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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 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.1 The subsidiaries 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

The four intercompany accounts were labeled and described functionally by Gannett 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).

1

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.

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