Title: Comptroller v. SYL

State: maryland

Issuer: Maryland Supreme Court

Document:

IN THE COURT OF APPEALS OF MARYLAND
Nos. 76 & 80
September Term, 2000
_________________________________________
COMPTROLLER OF THE TREASURY
v.
SYL, INC.
* * *
COMPTROLLER OF THE TREASURY
v.
CROWN CORK & SEAL COMPANY
(DELA WARE), INC.
_________________________________________
Bell, C.J.
        Eldridge
       
Raker
Wilner
Cathell
Harrell
Rodowsky, Lawrence F.
    (Retired, specially assigned),
 
                                
         JJ.
__________________________________________
Opinion by Eldridge, J.
__________________________________________
Filed:   June 9, 2003
1
Hereafter in this opinion we shall use the term “trademarks” for all of the intellectual property
assets.
These cases concern the liability for Maryland income taxes of two corporations
that do no business in Maryland, and own no tangible property in Maryland, but are
subsidiaries of parents that do business in Maryland.  The dispositive issue is whether
there is a sufficient nexus between the State of Maryland and each subsidiary
corporation so that the imposition of Maryland income tax does not violate either the
Commerce Clause of the United States Constitution, Art. 1, Section 8, cl. 3, or
principles of due process.
I. 
This opinion encompasses two cases; consequently, we shall set forth the facts
of each case separately.
A. No. 76, Comptroller of the Treasury v. SYL
SYL, Inc. is a Delaware corporation and a wholly owned subsidiary of Syms, Inc.
SYL owns intellectual property assets used by Syms, specifically trademarks, trade
names and advertising slogans.1  SYL’s primary function is to manage and control these
intellectual property assets.  Syms is a New Jersey corporation that sells men’s,
women’s and children’s clothing in numerous states, including Maryland.  
Syms incorporated SYL in December 1986, and upon its formation, Syms
assigned the above-described intellectual property assets to SYL.  In return, SYL
granted to Syms a license to manufacture, use and sell the products covered by the trade
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names and trademarks in its business throughout the United States.  In consideration
for these intellectual property rights, Syms agreed to pay SYL a royalty based on the
parent corporation’s sales.  At the same time that Syms created SYL, it also created
another wholly owned subsidiary named SYI, Inc., the purpose of which was to give
SYL investment advice.
For the tax years 1986 through 1993, SYL did not file corporate income tax
returns in Maryland.  Throughout this period, SYL did not own or lease tangible
property in Maryland, had no employees in Maryland, and maintained no bank accounts
in Maryland.  Nor did SYL directly sell or lease goods or services in Maryland through
advertising, mailings, or in-person solicitations.  Syms, however, did have extensive
business contacts in Maryland during this time period through its ownersh ip and
operation of retail stores in Maryland.  Syms regularly filed Maryland corporate income
tax returns.  
In 1996, the Comptroller issued a Notice of Assessment to SYL, indicating that
SYL owed for the years 1986 through 1993 an amount of $637,362 in corporate income
taxes, including interest and penalties.  SYL timely protested the Comptroller’s Notice
of Assessment.  After a hearing, the Comptroller, by a hearing officer, issued a Notice
of Final Determination that sustained the Notice of Assessment.  The hearing officer,
inter alia, found as follows:
“In general, the Comptroller*s Office assessed SYL, Inc., a tax-
haven entity earning substantial related party income, based on the
position that SYL, Inc. (“SYL”) was a phantom entity that did not
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have substantial economic substance. The Comptroller’s audit
section concluded that SYL*s lack of substantial substance and its
dependence on Syms Corporation (“Syms”) for its earnings
required SYL to file returns with Maryland based on the
apportionment factor of its parent company Syms. The
Comptroller*s audit section relied upon Comptroller  v.  Armco,
572 A.2d 562 (1990) (cert. denied); Comptroller v.  Atlantic
Supply  Co., 448 A.2d 955 (1982). The Comptroller*s Office
believes these decisions are consistent with Tax-General Article,
Section 10-402 which generally requires that the income
reasonably and fairly attributable to carrying on business in
Maryland be taxable by Maryland. In short, the Comptroller*s
section found SYL to be a phantom or bookkeeping entity and
taxed it based on economic reality and the true source of its
income.”
* * *
“In December, 1986, Syms incorporated SYL in Delaware and
putatively assigned to SYL its ownersh ip in trademarks.  As part of
an overall plan, SYL licensed back to Syms the trademarks and
ostensibly assumed (at least on paper) all obligations for
management and administration of the marks.  Just as before the
assignment and simultaneous license back of the marks, Syms
continued to utilize the marks in its retail clothes stores in
Maryland and other states.  SYL charged Syms a 4% royalty
pursuant to a license agreement which was apparently entered into
on December 18, 1986 (though dated July 1986).  The 4% royalties
were charged from October 1, 1986 even though the formal
assignment of the intangibles was not effectuated until
December 19, 1986.  Moreover, the valuation of the arm’s length
royalty rate was provided by a company which was engaged by a
consultant (Coventry Financial Corp.) which apparently was
provided a financial stake in the tax savings obtained.
“At least one significant objective of forming SYL was to
generate state income tax benefits.  See memorandum of Karen
Artz Ash dated July 22, 1986 at p. 6.  See also Rosen, “Use of a
Delaware Holding Company To Save State Income Taxes”, 20 Tax
Advisor 180 (1989).  Significant state income tax savings were
generated from SYL in Maryland and other separate return states
because (a) Syms deducted the substantial royalty payments of
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roughly $12 million each year to SYL and (b) SYL did not report
its royalty income as taxable in Maryland or other separate return
states other than Delaware.  Since Delaware does not generally tax
income from intangibles, SYL generated very substantial state
income tax benefits.  It appears from one document (finally
obtained after repeated requests) that Syms paid a third party –
Coventry Financial Corp. – a percentage of the early year state tax
savings for its consulting efforts in setting up SYL.  See the
Richard Diamond to Sy Syms memorandum dated December 12,
1986 entitled ‘State Income Tax Savings – Coventry Financial
Corp.’”
* * *
“While by no means exhaustive, I find some of the salient and
controlling facts as follows:
“(1) SYL was a thinly constituted entity with very little if any
true economic or operational activity in that:
“(a) It paid out very little in wages and the $1,200 or so
of yearly wages paid were to employees of third party ‘nexus
service providers’ which are in the business of providing tax-haven
entities with ‘apparent substance’.  SYL contracted with one such
‘nexus service provider’ which provides mail forwarding, shared
office space and shared employees for numerous other taxpayers.
At least some nexus service providers promote their services to
potential clients at tax seminars, and it is understood that hundreds,
if not thousands, of taxpayers enter into arrangements with these
nexus service providers.
“(b) SYL had no separate office or employees other than
the shared space and purported employees of nexus service
providers and the officers of Syms who were compensated solely
by Syms.
“(c) SYL had no phone listing, phone service or office
signage.
“(d) SYL apparently did not license its marks (or attempt
to license) to third parties.
-5-
“(e) SYL officers did not have business cards, job
descriptions, job evaluations or other indicia of a true employment
relationship.
“(f) Though requested, SYL could not produce invoices
issued to Syms pursuant to the royalty agreement (beyond the
initial billing period).
“(g) Though requested, SYL could not produce travel
reports showing business activity in Delaware.
“(h) Though requested, SYL failed to produce a person
at the informal hearing who could speak to any activities being
conducted by SYL.”
* * *
“From a legal standpoint, it is difficult to find fault in the
Comptroller’s assessment.  As in Armco, the Comptroller’s Office
appropriately determined that the factors and attributes of Syms
should determine how SYL’s income should be taxed.  Since SYL
was found to be a phantom, it was clearly appropriate to look to the
true underlying source of its income.  SYL’s booked income was
in reality generated from Syms’ sales, property and payroll.
“It was Syms’ use of the marks, its goodwill and its efforts in
Maryland and elsewhere which gave the marks value and generated
the income ‘booked’ in SYL.”
SYL appealed the assessments to the Maryland Tax Court, with its “Petition of
Appeal” headed “SYL, INC. c/o Syms Corporation[,] Syms Way[,] Secaucus, New
Jersey 07094 v. Comptroller of the Treasury.”  SYL’s petition alleged, inter alia, that
it was a Delaware corporation “organized in 1986 by its parent, Syms Corp. . . . to hold
certain registered trademarks and trade names,” that SYL had “as a valid business
purpose the protection, maintenance and management of valuable intangible assets,”
-6-
that SYL maintains an office in Delaware, a separate bank account, and has its own
corporate officers and board of directors who meet regularly, that SYL “is a bona fide
corporation with substantial corporate substance” and with “a valid business purpose,”
that the taxation of SYL’s income is not authorized by Maryland Code (1988, 1997
Repl. Vol., 2002 Supp.), § 10-402 of the Tax-General Article, or by any other Maryland
statute, and that the Comptroller’s assessments violate the Fourteenth Amendment’s
Due Process Clause and the Commerce Clause of the United States Constitution.  The
Comptroller’s answer denied SYL’s allegations concerning its viability, valid business
purpose, substance, etc., as well as SYL’s legal conclusions under the Maryland
statutes and the federal Constitution.
The parties thereafter entered into a stipulation setting forth the procedural
history of the case, the basic facts concerning Syms’s operations in Maryland, the fact
that SYL is a wholly-owned subsidiary of Syms, and SYL’s lack of property,
employees, or bank accounts in Maryland.  The stipulation also agreed upon the
introduction into evidence of twenty-eight exhibits which were attached.  In addition
to the numerous exhibits which were introduced, the Tax Court held a hearing
extending over two days during which several witnesses testified.  The administrative
record discloses the following information about the creation and operation of SYL.
The suggestion to create SYL for tax benefit reasons originated from Coventry
Financial, a consulting firm which approached Syms Corp. in June of 1986.  Upon the
creation of SYL as a trademark holding company, and SYI, Inc., as a second wholly-
-7-
owned subsidiary which would act as an investment advisor to SYL, Syms Corp. was
to assign the trademarks to SYL and SYL was to license the trademarks back to Syms.
Then, Syms was to pay SYL a royalty for the use of the trademarks, which SYL was to
keep temporarily before the funds were sent back to Syms as a dividend payment.  In
the interim, SYL was to invest the funds, with SYI controlling the investment
decisions.  Coventry Financial’s fee was directly tied to the total amount of tax savings
generated from the implementation of its so-called “program.” 
One of Syms’s inter-company documents stated that, once SYL received the
royalty payments, SYL was to hold the payments in Delaware for “at least a couple of
weeks.”  The document went on to explain that the payments would later be sent back
to Syms in the form of a dividend in the same quarter to “avoid any variances on the
financial statements which may alert a state auditor to this transaction.”  Furthermore,
a memorandum outlining the Syms-SYL transaction, written by Richard Diamond,
Syms’s Secretary-Treasurer, to Syms’s Chief Executive Officer, Sy Syms, stated that,
while the royalty payment funds were being held temporarily in Delaware, it was
“necessary” for SYI to be the investment advisor.  The memorandum further stated that
“it is necessary that it do[es]n’t appear that the investment decisions are being made by
Syms Corp.”  Notwithstanding this statement, three of the four officers of SYI were
officers of Syms.  On cross-examination, Mr. Diamond acknowledged that this “was
one of Coventry’s ideas to sort of distance SYL from Syms Corp. in terms of investing
the money; to help in terms of the tax aspects of this transaction.”  He further
-8-
acknowledged:
“Q.
So would you agree that it was an idea that was designed
to keep tax auditors from realizing what was going on?
“A.
From – yes.  From the tax part of it, yes.”
Mr. Diamond later reiterated that, “just from a tax point of view . . . I felt it was
advantageous to create some distance between Syms Corp. and SYL.” 
SYL used the services of Gunnip & Company to establish a presence in
Delaware.  Among other things, Gunnip offered SYL a “Delaware address” and “mail
forwarding.”  Additionally, a letter from Gunnip to Mr. Diamond advises that the total
$2400 per year fee paid to Gunnip “could be billed to [SYL] as rent monthly $100.00
and . . . as salary quarterly $300.00.”  Actually, SYL’s Delaware “office” lacked a
phone listing, had no office sign, and no business cards.  SYL’s Board of Directors
consisted of four people: (1) Sy Syms who, as previously mentioned, was Syms’s Chief
Executive Officer; (2) Marcy Syms who was Syms’s Chief Operating Officer; (3)
Richard Diamond who was Syms’s Secretary-Treasurer and Chief Financial Officer;
and (4) Edward Jones who was an accountant with Gunnip.  Jones also was SYL’s only
“employee,” and, out of the $2400.00 annual fee paid to Gunnip, $1200 annually was
designated as Jones’s “salary.”
Mr. Diamond testified that SYL hired outside trademark counsel to handle the
protection of the trademarks.  Nonetheless, on SYL’s financial statements, no legal
expenses were listed on any of the unaudited profit and loss statements submitted.
-9-
Mr. Diamond explained that they “were probably paid for by Syms Corp.” and that “[i]t
didn’t make a difference overall.”  In fact, nothing substantial appears to have changed
with respect to the management and administration of the trademarks after the
formation of SYL.  During the cross-examination of Karen Ash, Syms’s and SYL’s
outside trademark counsel, the following ensued:
“Q.
Was there any difference whatsoever in the work
performed by your law firm prior to and subsequent to
the assignment of these marks from Syms to SYL?
“A.
No.
“Q.
You continued to do the same thing?
“A.
Yes.
“Q.
If a mark needed to be registered you took to registering
it?  If an infringement was suspected, your firm would
take the appropriate action, correct?
“A.
Correct.”
Although the business purpose alleged for the formation of SYL was the
“maintenance and management of valuable intangible assets,” the license agreement
between Syms and SYL authorized Syms to take charge of such maintenance and
management.  It stated:  “Licensor [SYL] shall have the right (but not the obligation)
to take charge of the defense of any [infringem ent] claim, action or proceeding . . . .
If licensor declines . . . to defend any such claim, action or proceeding, licensee may
do so.”  The license agreement did impose some affirmative duties upon SYL, as
-10-
2
See Shell Oil Co. v. Supervisor, 276 Md. 36, 38, 343 A.2d 521, 522-523 (1975).
licensor, in the area of quality control of the trademarks.  Nevertheless, there is no
indication in the record that Edward Jones, SYL’s sole “employee,” performed any of
these duties.  Nor are the quality control duties mentioned in the letter memorializing
the services that Mr. Jones was to provide to Syms or SYL.  Instead, according to the
testim ony, these duties were assumed by Syms’s officers when they were wearing their
SYL “hats.”  Additionally, the license agreement imposed upon Syms the duty to
“deliver to Licensor a statement certified by the financial officer of Licensee showing
a computation of Net Sales and the amount of royalty payable hereunder.”  The record
discloses that no certified financial statements were ever provided to SYL.  
SYL’s cash receipts and disbursement journals fail to reveal any evidence of the
economic substance of that corporation.  In the relevant time period, SYL paid no costs
associated with the protection of the trademarks, i.e., no costs to register the
trademarks, no legal fees associated with the trademarks, and no telephone expenses
associated with any discussion of the trademarks, since SYL apparently did not have
a telephone.  A study of SYL’s financial statements reveals that, in some years, the
royalties owed were never received.  Finally, although “facilitating the franchising of
the Syms trade name to third parties” was one of the primary reasons for the formation
of SYL, the trademarks were never licensed to anyone but Syms Corp.  
The Maryland Tax Court, which is an administrative agency,2 in April 1999
issued an order reversing the assessments levied by the Comptroller. In an
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3
A judicial review action in the MCIIT case, presently pending before this Court, has been stayed
under the automatic stay provisions of federal bankruptcy law.  See 11 U.S.C. § 362(a).
accompanying opinion, the Tax Court incorporated by reference and quoted extensively
from its opinion in another case, MCIIT v. Comptroller, Tax Court No. C-96-0028-01
(1999), stating that the analysis and applicable law in the two cases were the same.3
The Tax Court pointed out that the parent corporation and the subsidiary were operating
as a “unitary” business, that the Comptroller, relying upon Comptroller v. Atlantic
Supply Co., 294 Md. 213, 448 A.2d 955 (1982), and Comptroller v. Armco, 82 Md.
App. 429, 572 A.2d 562, cert. denied, 320 Md. 634, 579 A.2d 280 (1990), cert. denied,
498 U.S. 1088, 111 S.Ct. 966, 112 L.Ed.2d 1052 (1991), asserted that the subsidiary
lacked “substantial economic substance,” and that, therefore, the subsidiary had a
“sufficient nexus” with Maryland through the operations of the parent in Maryland so
that Maryland could constitutionally tax an appropriate portion of the subsidiary’s
income.  The Tax Court then stated that the Atlantic Supply and Armco holdings applied
only when the subsidiary had no economic substance whatsoever, and that “we
conclude that Petitioner [SYL] is an entity of substance and not a ‘phantom.’  The Tax
Court continued:
“In the instant case, the evidence clearly indicates that
Petitioner is not just a book entry corporation.  Petitioner maintains
an office in Delaware.  That office contains office furniture and
corporate and financial records are kept there.  Mail is received at
the Delaware office location.  It has its own bank account and has
an employee.  Legal counsel was retained by Petitioner for
purposes of protection its ‘marks’.  The requisites for corporate
existence were met; i.e., the drafting of by-laws, the election of a
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board of directors and corporate officers, the holding of regular
and annual meetings, the recording of corporate minutes, and the
ratification of dividends.
“Respondent claims that Petitioner ‘was little more than a
corporate vehicle designed to reduce state income taxes’,
(Respondent’s Memorandum, p. 40), and points to the minimal
expenses, the one employee, the mere formality of the corporate
existence of Petitioner, and the timing of inter-entity transactions
as support that petitioner was creating the ‘illusion of substance’,
(Respondent’s Memorandum, p. 31).  In short, Respondent
assessed on the basis that the Petitioner was a sham entity for the
sole purpose to avoid Maryland taxes.
“Even if that were true, Armco and Atlantic Supply only apply
to entities with no substance whatsoever.  In addition, it is well
settled that tax avoidance (rather than tax evasion) is a legitimate
business purpose.  If Petitioner was legally created with a tax
avoidance purpose, absent authority and in a separate return
environm ent, the Respondent cannot tax it.  However, the evidence
presented leads to the conclusion that Petitioner was established
for non-tax reasons, among them:
•
To hold and manage intangible assets in a separate
corporation;
•
To protect the transferred intangibles from the claims of
Syms’ creditors and from liabilities of Syms;
•
To incorporate in a favorable corporate jurisdiction;
•
To avert hostile take-overs; and
•
To protect and enhance the value of Syms’ name and its
borrowing and business acquisition ability.
These facts easily distinguish the Petitioner from the phantom
taxpayers in Armco and Atlantic Supply.  Nexus cannot be
attributed to it for Maryland taxation purposes.”
Later the Tax Court concluded:
“Focusing solely on Petitioner, we find that its lack of in-state
activity precludes the imposition of the tax.  Petitioner is not doing
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business in Maryland.  Its income producing activity all occurs
outside of Maryland.  Petitioner has no offices, employees, agents
or property in Maryland.  Its only Maryland contact is an affiliation
with an entity with a Maryland presence.  This affiliation is hardly
enough to satisfy substantial nexus.
“Respondent relies on Armco and Atlantic Supply as support for
the application of nexus due to the presence of Syms in Maryland.
That reliance has been shown above to be erroneous.  Respondent
then points to the decision of Geoffrey, Inc. v. South Carolina Tax
Commission, 313 S.C. 15 (1993) as precedent in the taxing of a
Delaware holding company licensing trademarks and trade names
to its parent in-state company.  The Geoffrey Court concluded that
the use of intangible property (the ‘marks’) by the in-state affiliate
was sufficient to pass the constitutional nexus requirements in
order to tax the out-of-state entity. * * *  [A]s indicated above, we
differ in our conclusions as to whether the substantial nexus
requirement of the Commerce Clause was met.  Geoffrey focused
on the use of the marks by the in-state affiliate of the unitary group
in order to determine the nexus of the foreign corporation.  We
disagree that that activity constitutes ‘substantial’ nexus.
“In addition, the unitary relationship between entities does not
automatically establish nexus on all of the corporate entities in the
unitary group.”
The Tax Court also addressed an alternative argument by SYL, although pointing
out that the court’s constitutional holding rendered the issue moot.  The court agreed
with SYL that, under CBS v. Comptroller, 319 Md. 687, 575 A.2d 324 (1990), the
Comptroller should have promulgated a regulation before attempting to tax a portion
of the income of subsidiaries like SYL.
The Comptroller filed in the Circuit Court for Baltimore City an action for
judicial review of the Tax Court’s decision, and the Circuit Court affirmed the decision.
The Comptroller took an appeal to the Court of Special Appeals.  Before argument in
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the intermediate appellate court, this Court issued a writ of certiorari.  Comptroller v.
SYL, 360 Md. 485, 759 A.2d 230 (2000).
B. No. 80, Crown Cork & Seal Company (Delaw are), Inc. v. 
Comptroller of the Treasury
Crown Cork & Seal (Delaware) (hereafter referred to as “Crown Delaware”), is
a Delaware corporation and a wholly owned subsidiary of Crown Cork & Seal
Com pany, Inc., (hereafter referred to as “Crown Parent”), also a Delaware corporation.
Crown Delaware is the owner of certain intellectual property assets, namely thirteen
domestic patents and sixteen trademarks.  Crown Delaware’s purported function is to
manage and control these patents and trademarks.  As set forth in a stipulation of facts
filed in the Maryland Tax Court, Crown Parent is a corporation “engaged in the
manufacturing and sale of metal cans, crowns, and closures for bottles, can-filling
machines, and plastic bottles and containers, world-wide, including in the State of
Marylan d.”     
For the tax years 1989 through 1993, Crown Delaware did not file corporate
income tax returns in Maryland.  Crown Delaware did not directly own or lease tangible
property in Maryland, had no employees in Maryland, and maintained no bank accounts
in Maryland.  It did not sell or lease goods or services in Maryland, did not advertise
in Maryland, and engaged in no mailings or solicitations to persons or entities in
Maryland.  As both parties agreed in the stipulation filed with the Tax Court, Crown
Parent did engage in extensive business in Maryland during this time period, as it
operated manufacturing plants in Baltimore City, Harford County and Wicomico
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County, and marketed its products in Maryland.  Crown Parent timely filed Maryland
corporate tax returns for this period.  
In 1996, the Comptroller of Maryland issued a Notice of Assessment to Crown
Delaware, stating that Crown Delaware owed for the years 1989 through 1993
Maryland corporate income taxes, including interest and penalties, in the amount of
$1,421,034.  Crown Delaware timely protested the Comptroller’s Notice of
Assessment.  On February 25, 1997, the Comptroller issued a Notice of Final
Determination that sustained the Notice of Assessment.  The Notice of Final
Determination was similar to the previously quoted notice in the SYL case.  To
summarize, the Comptroller upheld the assessment on the grounds that Crown
Delaware was a “phantom company,” a mere corporate shell with little economic
substance and no independent source of income.  According to the Comptroller, Crown
Delaware was an alter ego of Crown Parent, designed to help Crown Parent avoid
Maryland corporate income taxes.  The Comptroller asserted that Crown Parent’s
royalty payments to Crown Delaware on intellectual property rights were a means of
shifting income out of Maryland and into Crown Delaware’s home State of Delaware.
The Comptroller stated that, by piercing the corporate veil of this “bookkeeping entity,”
and taxing Crown Delaware based on the apportionment factor of Crown Parent, the
State of Maryland would recover the income taxes to which it was entitled. 
Crown Delaware took an appeal to the Maryland Tax Court, challenging the
Comptroller’s assessment.  As in the SYL case, Crown Delaware argued that the
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Comptroller was prohibited under the Commerce Clause of the United States
Constitution, Art. 1, Section 8, cl. 3,  from taxing it because Crown Delaware lacked
a substantial nexus with the State of Maryland.  Relying on the principle set forth in
Complete Auto Transit, Inc. v. Brady, 430 U.S. 274, 279, 97 S.Ct. 1076, 1079, 51
L.Ed.2d. 326, 331 (1977), that under the Commerce Clause a state tax is permitted
when, inter alia, “the tax is applied to an activity with a substantial nexus with the
taxing State,” Crown Delaware asserted that there was no nexus in this case because
it had no tangible property or business presence within Maryland.  Crown Delaware
also contended that the Comptroller erred in treating it as a “phantom corporation,”
asserting that it had employees, office space, and other corporate attributes that imbued
it with sufficient economic substance, and that it was formed for the valid business
purpose of protecting its parent’s intellectual property assets.  Finally, like the
subsidiary in the SYL case, Crown Delaware contended that the Comptroller’s attempt
to tax it represented a change in policy which should have been accomplished by the
promulgation of a regulation.
The Comptroller’s arguments were essentially the same as in the SYL case.  The
Comptroller contended that there was a nexus between Crown Delaware and the State
of Maryland, based on Crown Delaware’s licensing of intangible property rights to its
parent for use in  products that were sold in Maryland.   The Comptroller argued that
Crown Delaware relied upon its unitary parent for its entire source of income, as
Crown Parent’s marketing to consumers of products based on Crown Delaware’s
-17-
licensed patents and trademarks was Crown Delaware’s exclusive source of royalty
fees.  In addition, the Comp troller analogized Crown Delaware to the “sham”
subsidiaries involved in Armco and in Comptroller v. Atlantic Supply Co.  The
Comptroller pointed out that Crown Delaware lacked a separate office and employees
from Crown Parent, did not exert a direct involvement in the control of the
intellectual property assets which it was assigned, and did not conduct business
activities on its own but, instead, relied on the business activities of Crown Parent.
The Comptroller also asserted that the assessments did not represent a change in
policy so as to require promulgation by a regulation.
The evidence before the Tax Court disclosed the following.  Crown Delaware
was incorporated in 1989, and Crown Parent assigned its intellectual property assets
to Crown Delaware in exchange for all of Crown Delaware’s issued stock.  Crown
Delaware then granted to Crown Parent an exclusive license, to continue from year
to year unless terminated by either party, to manufacture, use and sell the products
covered by these assets.  In consideration for Crown Delaware’s licensing of these
intellectual property rights, Crown Parent agreed to pay Crown Delaware a royalty
based on Crown Parent’s sales.
In attempting to create a Delaware presence, Crown Delaware employed a third
party, Organization Services, Inc. (“OSI”), “to facilitate the establishment of its
business operatio ns.”  OSI’s brochure stated that it provided “comple te services for
corporations to minimize state taxes” through the use of various suggested
-18-
subsidiaries.  George P. Warren, the founder and president of OSI, described his
company’s function as “providing nexus services to Delaware Investment Holding
Companies.”  Among these “nexus services,” the OSI brochure listed “discretionary
mail forwa rding.”  Add itionally, the OSI brochure warned prospective customers as
follows:
“Caution! 
“A Delaware subsidiary must have substance to satisfy other
states as to its situs within Delaware.  This will include, but is not
limited to, the following evidence of Delaware activ ity: 
Employees
Personal income tax withholding
Unemployment tax reporting
Bank accounts and other assets
Office space
Furniture and equipment
Stationery and business cards
Books and records
Director and stockholder meetings”
OSI provided these “nexus services” for about 400 other companies like Crown
Delaware.  Mr. Warren’s duties as an “employee” of Crown Delaware were described
by Crown Parent’s general counsel as “do[ing] everything necessary basically in
Delaware to comply with the law and regulations to give substance to this company
as a viable and good company in Delaw are.” 
Crown Delaware leased its corporate office space from OSI at the rate of up to
$100.00 per month.  In return, OSI provided “desk space” on a “part-time or full-time
basis” as well as conference rooms for meetings.  Under the sublease agreement
-19-
between OSI and Crown Delaware, OSI was to list Crown Delaware’s name on one
of the telephone numbers assigned to OSI in the Wilmington, Delaware “white pages”
directory.  OSI’s address is listed on Crown Delaware’s company checks. 
Add itionally, Crown Delaware hired OSI employees to manage its daily
operations.  Each of the nine part-time employees from OSI had a written employment
agreement with Crown Delaware and was paid directly by Crown Delaware, which
also withheld and remitted withholdings to the appropriate taxing authorities.  A
review of the employees’ W-2 forms, however, reveals that the wages paid to these
employees were insignificant in comparison with the ordinary labor costs incurred by
a corporation earning revenue of over thirty million dollars per year.  For example,
in 1989, the total annual wages paid for the nine employees were $148.00; in 1990,
$668 was the total amount paid in employee wages for the nine employees; in 1991,
$562.64; for 1992, $623.79; and, finally, in 1993, the total amount of wages paid for
all nine employees of Crown Delaware was $843.66.  These employees were paid only
once annually.  These nine employees were clerical employees whose responsibilities
never involved any intellectual property expertise. 
George P. Warren, Jr., the president of OSI, is both an officer and director of
Crown Delaware.  Under the terms of his employment contract, Mr. Warren’s salary
for these services is $200 per year.  Jane Warren, the Vice-President and Secretary of
OSI, is also an employee of Crown Delaware, as is Lee Lieberman, assistant secretary
and assistant treasurer of OSI.  OSI also serves as Crown Delaware’s registered agent
-20-
for service of process in the State of Delaware.  The employment agreeme nts define
the “place of employme nt” as “any suitable location within the greater Wilmington
metropolitan area.” 
Crown Delaware’s balance sheets for the years in question reveal that, although
the parent company made royalty payments to Crown Delaware, Crown Delaware
immedia tely loaned the total payments back to its parent company.  With regard to
four of the five royalty payments in the relevant time period, the wire transfer records
show that the royalty payments paid by Crown Parent were wired back to Crown
Parent on the same day, creating an immedia te circular flow.  From 1989 to 1993, the
debt owed by the parent company to Crown Delaware increased each year by the same
amount as the royalty that the parent owed to Crown Delaware.  As of 1993, there was
no evidence in the record of the debt being paid.  Nor does any loan agreeme nt,
stipulating to the terms of repayment or the sanctions in the event of default, appear
in the record.  Also notable was the fact that Crown Parent’s 1991 royalty payment
to Crown Delaware was paid on November 7, 1991, which was thirty-one days before
Crown Delaware billed Crown Parent for the royalty payment and fifty-four days
before the end of the year. 
Moreover, for the years 1990 through 1993, despite having revenues that
averaged around thirty-seven million dollars annually, Crown Delaware’s actual
operating costs averaged just over two thousand dollars per year.  The regular
operating costs that inevitably arise in a normal business operation, such as meals and
-21-
entertainment, telephone, and postage, were virtually non-existent on Crown
Delaware’s balance sheets.  Over the five-year period in question, Crown Delaware
incurred a total of twenty dollars in meals and entertainment, about sixty dollars in
telephone charges, and about one hundred dollars in postage.  Travel costs for the
entire period in question amounted to less than seven dollars.  Add itionally, Crown
Delaware’s financial statements reported no depreciation for personal prop erty.  
Despite the fact that Crown Delaware’s sole raison d’être was to manage its
parent company’s intellectual prop erty, the subsidiary managed to avoid any and all
legal fees associated with the patents and trademarks at issue.  Following the creation
of Crown Delaware, Crown Parent continued to use the services of the same two
patent law firms that handled its intellectual property prior to Crown Delaware’s
creation. 
Add itionally, the patent and trademark license agreeme nts disclose that Crown
Delaware, the repository of this intellectual prop erty, granted an exclusive license to
its parent company.  Accordingly, Crown Delaware could not license these intangibles
to any other entity.  Crown Parent, however, was entitled to do so, since the
agreeme nts authorized it to sub-license the intangibles to any third party.
Furthermore, the licensing agreeme nts imposed upon Crown Parent the responsibility
of maintaining and defending the validity and ownersh ip of these intangibles, as well
as the general administrative duties of complying with all laws and regulations that
may relate to them. 
-22-
The administrative record repeatedly shows instances where the formalities that
normally serve to separate a parent corporation from its subsidiary were blurred.  For
example, there are instances where the terms “Crown Cork & Seal Comp any, Inc.”
and “Crown Cork & Seal Company (Delaware), Inc.” are used interchan geab ly.  There
are also examples of Crown Parent’s officers or directors signing docume nts as
Crown Delaware’s officers when in fact they are not officers; examples of
Mr. Warren signing as Secretary of Crown Delaware when in fact he was not
Secretary; or examples of the address of one entity being listed as the address of the
other entity.  In each instance, Crown Parent’s general counsel explained that these
examples were merely “screw-ups” or “mistak es.” 
As in the SYL case, the Tax Court issued an order reversing the assessments.
In a brief opinion accompanying the order, the Tax Court “incorporated by reference”
its opinion in SYL.  While the Tax Court recognized that Crown Delaware and its
parent were a unitary business, it rejected the attempt of the Comptroller to apply the
holdings of Atlantic Supply and Armco to the taxation of Crown Delaware.  The court
expressed the view that the holdings of these two cases were limited to the taxation
of “phantom” or “sham” subsidiaries with “no genuine econom ic substan ce.”  The
administrative agency concluded that Crown Delaware had “econom ic substan ce,”
and held as follows:
“Thus the factual resolution for the Court is whether nexus
exists between Petitioner and Maryland.  In order to meet
-23-
Commerce Clause nexus requirements, there must be a
‘substantial nexus’ with the taxing state.  Comp lete Auto Transit
v. Brady, 430 U.S. 274, 51 L.Ed.2d 326, 97 S.Ct. 1076 (1977).
Petitioner does not own or lease property in Maryland. Petitioner
has no employees, agents or offices in Maryland.  Its income
producing activity all occurs outside of Maryland.  Crown Parent
is the only contact Petitioner has with Maryland and that contact
is not sufficient to meet the substantial [nexus] requireme nt.
“Nexus attributed to an out-of-state entity was found to be
proper by the Maryland Courts only when the entities were true
phantom corporations. . . .  The evidence presented clearly shows
that Petitioner is not a phantom or sham corporation. Petitioner is
a viable entity established for valid business purposes, including
the protection of valuable intellectual property rights from hostile
takeovers of the parent corporation. Petitioner maintained an
office in Delaware, met all corporate formalities, had separate
bank accounts and employees performing services pursuant to
written employment agreem ents.”
The Comptroller filed in the Circuit Court for Baltimore City this action for
judicial review of the Tax Court’s decision, and the Circuit Court affirmed.  The
Comptroller filed an appeal to the Court of Special Appeals.  Again, before argument
in the intermediate  appellate court, this Court issued a writ of certiorari.  Comptroller
v. Crown Cork & Seal Company (Delaw are), Inc., 360 Md. 488, 759 A.2d 232 (2000).
II.
The controlling principles of Maryland income tax law and federal
constitutional law, in cases like the instant ones, were recently summarized by Judge
Rodowsky for this Court in Hercules, Inc. v. Comptroller, 351 Md. 101, 716 A.2d 276
(1998).  First, with regard to federal constitutional limitations, the Hercules opinion
-24-
stated (351 Md. at 109-111, 716 A.2d at 279-280, some internal quotation marks
omitted):
“Under both the Due Process and the Commerce Clauses of the
Constitution, a State may not, when imposing an income-based
tax, ‘tax value earned outside its borders.* Container Corp. of
America v. Franchise Tax Bd., 463 U.S. 159, 164, 103 S.Ct. 2933,
2939, 77 L.Ed.2d 545, 552 (1983) (quoting ASARCO Inc. v Idaho
State Tax Comm’n, 458 U.S. 307, 315, 102 S.Ct. 3103, 3108, 73
L.Ed.2d 787, 794 (1982)).
* * *
“In order to levy a tax upon Hercules*s capital gain from the
sale of . . . stock, there must be some nexus linking this income to
activities within the state. The necessary nexus usually ‘is
satisfied by demonstrating the existence of unitary business, part
of which is carried on in the taxing state.’ NCR Corp. v.
Comptroller of the Treasury, 313 Md. 118, 132, 544 A.2d 764,
771 (1988). Where the nexus exists, the Maryland tax on a
corporation engaged in a multistate business is governed by
Maryland Code (1957, 1997 Repl. Vol.), § 10-402(c) of the Tax-
General Article (TG), which requires that net income be
apportioned to this state on the basis of a formula using prop erty,
payroll, and sales.  See Random House, Inc. v. Comptroller of the
Treasury, 310 Md. 696, 697, 701, 531 A.2d 683, 683, 685 (1987);
see also NCR Corp., 313 Md. 118, 141-42, 544 A.2d 764, 775;
Xerox Corp. v. Comptroller of the Treasury, Income Tax Div., 290
Md. 126, 129-30, 428 A.2d 1208, 1211 (1981); accord Mobil Oil
Corp. v. Commissioner of Taxes, 445 U.S. 425, 100 S.Ct. 1223, 63
L.Ed.2d 510 (1980).
* * *
“The Supreme Court has recently reemphasized its three-part
test in determining whether a subsidiary is a part of the unitary
business of the parent; those three elements are: (1) functional
-25-
integration, (2) centralization of manage ment, and (3) economies
of scale.  Allied-Sign al, Inc. v. Director, Div. of Taxation, 504
U.S. 768, 783, 112 S.Ct. 2251, 2260, 119 L.Ed.2d 533, 549
(1992).”
Turning to the scope of § 10-402 of the Maryland Tax-General Article, the Court in
Hercules reiterated (351 Md. at 110, 716 A.2d at 280, some internal quotation marks
omitted):
“The legislative purpose underlying this statute is to tax multi-
state corporations doing business in Maryland to the bounds
permitted by the United States Constitution.  NCR Corp., 313 Md.
at 146, 544 A.2d at 777.  To that end, the question before us
becomes one of federal constitutiona l, rather than of Maryland
statutory, law.  In resolving that question, the burden is on the
taxpayer to show ‘by clear and cogent evidence’ that [the state
tax] results in extraterritorial values being taxed. Container
Corp., 463 U.S. at 175, 103 S.Ct. at 2945, 77 L.Ed. 2d at 559-60.”
In NCR Corp. v. Comptroller of the Treasury, 313 Md. 118, 131-132, 544 A.2d
764, 770-771 (1988), Judge Adkins for the Court explained:
“Apportionment under the unitary business formula, however,
is not without its restrictions.  The due process and commerce
clauses do not allow states to tax a corporation’s interstate
activities unless there exists a ‘“minimal connection” or “nexus”
between the interstate activities and the taxing State, and “a
rational relationship between the income attributed to the State
and the intrastate values of the enterprise.”’ Exxon Corp. v.
Wisconsin Dept. of Revenue, 447 U.S. 207, 219-220, 100 S.Ct.
2109, 2118, 65 L.Ed.2d 66, 79 (1980) (quoting Mobil Oil Corp.
v. Comm ’r of Taxes, supra, 445 U.S. at 436-437, 100 S.Ct. at
1231, 63 L.Ed.2d at 520).
-26-
4
House Bill 753 of the 2003 session of the General Assembly which passed both houses of the
General Assembly but was vetoed by the Governor on May 21, 2003, concerned several provisions
of the Maryland Code relating to taxation.  A portion of the bill would have added language to § 10-
402 of the Tax-General Article, apparently with the purpose of underscoring the scope of the section.
The Governor’s veto message stated in pertinent part:
“The changes to corporate income taxation include restrictions on
Delaware Holding Company transactions. . . . Currently, the
Comptroller is involved in litigation regarding this very issue.  At this
juncture, I believe it is prudent to wait until the Judiciary rules on the
matter.”
* * *
“[The nexus p]rong . . . of the test is satisfied by demonstrating
the existence of unitary business, part of which is carried on in the
taxing 
state. 
 
Hellerstein, 
‘State 
Income 
Taxation 
of
Multijurisdictional Corporations, Part II: Reflections on ASARCO
and Woolw orth,’ 81 Mich.L.Rev. 157, 168 (1982) (hereinafter
‘State Income Taxation’).  Once the requisite nexus has been
shown, the taxpayer then bears the burden of demonstrating that
the income it seeks to exclude from taxation was derived from
unrelated business activity that constituted a discrete business
enterprise.  See Container Corp. supra, 463 U.S. at 164, 103 S.Ct.
at 2939-2940, 77 L.Ed.2d at 552; Exxon Corp, supra, 447 U.S. at
223-224, 100 S.Ct. at 2120, 65 L.Ed.2d at 81; Mobil Oil, supra,
445 U.S. at 442, 100 S.Ct. at 1234, 63 L.Ed.2d at 524.”
The NCR opinion, 313 Md. at 146, 544 A.2d at 777, went on to emphasize “that the
goal of [the applicable Maryland statute] is ‘taxation of so much of a corporation’s
net income as is constitutiona lly permissible,’” quoting Xerox Corp. v. Comptroller,
290 Md. 126, 142, 428 A.2d 1208, 1217 (1981). 4
A case relied upon by the Comptroller, and distinguished by the Tax Court,
SYL, and Crown Delaware, is Comptroller v. Atlantic Supply Co., supra, 294 Md.
-27-
213, 448 A.2d 955.  In that case, Atlantic Supply Co. was a wholly owned subsidiary
of the Macke Com pany, a vending machine company, with headquarters in Maryland
and with wholly owned subsidiary vending machine companies in other states.
Atlantic Supply was created as a wholesaler to purchase Coca-C ola products for the
parent and various subsidiary vending machine companies because Coca-C ola refused
to sell directly to retailers.  Atlantic Supply had no separate place of business, no
“office that [was] exclusively its own,” no employees or payroll, and no bank account,
although it had a post office box.  294 Md. at 217, 448 A.2d at 958.  This Court held
that the parent corporation and Atlantic Supply carried on a unitary business, and that
(294 Md. at 223-224, 448 A.2d at 961)
“Atlantic’s trade or business operates exclusively within Macke’s
unitary business.  Even though Atlantic must file a separate tax
return, the particular nature of its business cannot be ignored.
Atlantic’s business could not function without the funds supplied
by Macke-parent and without the Macke-branches as captive
customers.  Within the framework  of the kind of business it does,
Atlantic enjoys the services of Macke-parent employees for
Atlantic’s clerical and accounting functions and the services of
Macke-branch employees as Atlantic’s buying and selling agents.
Those employees worked in Macke’s unitary business . . . .  Those
individuals in the general employ of Macke-parent and of the
Macke-branches, who conducted the business of Atlantic, were
sufficiently related with Atlantic, through Macke’s unitary
business, to permit Atlantic to apportion its income.”
This Court held that the portion of Atlantic Supply’s income that was attributable to
Maryland was subject to Maryland income tax.  Nevertheless, no argument had been
-28-
made in the Atlantic Supply case that all of that subsidiary’s income should be exempt
from Maryland income taxes.  
More pertinent is the opinion of the Court of Special Appeals in Comptroller
v. Armco, supra, 82 Md. App. 429, 572 A.2d 562.  That case involved three separate
manufacturers doing business in Maryland (Armco, Inc., General Motors, and
Thiokol), each of which created a wholly owned sales subsidiary known as a
Dome stic International Sales Corporation or DISC.  The creation of such a subs idiary,
as a device to encourage exports, had tax advantages under the federal Internal
Revenue Code.  Judge Getty for the Court of Special Appeals in Armco explained the
federal tax advantages as follows (82 Md. App. at 430-431, 572 A.2d at 563-564):
“By definition, a sales DISC (I.R.C., § 992(a)(1)(A)), earns
income because it buys goods from its parent company and then
resells the goods to an actual overseas customer; a commiss ion
DISC earns its income by a contractual agreement with its parent
company giving it a percentage of each qualifying export sale
made by the parent (I.R.C., § 992(a)(1)(C)).  In either case, no
activity is performed by the DISC to earn the income.
“DISC income is taxable income, but if the DISC transactions
meet the tests of I.R.C., §§ 991-997, a DISC pays no federal
taxes. Instead, a percentage of its income is imputed to the parent
company as a constructive taxable dividend; the balance is taxable
to the parent when it is actually distributed as a dividend.  In
short, DISCs are an approved device designed to defer paying the
full amount of tax due when the income is received.  This
artificial accounting between related corporations is an exception
to the general rule, I.R.C. § 482, requiring transactions between
parent and subsidiary corporations to be arms length dealing .”
-29-
In the Armco case, the Comptroller had attempted to subject a portion of each DISC’s
income to Maryland income tax, but the Tax Court and the Circuit Court, as in the
present cases, held that there was an insufficient nexus with Maryland so as to allow
Maryland taxation under the Commerce Clause of the United States Constitution.  As
pointed out by the Court of Special Appeals (82 Md. App. at 435, 572 A.2d at 566 ),
the DISCs
“herein persuaded the Tax Court that nexus to tax DISCs must
come from Maryland prop erty, payroll, or sales by the DISC
itself.  We think that reasoning is flawed due to the very nature of
a DISC, which has no tangible property or employees and can
only conduct its activity and do business through branches of its
unitary affiliated parent.”
In language that is equally applicable to the SYL and Crown Delaware cases, the
Court of Special Appea ls in Armco concluded (82 Md. App. at 436, 572 A.2d at 566):
“The three key elements necessary for constitutional nexus
were affirmative ly established in each of these three DISC cases.
They are:
1.
The parent is engaged in business in Maryland.
2.
The parent is unitary with the DISC.
3.
The apportionment formula is fair.
“Activity directly connected to the DISCs took place in Maryland
in that the goods produced here and sold overseas generated the
-30-
DISC income.  That activity included assembly of vehicles by
GM, production of rocket motors by Thiokol, and steel fabrication
by Armc o.”
The Court of Special Appea ls in Armco held that a portion of each subsidiary’s
income, namely that properly attributable to activity in Maryland, was subject to
Maryland income tax.
SYL and Crown Delaware, like the Tax Court and the Circuit Court, take the
position that the holding of the Armco case applies only where the subsidiary lacks
all substance or is a “phantom” corporation.  SYL and Crown Delaware point to the
Tax Court’s conclusions that each of them has econom ic substance.  Treating these
conclusions as findings of fact, SYL and Crown Delaware argue that the findings are
supported by substantial evidence and that, therefore, they are binding upon this Court
in these judicial review actions.
Preliminarily, the basic facts in these two cases are undisputed.  Moreover,
neither case involves the situation where some factors point to one conclusion, other
factors point to a contrary conclusion, and, therefore, a reviewing court should accord
a degree of deference to the balance struck by the administrative agency as trier of
facts.  Cf. Ramsay, Scarlett & Co. v. Comptroller, 302 Md. 825, 834-839, 490 A.2d
1296, 1300-1303 (1985); Baltimore Lutheran High School v. Employment Security
Administration, 302 Md. 649, 663-664, 490 A.2d 701, 709 (1985); Comptroller v.
Haskin, 298 Md. 681, 692-694, 472 A.2d 70, 76-77 (1984).  Under circumstances like
-31-
5
Even if the ultimate conclusions were viewed as findings of fact, we would hold that the Tax
Court’s findings, that SYL and Crown Delaware had real economic substance, were unsupported by
substantial evidence in light of the entire records.
those in the present cases, where the facts before the administrative agency were
undisputed, the legal conclusion based on those facts has been treated as an issue of
law.  See, e.g., Comptroller v. Ganne tt, 356 Md. 699, 707, 741 A.2d 1130, 1134-1135
(1999); Hercules v. Comptroller, supra, 351 Md. at 110, 716 A.2d at 280; State
Department v. Consumer Programs, 331 Md. 68, 72-76, 626 A.2d 360, 362-365
(1993); Comptroller v. Atlantic Supply Co., supra, 294 Md. at 218-221, 448 A.2d at
958-960.5
The records in these cases demons trate that SYL and Crown Delaware had no
real econom ic substance as separate business entities.  They resembled the
subsidiaries involved in the Armco case, except that SYL and Crown Delaware had
a touch of “window dressing” designed to create an illusion of substance.  Neither
subsidiary had a full time employee, and the ostensible part time “employees” of each
subsidiary were in reality officers or employees of independent “nexus-service”
companies.  The annual wages paid to these “employees” by the subsidiaries were
minuscule.  The so-called offices in Delaware were little more than mail drops.  The
subsidiary corporations did virtually nothing; whatever was done was performed by
officers, employees, or counsel of the parent corporations.  The testimony indicated
that, with respect to the operations of the parents and the protections of the
trademarks, nothing changed after the creation of the subsidiaries.  Although officers
-32-
of the parent corporations may have stated that tax avoidance was not the sole reason
for the creation of the subsidiaries, the record demonstrates that sheltering income
from state taxation was the predominant reason for the creation of SYL and Crown
Delaware.  For a discussion of the nature of Delaware trademark-holding subsidiaries
like SYL and Crown Delaware, see Glenn R. Simpson, Diminishing Returns: A Tax
Maneuver in Delaware Puts Squeeze on States, THE WALL STREET JOURNAL,
August 9, 2002, at p. A1.  See also, Craig J. Langstraat and Emily S. Lemmon,
Econom ic Nexus: Legislative Presumption or Legitimate Proposition? 14 Akron Tax
J. 1 (1999).
In reality, SYL and Crown Delaware have no more substance than the
subsidiary DISC corporations involved in the Armco case.  Under the holding of
Armco, with which we fully concur, an appropriate  portion of SYL’s and Crown
Delaware’s income was subject to Maryland income tax. 
Other courts have also upheld the application of state income tax laws with
respect to a portion of the income of out-of-state subsidiaries having the sole function
of owning their parents’ trademarks.  In Syms Corp. v. Commissioner of Revenue, 436
Mass. 505, 506, 765 N.E.2d 758, 760 (2002), the Supreme Judicial Court of
Massac husetts upheld the Commissioner of Revenue’s “disallowance of deductions
Syms had taken for royalty payments it had made to its wholly owned subs idiary,
SYL, Inc.”  The description of the relationship between Syms and SYL, by the
Massac husetts Supreme Judicial Court, is a perfect fit in one of the cases at bar (436
-33-
Mass. at 509, 765 N.E.2d at 762, footnote omitted):
“SYL’s corporate ‘office’ consisted of an address rented from
Jones’s Delaware accounting firm, for an annual fee of $1,200.
The accounting firm provided this same service to ‘a couple of
hundred’ other corporations that used Delaware subsidiary
corporations to hold their intangible assets.  Jones was not only a
partner of the accounting firm, he was SYL’s only employee,
serving in a part-time capacity for which he was paid $1,200 per
year.  
“The business operations of Syms did not change after the
transfer and license-back of the marks.  All of the work necessary
to maintain and protect the marks continued to be done by the
same New York City trademark law firm that had previously
performed those services, and Syms (not SYL) continued to pay
all the expenses attendant thereto.  All efforts to maintain the
good will and thus to preserve the value of the marks were
undertaken by Syms, and all advertising using the marks was
controlled and paid for by Syms or by a wholly owned Syms
subsidiary formed solely to do advertising.  The choice of which
products would be sold under the marks, as well as the quality
control of those products, remained the responsibility of the same
persons who had done that work before the transfer – Sy Syms,
himself, and the Syms staff of buyers.”
The Massac husetts court continued (436 Mass. at 509-510, 765 N.E.2d at 762-763):
“Syms does not contest the validity of the ‘sham transaction
doctrine’ and the commissioner’s authority under that doctrine to
disregard, for taxing purposes, transactions that have no economic
substance or business purpose other than tax avoidance.  It is a
doctrine long established in State and Federal tax jurisprudence
dating back to the seminal case of Gregory v. Helvering, 293 U.S.
465, 55 S.Ct. 266, 79 L.Ed. 596 (1935).”
-34-
The court upheld the administrative finding “that the transfer and license back
transaction had no practical econom ic effect on Syms other than the creation of tax
benefits, and that tax avoidance was the clear motivating factor and its only business
purpose.”  436 Mass. at 511, 765 N.E.2d at 764.
The Supreme Court of South Carolina in Geoffrey, Inc. v. South Carolina Tax
Commission, 313 S.C. 15, 19-20, 437 S.E.2d 13, 16 (1993), upheld the imposition of
state income tax on a portion of the income of a Delaware trademark-holding
subsidiary of Toys R Us which had stores in South Carolina, saying:
“In our view, Geoffrey has not been unwillingly brought into
contact with South Carolina through the unilateral activity of an
independent party. Geoffrey’s business is the ownership,
licensing, and management of trademarks, trade names, and
franchises.  By electing to license its trademarks and trade names
for use by Toys R Us in many states, Geoffrey contemplated and
purposefully sought the benefit of econom ic contact with those
states.  Geoffrey has been aware of, consented to, and benefitted
from Toys R Us’s use of Geoffrey’s intangibles in South Carolina.
Moreover, Geoffrey had the ability to control its contact with
South Carolina by prohibiting the use of its intangibles here as it
did with other states.  We reject Geoffrey’s claim that it has not
purposef ully directed its activities toward South Carolina’s
econom ic forum and hold that by licensing intangibles for use in
South Carolina and receiving income in exchange for their use,
Geoffrey has the ‘minimum connection’ with this State that is
required by due process.  See American Dairy Queen Corp. v.
Taxation and Revenue Dep’t, 93 N.M. 743, 605 P.2d 251 (1979);
AAMCO Transmissions, Inc. v. Taxation and Revenue Dep’t, 93
N.M. 389, 600 P.2d 841, cert. denied, 93 N.M. 204, 598 P.2d
1165 (1979).
“In addition to our finding that Geoffrey purposef ully directed
its activities toward South Carolina, we find that the ‘minimum
-35-
6
The issue has also arisen in New Mexico, and the Court of Appeals of New Mexico in Kmart
Properties, Inc. v. Taxation and Revenue Department of the State of New Mexico, N. M. Ct. App.
Nov. 27, 2001, held that the income paid to the out-of-state trademark-holding subsidiary was
subject to state income taxes.  The New Mexico Supreme Court granted a petition for a writ of
certiorari in the case, Kmart Properties v. Taxation and Revenue Department, 131 N.M. 564, 40 P.3d
1008 (2002), but the case has been stayed pursuant to the automatic stay provisions of the bankruptcy
law, 11 U.S.C. § 362(a).
The same issue is now pending in the North Carolina courts, where the Wake County Superior
Court has upheld an administrative decision against a trademark-holding subsidiary.
connection’ required by due process also is satisfied by the
presence of Geoffrey’s intangible property in this State.”
The South Carolina Supreme Court concluded as follows (313 S.C. at 23-24, 437
S.E.2d at 18): “We hold that by licensing intangibles for use in this State and deriving
income from their use here, Geoffrey has a ‘substantial nexus’ with South Carolin a.” 6
We hold that a portion of SYL’s and Crown Delaware’s income, based upon
their parent corporations’ Maryland business, is subject to Maryland income tax.
III.
A final issue decided by the Tax Court was whether, under CBS v. Comptroller,
supra, 319 Md. 687, 575 A.2d 324, the Comptroller was required to promulgate  an
administrative regulation as a condition precedent to the imposition of Maryland
income tax upon portions of SYL’s and Crown Delaware’s income.  The Tax Court
stated that the promulgation of a regulation was required, but we disagree.  
The CBS case involved a policy matter that had been delegated to the
Comptroller.  The Comptroller had adopted one particular policy regarding the matter,
-36-
and later the Comptroller changed to a different policy.  We held that, under such
circumstances, the Comptroller’s change should have been embodied in a new
administrative regulation.  The instant cases do not involve a policy matter that has
been delegated to the Comptroller.  Instead, under our cases, the income involved is
taxable under the Maryland statutory provisions to the extent permissible under the
Commerce Clause and principles of due process.  The issue is the sufficiency of a
nexus between the income and the State of Maryland so as to permit the imposition
of the tax under the United States Constitution.
In addition, even if it were pertinent, the case does not involve a change in the
Comptroller’s policy.  Prior to the assessments in these cases, the Comptroller had no
policy regarding the matter.  The creation of wholly owned trademark-holding
Delaware subsidiaries has been a fairly recent developm ent.
There were other issues raised in these cases which the Tax Court did not reach.
Con sequ ently, we shall direct a remand to that administrative body.
JUDGMENTS OF THE CIRCU IT COURT
FOR BALTIMORE CITY REVERSED, AND
CASES REMANDED TO THAT COURT
WITH DIRECTIONS TO REVERSE THE
ORDERS OF THE MARYLAND TAX
COURT AND TO REMAND THE CASES TO
THE 
TAX 
COURT 
FOR 
FURTHER
PROCEEDINGS CONSISTENT WITH  THIS
OPINION.  APPELLEES TO PAY COSTS.