IN RE TAX APPEAL OF LEE APPAREL CO.

Citation30 Kan. App.2d 240,40 P.3d 974
Decision Date15 February 2002
Docket NumberNo. 85,855.,85,855.
PartiesIn the Matter of the Appeal of LEE APPAREL COMPANY, INC.; TROUTMAN INDUSTRIES, INC.; BLUE BELL, INC.; From an Order of the Division of Taxation on Assessment of Corporate Income Tax.
CourtCourt of Appeals of Kansas

James Bartle, of Legal Services Bureau, for appellant Kansas Department of Revenue.

S. Lucky DeFries and Jeffrey A. Wietharn, of Coffman, DeFries & Nothern, a Professional Association, of Topeka, for appellees Lee Apparel Company, Inc., et al. Before KNUDSON, P.J., PIERRON and GREEN, JJ.

GREEN, J.:

This appeal arises out of the audit conducted by the Kansas Department of Revenue (the Department) on Lee Apparel Company, Inc. (Lee), Troutman Industries, Inc. (Troutman), and Blue Bell, Inc. (Blue Bell), collectively referred to as the taxpayers, for calendar years 1988 through 1990. As a result of its audit, the Department determined that the taxpayers, together with their parent company VF Corporation (VF), and VF's numerous other subsidiaries, were engaged in a unitary business and should have determined their Kansas income tax liabilities using the combined report method. The Department recomputed the tax due and issued three corporate income tax assessments consisting of tax, penalty, and interest in the total amount of $2,907,448.

The taxpayers appealed to the Director of Taxation, contending that VF and its subsidiaries were not unitary. In addition, the taxpayers assert that the assessments for years 1988 and 1989 were barred by the statute of limitations. With the exception of the statutory penalties, which were abated, the Department's assessments were upheld. The Director later denied the taxpayers' petition for review.

When the taxpayers appealed the Director's decision to the Board of Tax Appeals (BOTA), BOTA reversed the Director on both the unitary issue and the statute of limitations issue, which effectively invalidated the Department's assessments.

On appeal, the Department contends that BOTA failed to clearly state and apply the applicable legal presumptions. This issue was previously considered in In re Tax Appeal of Broce Construction Co., 27 Kan. App. 2d 967, 9 P.3d 1281, rev. denied 270 Kan. 898 (2000), and we will not reexamine the issue here. Instead, we adopt Broce's holding and note that BOTA failed to clearly state that it would presume the Department's determination of unity was correct and that the taxpayers had the burden of proving otherwise. 27 Kan. App.2d 980-81.

The Department additionally contends that BOTA's order failed to comply with the Kansas Administrative Procedures Act (KAPA), K.S.A. 77-501 et seq. We agree that BOTA's order failed to comply with K.S.A. 77-526(c) because the order failed to include separately stated findings of fact, conclusions of law, and policy reasons for its decision.

The Department raises two additional issues that merit considerable analysis. First, the Department argues that its assessments for the years 1988 and 1989 were not barred by the statute of limitations. We agree. Additionally, the Department maintains that the taxpayers, together with VF and VF's other subsidiaries, were engaged in a unitary business for the years 1988 and 1989. We affirm in part and reverse in part.

VF is a Pennsylvania corporation with its home office in Wyomissing, Pennsylvania. VF is the world's largest publicly owned apparel company, and its principal business is the designing, manufacturing, and marketing of apparel products.

Originally incorporated in 1899 as the Reading Glove & Mitten Manufacturing Company and later known as Vanity Fair Silk Mills, VF operated for many years as a manufacturer of lingerie and intimate apparel. In 1969, it changed its name to VF Corporation and expanded its operations by acquiring companies such as The H.D. Lee Co., Inc. (jeans, 1969); Kay Windsor (lingerie, 1971); Modern Globe (lingerie, 1984); and Bassett-Walker (fleecewear, 1984). In 1986, VF acquired Blue Bell (manufacturer of Wrangler and Rustler jeans, Jantzen and JanSport sportswear, and Red Kap and Big Ben occupational clothing).

VF is a holding company that owns, either directly or indirectly, all of the stock in Lee, Troutman, Blue Bell and numerous other subsidiaries. Many of these subsidiaries are engaged in apparel manufacturing, marketing, and retailing, although others perform functions that complement or support the apparel operations. In each year of the audit period, VF had 22 active subsidiaries, although not all of the same 22 subsidiaries were active in each of those 3 years.

The taxpayers were all in the business of manufacturing various types of apparel. Lee manufactured jeans and jeanswear products. Troutman manufactured Pepsi-branded apparel. Blue Bell had several divisions that manufactured jeans and occupational clothing. During the audit period, each of the taxpayers had business operations in Kansas. Lee is a Pennsylvania corporation with its home office in Merriam, Kansas. Troutman is a North Carolina corporation and maintained its home office in Lenexa, Kansas, before 1989 when it was merged into Lee. Blue Bell is a Delaware corporation with its home office in Greensboro, North Carolina.

Statute of Limitations

The Department argues that the tax assessments for tax years 1988 and 1989 were not barred by the statute of limitations. A statute of limitations does not run against the State unless expressly so provided, and all doubts as to whether it shall run are to be resolved in favor of the State. KPERS v. Reimer & Koger Assocs., Inc., 262 Kan. 635, Syl. ¶ 4, 941 P.2d 1321 (1997).

As to questions of law, BOTA exists to decide tax matters; therefore, its decisions should be given due consideration when it is acting within its area of expertise. Nevertheless, "`the determination of an administrative body on questions of law is not conclusive, and while persuasive, is not binding on the courts.' [Citation omitted.]" Board of Johnson County Comm'rs v. Smith, 18 Kan. App. 2d 662, 664-65, 857 P.2d 1386 (1993). The appellate courts have unlimited review of questions of law. Gillespie v. Seymour, 250 Kan. 123, 129, 823 P.2d 782 (1991).

As the appellant, the Department has the burden of proving that BOTA's actions were in error. K.S.A. 77-621(a)(1). The Department claims that it is entitled to relief because in finding that the 1988 and 1989 assessments were made outside the statute of limitations (1) BOTA erroneously interpreted and applied the law; and (2) BOTA's decision is unreasonable, arbitrary, or capricious.

Under K.S.A. 79-3230(a) (Ensley 1989), the statute in effect for the 1989 tax year, the Department was required to assess income taxes within 3 years after the taxpayers' returns were filed or when the taxes as shown thereon were paid, whichever was the later date. For the tax year 1988, the period of limitations was 4 years. K.S.A. 79-3230(a) (Ensley 1984). The Department concedes that its assessments dated October 20, 1993, were issued more than 3 years after the taxpayers' 1989 returns were filed and more than 4 years after the 1988 returns were filed.

However, the Department relies on K.S.A. 79-3230(e) (Ensley 1989) in arguing that its assessments are not barred by the statute of limitations. The statute provides:

"(e) Before the expiration of time prescribed in this section for the assessment of additional tax or the filing of a claim for a refund, the director of taxation is authorized to enter into an agreement in writing with the taxpayer consenting to the extension of the periods of limitations as defined in this act for the assessment of tax or for the filing of a claim for refund, at any time prior to the expiration of the period of limitations. The period so agreed upon may be extended by subsequent agreements in writing made before the expiration of the period previously agreed upon. An agreement between the taxpayer and the internal revenue service providing for the extension of the period for assessment of federal income taxes shall constitute an agreement with the director of taxation to extend the period for assessment of income taxes under the provisions of the Kansas income tax act. A copy of all such agreements and extensions thereof shall be filed with the director of taxation within 30 days after their execution." (Emphasis added.)

The above-quoted statutory language was also in effect for the 1988 tax year. K.S.A. 79-3230(e) (Ensley 1984).

Although K.S.A. 79-3230(e) was amended in 1997 to eliminate any reference to extension agreements between a taxpayer and the IRS, the amendment was not retroactive. The taxpayers, however, argue that the amendment did not change the existing law but rather clarified the Department's longstanding policy that it could not reopen an audit period when the IRS issued an extension for the assessment of federal income taxes. The taxpayers' argument, however, is contrary to our rule of statutory construction that "[w]hen the legislature revises an existing law, it is presumed that the legislature intended to change the law as it existed prior to the amendment. [Citation omitted.]" Kaul v. Kansas Dept. of Revenue, 266 Kan. 464, 471, 970 P.2d 60 (1998),cert. denied 528 U.S. 812 (1999). As a result, we find that the issue of whether the Department's assessments were timely is controlled by K.S.A. 79-3230(e) (Ensley 1989) because that version of the statute was in effect during the tax years in question. However, K.S.A. 79-3230(e) (Ensley 1989) has not been interpreted by a Kansas appellate court and, as a result, whether the Department's assessments were timely under that statute is an issue of first impression.

The Department claims that its assessments for tax years 1988 and 1989 were timely because the taxpayers entered into agreements with the IRS to extend the period for assessment of federal income taxes with respect to tax years 1988 and 1989. The IRS was authorized to assess...

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