Annapolis, MD (April 17, 2008) - Emphasizing his commitment to eliminate corporate tax avoidance, Comptroller Peter Franchot announced today that Classics Chicago, a subsidiary of Talbots, Inc., was found liable to Maryland for their corporation income tax for 11 years from 1993 to 2003. The Maryland Tax Court ordered Classics to pay the state $1,092,336.00 in back taxes along with interest and ten percent in penalties. This case was the most recent victory for the Comptroller's office in an aggressive effort to crack down on corporations avoiding taxes using Delaware Holding Company tax schemes. To date, the Comptroller's office has collected $267 million in taxes through Delaware Holding Company cases, and has an additional $145 million in outstanding assessments against corporations using this tax-avoidance system.
"The vast majority of Maryland businesses are playing by the rules and we will not allow a few large corporations to gain an unfair competitive advantage by flouting our tax laws," said Comptroller Peter Franchot. "I am committed to ensuring that everyone pays their fair share and helps us through the tough fiscal times we find ourselves in."
The corporate relationships and transactions in this case are very similar to those found in the 2003 case against SYL, Inc. In that case, the court found the company liable based on the presence of the parent within Maryland and the fact that the subsidiary had no economic substance.
Originally tried in 1998, the SYL case was one of the original Delaware Holding Company actions, ultimately decided in 2003 when the Court of Appeals upheld Maryland's contention that the holding company- which received millions in royalty payments from its parent company and had minimal expenses- was doing business in Maryland where its parent did business. In 2004, the General Assembly passed an amnesty bill that disposed of 50 pending cases plus numerous other open investigations. The amnesty bill did bring in approximately $200 million to the state that year. This case represented the first of several cases against companies arguing their situation was not covered by the 2003 Court of Appeals decision.
Classics Chicago argued that the state needed to prove that the company's licensing transaction was a sham in order to prevail. The Comptroller asserted that it was not necessary to prove a sham; rather, if the holding company subsidiary lacked economic substance, then it was proper to look at the activities of its operating parent to determine if the subsidiary has connections with Maryland. The Court agreed with the Comptroller.
A similar case against the popular retail chain, Nordstrom is set to go to trial next month. Four other high profile companies are facing like charges and will go to trial later this year, Gore in July, Cytec in August, RR Donnelly Receivables in September and Recot, an affiliate of Frito Lay, in December.
###
Contact: Joe Shapiro, (410) 260-7305
