions or permitting any other adjustments.  If it
could validly do this, and we think it could, there is no reason to doubt that it
could select some other figure, objectively arrived at, upon which the tax could
be based, Tawes v. Strouse, 182 Md. 508, 512-13, 35 A.2d 233[, 235] (1943).
It did this when it chose to base the tax on the figures for adjusted gross
income and taxable income, as developed by the federal returns.
Id. at 205-06, 282 A.2d at 473 (emphasis added).  Ultimately, we upheld the assessment
against the taxpayers, rejecting their argument, inter alia, that the new law was
 There are other provisions that affect the final income figure reported on the
5
Maryland tax form; for instance, 10-402 requires that only Maryland-earned income be
reported by corporations and section 10-811 requires affiliated corporations to allocate
income to each separate business entity.  The provisions in Subtitle 3 calculate Maryland
modified income; these other provisions apportion the calculated modified income.
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unconstitutionally arbitrary in its application:
It seems to us that the State has the better of this argument when it says
that the Act uses as a base an individual taxpayer’s adjusted gross income
reported for federal income tax purposes, with certain additions and
subtractions.  The Act is not directed at payments received from installment
sales before the date of its enactment.  Neither does it purport to be a tax on
capital gains as such or a tax on installment payments as such.  It is rather a
tax measured by the yardstick of income reported for federal tax purposes,
whether capital gains be reflected in this figure or not.
Id. at 203-04, 282 A.2d at 472.  American Sattelite, Marco Associates, NCR Corp. and
Katzenberg all lead to the same interpretation of section 10-304: the figure reported as
federal taxable income on a federal return is the base figure used on the Maryland tax form
as Maryland modified income, subject to recalculation only by sections 10-305 through 10-
308.   Appellant apparently understands this interpretation of its power to compute Maryland
5
income tax to be correct.  In its own regulations, COMAR 03.04.03.05(B), “Use of Federal
Figures,” appellant has determined that “[t]he starting point for the Maryland return is the
taxable income as defined in the Internal Revenue Code and developed on the federal
return.”  (Emphasis added.)
The Illinois Appellate Court, in Bodine Electric Co. v. Allphin, 70 Ill. App. 3d 844,
389 N.E.2d 168 (1979), aff’d, 81 Ill. 2d 502, 410 N.E.2d 828 (1980), made a similar
interpretation of their state’s corporate income tax code.  The parties in Bodine Electric
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debated the effect a federal tax code provision regarding net operating losses had on the
taxpayer’s state taxable income.  Noting that the state income tax “provisions mandate that
the taxpayer’s state base income is equal to its Federal taxable income as determined on a
separate return basis and subject to specified adjustments,” id. at 846, 389 N.E.2d at 170, the
Appellate Court balked at the parties’ implication that the I.R.C. provision at issue had any
effect on the amount of state taxable income:
There is no provision in the Illinois Act which specifically adopts all federally
allowed deductions; however, the Illinois Act does specifically adopt federal
taxable income as the starting point upon which the state tax is computed. . .
.
. . . .
Although the legislature has adopted federal taxable income as a
starting point for calculating state corporate income tax, it has not enacted a
specific statutory provision allowing a deduction for net operating loss . . . .
. . . We must, therefore, conclude that the taxpayer is entitled to a net
operating loss deduction only in the same manner and amount as the taxpayer
would have been entitled to such a deduction on its federal income tax return
for the same taxable year.
Id. at 847, 848, 389 N.E.2d at 171, 172.  In affirming, the Illinois Supreme Court held that
“the legislature’s intent [is] that a net-operating-loss deduction is relevant to the computation
of Illinois tax liability only insofar as this deduction enters into the computation of base
income under the relevant provisions of the Act.”  81 Ill. 2d at 510, 410 N.E.2d at 832.  See
also B.W. Co. v. State Tax Comm’n, 370 Mass. 18, 20, 345 N.E.2d 884, 886 (1976) (noting
that a gain not included on the taxpayer’s federal tax return “was not part of its Federal gross
income and literally, therefore, was not part of the taxpayer’s Massachusetts gross income.”).
 Some of the I.R.C. provisions cited by appellant grant the IRS discretion to allow
6
a taxpayer to modify its accounting procedures or period.  The Maryland income tax code
generally requires the taxpayer to follow the same procedures or period used on its federal
return on its Maryland return.  § 10-501.  Similar to the I.R.C. provisions, section 10-504
specifically grants appellant the authority to allow the taxpayer to change its accounting
period.  The General Assembly thus has already made a legislative determination to
incorporate these federal provisions into the Maryland income tax code.
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We note that appellant responds to appellee’s argument that I.R.C. § 482 authorizes
only the IRS to allocate income by pointing out several I.R.C. provisions that empower the
IRS to perform various income-determination functions.  Appellant implies that it too can
enforce these provisions to ensure that taxpayers accurately report their Maryland modified
income.  Most of the I.R.C. provisions cited by appellant, however, either impose mandatory
powers upon the IRS or grant it the authority to impose mandatory regulations in order to
calculate federal taxable income.   This is completely different from I.R.C. § 482, which
6
grants the IRS full discretion to individually impute income between affiliated taxpayers.
If a taxpayer failed to report certain income on its federal tax return that the I.R.C.
mandated it to report, and the IRS accepted that figure, appellant should be permitted to
recalculate the Maryland modified income because the federal taxable income figure it relies
on would be incorrect.  Likewise, if the IRS exercised its discretion to create mandatory
regulations that required the taxpayer to report certain income, and the taxpayer failed to do
so, appellant could follow those IRS regulations in recalculating the Maryland modified
income.  In both cases, the statute or regulation are rigid and objective in their determination
of what is taxable income.  If we were to hold that appellant could never apply such
 The existence of criminal sanctions shows why it would be absurd not to attribute
7
the power to recalculate Maryland modified income to appellant when the federal tax return
figures are incorrect.  If appellant had no such power, the State could prosecute the taxpayer
for tax evasion, but still would not be able to collect taxes on unreported modified income.
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provisions, then taxpayers who evade their federal income taxes would be free, without
considering criminal sanctions, to evade their Maryland income tax obligation as well.   We
7
should not attribute such an illogical intent to the Legislature’s 1967 revision of the state tax
code.  See Degren v. State, 352 Md. 400, 418, 722 A.2d 887, 895 (1999) (“[W]e should
construe the statute in a manner that results in an interpretation ‘reasonable and consonant
with logic and common sense.’” (quoting Lewis v. State, 348 Md. 648, 654, 705 A.2d 1128,
1131 (1998))); Edgewater Liquors, Inc. v. Liston, 349 Md. 803, 808, 709 A.2d 1301, 1303
(1998) (“[W]e approach statutory construction from a common sense perspective.”); Lewis,
348 Md. at 662, 705 A.2d at 1135 (“We shall not interpret a statute to produce unusual or
extraordinary results, absent the clear legislative intent to enact such a provision.”); D & Y,
Inc. v. Winston, 320 Md. 534, 538, 578 A.2d 1177, 1179 (1990) (“[C]onstruction of a statute
which is unreasonable, illogical, unjust, or inconsistent with common sense should be
avoided.”); Blandon v. State, 304 Md. 316, 319, 498 A.2d 1195, 1196 (1985) (“[R]ules of
statutory construction require us to avoid construing a statute in a way which would lead to
absurd results.”).
I.R.C. § 482, on the other hand, is completely within the subjective discretion of the
IRS: “the Secretary may distribute, apportion, or allocate gross income, deductions, credits,
or allowances between or among . . . businesses.”  (Emphasis added.)  As stated in Treasury
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Regulation § 1.482-1(a)(1) (as amended in 1994), “[t]he purpose of section 482 is to ensure
that taxpayers clearly reflect income attributable to controlled transactions, and to prevent
the avoidance of taxes with respect to such transactions.”  As a result, “[t]he [IRS] district
director may make allocations between or among the members of a controlled group if a
controlled taxpayer has not reported its true taxable income.”  Id. § 1.482-1(a)(2) (emphasis
added).  I.R.C. § 482 and its corresponding regulations, therefore, grant the IRS a choice
whether to allocate income between affiliated taxpayers when evidence exists that the
taxpayer had not reported its income correctly.  Because we must construe our own income-
determining statutes against appellant, see supra, we cannot extend such a discretionary
choice to appellant.  If the IRS fails to impute discretionary federal taxable income to the
taxpayer, appellant must accept that determination, and the resulting federal taxable income
figure, as the Maryland modified income.  As we noted in Marco Associates, 265 Md. at
676, 291 A.2d at 493,“[t]his may not be fair, but it is a fact of life.”
The New York Court of Appeals made a similar interpretation of its state income tax
provisions in People ex rel. Barcolo Mfg. Co. v. Knapp, 227 N.Y. 64, 124 N.E. 107 (1919).
At the time, in New York
[a] definition of the words “net income” was not incorporated in the [state]
statute.  The meaning given and characterizing them through and as used in the
Federal statutes was their meaning as used in the state statute.  The conditions
and limitations, expressed in the Federal statutes, creating their office and
effect under those statutes are adopted by the state statute.  It used the term net
income as established by the Federal statutes.
Id. at 70-71, 124 N.E. at 108.  To the court, this meant that “within the legislative intention
 For instance, after Marco Associates, 265 Md. at 678, 291 A.2d at 494, held that S
8
corporations must pay income tax on all their federal reported income, including the tax-free
portion under the I.R.C., the General Assembly expressly incorporated the Subchapter S
corporation tax break into section 10-304(3).  See 1988 Md. Laws, Chap. 135, § 1.
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the net income of the statute is that returned or reported to the United States in accordance
with the Federal statutes.”  Id. at 71, 124 N.E. at 108 (emphasis added).  The court noted,
as we do in the case sub judice, that “the [state tax] commission is free to fix, from the return
and any other information, the true and correct amount of the net income, but not to change
the nature or definition of it.”  Id.  In other words, the state tax agency is free to correct
falsehoods and incorrect statements made on the federal income tax return, subsequently
transferred to the state return, but not alter the definition of what is or is not the taxpayer’s
income.  The authority bestowed upon the IRS by I.R.C. § 482 is a power in the latter
category.  Thus, for appellant to possess authority similar to that contained in I.R.C. § 482,
they must seek it from legislative enactment.8
That several of our sister states’ legislatures have adopted statutes that specifically
incorporate I.R.C. § 482 into their tax code or bestow § 482-type powers upon its state
revenue agency bolsters our holding that appellant can only exercise such powers with the
grace of the General Assembly.  The legislatures of Alaska, California, and Hawaii, for
instance, have expressly incorporated I.R.C. § 482 into their own tax codes.  See Alaska Stat.
§ 43.20.021(a) (Lexis 1998); Cal. Rev. & Tax. Code § 24725 (West 1999); Haw. Rev. Stat.
§ 235-2.3 (Supp. 1998).  A number of other state legislatures have adopted their own statutes
based upon the language of I.R.C. § 482.  See Ariz. Rev. Stat. Ann. § 43-942(A) (West
 In personal income tax matters, Oregon has adopted by reference all of the income-
9
determining provisions of the I.R.C.  See Or. Rev. Stat. § 316.007 (1997).
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1998); Ark. Code Ann. § 26-51-805(e) (Michie 1997); Colo. Rev. Stat. Ann. § 39-22-303(6)
(West 1999); D.C. Code Ann. § 47-1810.3 (1997); Ind. Code Ann. § 6-3-2-2(m) (Michie
1998); Kan. Stat. Ann. § 79-32,141 (1997); La. Rev. Stat. Ann. § 47:287.480(2) (West
1990); Okla. Stat. Ann. tit. 68, § 2366 (West 1992); Or. Rev. Stat. § 314.295 (1997);  Utah
9
Code Ann. § 59-7-113 (1996); Wis. Stat. Ann. §§ 71.30(2), .80(1)(b) (West 1999).  At least
six other states provide their respective tax authority with broad power to prevent distortions
of net income and deceptive tax accounting methods.  See Conn. Gen. Stat. § 12-226a
(1997); Ga. Code Ann. § 48-7-58(a) (1995); N.Y. Tax Law § 211(5) (Consol. 1990); N.C.
Gen. Stat. § 105-130.16 (1997); R.I. Gen. Laws § 44-11-4 (1995); Va. Code. Ann. § 58.1-
446 (Michie 1997).  There is no reason why appellant could not seek similar authority from
the General Assembly.  However, until appellant obtains the authority to allocate income for
tax enforcement purposes, it cannot assume that it has such authority from the provisions of
the federal tax code.  See Allison v. Department of Revenue, 11 Or. Tax 431, 435 (1990)
(holding that the state legislature had not adopted I.R.C. § 482 by reference); cf. Ex Parte
Jones Mfg. Co., 589 So. 2d 208, 210 (Ala. 1991) (noting that the state legislature had
statutorily adopted I.R.C. § 337, which prevented gains made from a total liquidation of
assets from being assessed, but not I.R.C. § 1245, which required any part of those gains that
recaptured depreciation to be assessed); In re Estate of Armstrong, 133 Mont. 328, 331-32,
323 P.2d 595, 596-97 (1958) (holding that a state law authorizing taxpayers to use the “best
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accounting practice in the trade or business” did not incorporate by reference a federal tax
provision granting special capital gains tax status to breeding animals and that, to hold
otherwise, would “amount[] to judicial legislation.”).
Finally, we address appellant’s implication that section 10-107, which states “[t]o the
extent practicable, [appellant] shall apply the administrative and judicial interpretations of
the federal income tax law to the administration of the income tax laws of this State,”
requires it “to apply . . . all relevant principles of federal tax law,” including those contained
in I.R.C. §§ 482 and 7872.  Section 10-107 is not a direct authorization for appellant to
incorporate into the Maryland tax code whatever I.R.C. provisions it sees fit to apply; rather,
section 10-107 expresses a policy of comity that, when exercising any legislatively-
authorized powers that parallel an I.R.C. provision, appellant must comply with the judicial
and administrative interpretations of that federal statute.  We noted as much in Lyon v.
Campbell, 324 Md. 178, 185, 596 A.2d 1012, 1015 (1991):
Section 10-107 applies where the Maryland tax code is “‘inextricably
keyed’” to the federal tax code “by virtue of its adoption of the federal law.”
Comptroller v. Chesapeake Corp., 54 Md. App. 208, 213-14, 458 A.2d 459,
463 (1983).  It avoids the “anomalous result” of the taxpayer achieving a
different result regarding payment of Maryland tax where the Maryland tax
provision incorporates the federal tax provision.  See Comptroller v. Diebold,
Inc., 279 Md. 401, 409, 369 A.2d 77, 82 (1977) (holding that where the
Maryland tax code incorporates a federal tax code provision, the interpretation
of the Maryland and federal tax provisions should be consistent).
Other states have interpreted their particular version of section 10-107 in a similar
manner.  In Commonwealth ex rel. Allphin v. Borders, 267 S.W.2d 940, 941 (Ky. Ct. App.
1954), the taxpayer argued that Kentucky’s version of the statute stood “for the proposition
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that the federal law would be applied unless the state law expressly provided for a different
result.”  The Court of Appeals of Kentucky agreed with the state tax authority, however, that
the statute “contemplated only the adoption of interpretations of federal law in those cases
where the same or a similar situation arose under the state law, or where the provisions of
the federal and state laws were similar.”  Id.  The court also noted that “[i]f we were to
accept the argument of the taxpayer, it would mean that every deduction allowed under the
federal law and not mentioned in the state law would have been allowable for state income
tax purposes . . . .”  Id.  The Supreme Judicial Court of Maine, in Central Maine Power Co.
v. Public Utilities Commission, 382 A.2d 302, 320 (Me. 1978), has said that Maine’s version
of the statute “merely attempts to resolve semantic conflicts in the interest of efficiency. . .
. [W]e do not view [the statute] itself as mandating our passive acceptance of all federal
interpretations of federal tax statutes.”  Cf. In re Estate of Armstrong, 133 Mont. at 331, 323
P.2d at 596-97 (noting that when a specific Montana “income tax law in force . . . bore no
likeness to the Federal law,” that “[r]esort to the Federal statutes or decisions” would provide
“no aid in the interpretation of the state statute.” (emphasis added))
Section 10-107 does not grant any authority to appellant.  The statute merely states
that, when appellant is specifically empowered to enforce an I.R.C. provision, it must obey
the previous administrative and judicial interpretations of the tax law at issue as precedent.
The statute does not allow appellant to put forth its own interpretation that a federal tax law
is incorporated into the Maryland tax code.
C. Authority to Impute Income Under I.R.C. § 7872
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The plain language of I.R.C. § 7872 reflects that it is a mandatory income-determining
provision for the IRS.  It does not grant the IRS, as I.R.C. § 482 appears to, any discretion
over whether to enforce its terms, except through self-imposed regulations.  Thus, appellant
may enforce the terms of that federal statute in determining Maryland modified income,
when its application affects the federal taxable income figure.
We noted, supra, that section 10-107 mandates that appellant comply with all judicial
and administrative interpretations of I.R.C. § 7872.  The IRS has adopted regulations
describing what types of transactions are to be affected by I.R.C. § 7872.  They state in part:
(3) Loans without significant tax effect.  Whether a loan will be
considered to be a loan the interest arrangements of which have a significant
effect on any Federal tax liability of the lender or the borrower will be
determined according to all of the facts and circumstances.  Among the factors
to be considered are — 
(i) Whether items of income and deduction generated by the loan offset
each other;
(ii) The amount of such items;
(iii) The cost to the taxpayer of complying with the provisions of
section 7872 if such section were applied; and
(iv) Any non-tax reasons for deciding to structure the transaction as a
below-market loan rather than a loan with interest at a rate equal to or greater
than the applicable Federal rate and a payment by the lender to the borrower.
Temp. Treas. Reg. § 1.7872-5T(c)(3) (as amended in 1998).
Section 10-107 requires appellant to follow this regulatory interpretation as worded
by the IRS.  As appellee argues, the regulation is only concerned with the effect a transaction
will have on federal tax liability; in this case, the intercompany account transactions had no
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effect because their tax consequences offset each other, a situation specifically addressed by
the regulation.  As a result, I.R.C. § 7872 could not affect appellee’s taxable income as
reported on its federal return.  Because appellee complied with both the statute and the
regulation, the corporate taxable income figure is correct as reported on its federal tax return.
As we noted, supra, appellant may enforce a mandatory provision, like I.R.C. § 7872, to
ensure that the federal taxable income figure transferred to the Maryland tax form is correct.
Appellant wishes to take the auspices of I.R.C. § 7872 a step further, however, and impute
income for purely State income tax purposes.  This it cannot do; once the federal taxable
income figures are verified as true and correct under the mandatory I.R.C. provisions,
appellant must accept those figures.  In this case, the credits legitimately were left unreported
on appellee’s federal tax return; appellee could not thereafter add those credits to appellee’s
Maryland modified income in order to generate State income tax.
III. Conclusion
In calculating Maryland modified income for an affiliated corporation in Maryland,
appellant generally must accept the figure adopted as taxable income on the corporate
taxpayer’s consolidated federal return, subject to the specific Maryland modifications
allowed under Maryland’s tax code.  In this case, appellee’s modified federal taxable income
as reported on its consolidated tax returns did not reflect any income derived from I.R.C. §§
482 and 7872.  Appellant could only allocate appellee’s portion of that consolidated income
based on the remaining applicable state code provisions pertaining to apportionment and
modification.  None of those provisions grant any power to appellant, similar to that
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contained in I.R.C. § 482, to allocate or impute income for tax enforcement purposes.  Nor
do any of these provisions authorize appellant to enforce I.R.C. § 7872 beyond its terms in
order to generate state income tax from income legitimately not reported on a taxpayer’s
federal return.
The decision of the circuit court is affirmed.
JUDGMENT 
OF THE CIRCUIT
COURT 
FOR 
MONTGOMERY
COUNTY AFFIRMED; COSTS TO BE
PAID BY APPELLANT.
Comptroller of the Treasury v. Gannett Co., Inc.
No. 49, September Term, 1999
Headnote:
The Comptroller, which generally must accept the taxable income reported on
a corporation’s federal tax return as the Maryland modified income, does not
have the power to impute interest income under the federal Internal Revenue
Code.