A+ Gov't Solutions, LLC v. Comptroller of Md.

• Decision Date: 31 March 2022
• Docket Number: 0466, Sept. Term, 2021
• Citation: 254 Md.App. 311,272 A.3d 882
• Parties: A+ GOVERNMENT SOLUTIONS, LLC, et al. v. COMPTROLLER OF MARYLAND
• Court: Court of Special Appeals of Maryland

254 Md.App. 311

272 A.3d 882

A+ GOVERNMENT SOLUTIONS, LLC, et al.

v.COMPTROLLER OF MARYLAND

No. 0466, Sept. Term, 2021

Court of Special Appeals of Maryland.

March 31, 2022

Argued by: Diane Festino Schmitt (Stuart M. Schabes, Baker, Donelson, Bearman, Caldwell & Berkowitz PC, Baltimore, MD), all on the brief, for Appellant.

Argued by: Michael J. Salem (Brian E. Frosh, Atty. Gen., Annapolis, MD), all on the brief, for Appellee.

Kehoe, Leahy, Patrick L. Woodward (Senior Judge, Specially Assigned), JJ.^*

Leahy, J.

The Chickasaw Nation is a federally recognized Native American tribe.¹ Chickasaw Nation Industries, Inc. ("CNI"), is a federally chartered corporation created and incorporated in 1996 under the Oklahoma Indian Welfare Act, 25 U.S.C. §§ 5201 - 5210 ("OIWA"), commonly referred to as a "section 17 corporation" after the parallel provision in section 17 of the Indian Reorganization Act of 1934, 25 U.S.C. §§ 5101 - 5143. The appellants are a collection of six limited liability companies (the "CNI Subsidiaries"),² each wholly owned by CNI Government, LLC,³ which in turn is owned by CNI. The CNI Subsidiaries, as well as CNI Government, are treated as disregarded entities for income tax purposes. The parties have stipulated that the CNI Subsidiaries "derive all, or substantially all of their income from the performance of various services contracts with the federal government."

On August 18, 2014, the Comptroller of the Treasury issued notices of tax assessment against each of the CNI Subsidiaries for tax year 2012 after determining that they were required to pay pass-through entity income tax ("PTE income tax"). The CNI Subsidiaries challenged this determination, but the Tax Court and the Circuit Court for Anne Arundel County both affirmed the Comptroller's assessment of PTE income tax against them.

On appeal to this Court, the CNI Subsidiaries present three questions for our review, which we have rephrased and recast as two:⁴

1. Did the Tax Court err by affirming the Comptroller's assessment of PTE income tax against the CNI Subsidiaries even though CNI Government, LLC, their sole owner, is, in turn, owned by CNI, a federally chartered tribal corporation?

2. Did the Tax Court err by ruling that CNI, a non-party, is required to prepare a federal income tax return to calculate its Maryland taxable income?

We hold that the Tax Court erred in its determination that the CNI Subsidiaries are subject to PTE income tax. As Maryland Code (1988, 2016 Repl. Vol.), Tax-General Article ("TG"), § 10-102.1(c)(1) provides, the PTE income tax is not imposed on the pass-through entity itself (here, the CNI Subsidiaries and CNI Government)—rather, it is "treated as a tax imposed on the nonresident [owner]" of the pass-through entity (here, CNI) "that is paid on behalf of the nonresidents ... by the pass-through entity." Accordingly, the Comptroller's ability to collect PTE income tax from the CNI Subsidiaries depends on whether CNI's income is taxable under Maryland law. And because we use the federal calculation of taxable income as the base for PTE income tax, whether CNI is subject to Maryland income tax depends on whether any of its income is taxable at the federal level.⁵

Under 26 C.F.R. § 301.7701-1(a)(3), section 17 corporations like CNI "are not recognized as separate entities for federal tax purposes," and the corporations therefore receive the same federal tax treatment as the tribes that own them. Uniband, Inc. v. Comm'r of Internal Revenue , 140 T.C. 230, 262-63 (T.C. 2013). Native American tribes are not subject to federal income tax; consequently, neither are federally chartered tribal corporations like CNI. Id. at 245, 263. Thus, because none of CNI's income is taxable under federal law, and Maryland has elected to rely on the federal calculation of taxable income, we hold that none of CNI's income is taxable under Maryland law, regardless of whether that tax is assessed directly or if it is assessed via CNI Government and the CNI Subsidiaries as pass-through entities. Accordingly, we reverse the judgment of the Tax Court affirming the assessment of pass-through entity income tax against the CNI Subsidiaries and requiring CNI to complete a federal income tax return.

BACKGROUND⁶

As expressed in the parties’ submissions to the Tax Court, the organizational flow chart for CNI and its subsidiaries is as follows:

Chickasaw Nation (Indian Tribe)

?

Chickasaw Nation Industries, Inc. (CNI)

(Federally chartered tribal corporation of CNI formed under OIWA)

?

CNI Government, LLC (wholly owned by CNI)

?

CNI Subsidiaries (all wholly owned by CNI Government)

CNI Ancillary Services, LLC (Oklahoma)

CNI Technical Services, LLC (Oklahoma)

[Chickasaw] Advisory Services, LLC (Oklahoma)

CNI Federal Services, LLC (Oklahoma)

CNI Professional Services, LLC (Texas)

A+ Government Solutions, LLC (Delaware)

The Operating Agreements of the CNI Subsidiaries and of CNI Government all expressly provide that each respective CNI Subsidiary "shall be treated as a disregarded entity for income tax purposes." As the parties stipulated before the Tax Court, "neither the CNI Subsidiaries nor CNI Government ... have ever made the ‘check the box’ election to be treated as corporations on federal income tax returns."

On June 24, 2003, Cathy Bird, an Indian Tribal Government Specialist with the United States Internal Revenue Service ("IRS"), sent a letter to a CNI consultant stating that income earned by an LLC "that has an Indian Tribe incorporated pursuant to the [OIWA] as the LLC's only member is non-taxable." The letter further explained that "a single member LLC is either classified as a corporation or it is disregarded," and stated that if an Oklahoma LLC does not affirmatively elect to be treated as a corporation, it "will be disregarded and treated as a division or branch of the tribal corporation for federal income tax purposes."

Just over a decade later, on April 16, 2014, each of the CNI Subsidiaries filed a Maryland corporate income tax return for tax year 2012. Each CNI Subsidiary's return reported that it had federal taxable income in 2012. Tom Leydorf, executive vice president of CNI, later stated in an affidavit that these tax returns were filed "mistakenly" and that it had been "erroneous[ ]" for the CNI Subsidiaries to report that they had federal taxable income.

On August 18, 2014, the Comptroller issued Corporation Income Tax Notices for each of the CNI Subsidiaries for tax year 2012, which asserted that each of the CNI Subsidiaries owed Maryland income taxes.⁷ One month later, on September 23, 2014, the Comptroller issued final notices of tax assessment for the CNI Subsidiaries for tax year 2012.

The CNI Subsidiaries filed administrative appeals of the September 23, 2014 notices of tax assessment on October 15, 2014. On January 15, 2015, while the appeals were still pending, the CNI Subsidiaries filed amended tax returns for tax year 2012, each reporting zero federal taxable income.

Comptroller's Final Determinations

The Comptroller's designated hearing officer held a hearing on the administrative appeals on February 26, 2015. At this hearing, counsel for the CNI Subsidiaries argued that the Comptroller's assessments were made in error because the CNI Subsidiaries had no federal taxable income, and, accordingly, no Maryland taxable income. The following exchange ensued:

[HEARING OFFICER]: Your position is that ... if an entity or individual does not have a federal income tax filing requirement. In Maryland it starts their return with the federal information. If the person doesn't have a federal requirement, then Maryland is not going to be able to tax them? Is that generally correct?

[COUNSEL]: Yes, I would state it this way. That if you are an entity like these particular, like [a] tribal corporation. You are not subject to federal income tax.

[HEARING OFFICER]: Absolutely and I agree with you.

[COUNSEL]: It's not that they're exempt. Just not subject to the tax. So it would be our position that these entities have zero federal taxable income. So now, does that mean that Maryland cannot tax them? I don't know the answer to that ....

Maryland needs the statutory authority to basically say, you're not an entity or subject to federal taxation, but you earned income in Maryland that we want to tax. Maryland has to have specific statutory authority to do that. They don't have that.

Counsel for the CNI Subsidiaries also clarified that the CNI Subsidiaries were not arguing that Maryland tax liability depends on whether the taxpayer is required to file a federal tax return; rather, it depends on whether the taxpayer is subject to federal income tax in the first place:

[HEARING OFFICER]: The parallel that pops into my mind is, and I'm just using 2014 numbers because that's the first thing that came into my mind, is for 2014, you know the federal filing threshold for an individual is $11,150. The state filing threshold is lower. It's $9,750. So ... I was kind of wondering what your opinion was because let's say someone makes $10,000. They clearly, by the IRS’ own guidelines do not have any obligation to file a federal income tax return. Because of the starting point of the state return, is the federal [adjusted gross income], would you ... say that, that individual then will not be subject to the Maryland tax absent specific statutory authority?

[COUNSEL]: I don't know that I would necessarily say that. That particular individual? They're subject to federal income tax. They just fall within the argument that they don't have to file a return.

At the conclusion of the hearing, the hearing officer took the matter under advisement.

On July 24, 2017, the hearing officer reached a decision on the CNI Subsidiaries’ administrative appeals, issuing each CNI Subsidiary a substantively identical "Notice of Final Determination." The hearing officer agreed with the CNI Subsidiaries that CNI is not subject to federal income tax but found "no reason to believe" that the CNI...