State Tax Assessor v. Kraft Foods Grp., Inc.

• Decision Date: 04 June 2020
• Docket Number: Docket: BCD-18-524
• Citation: 235 A.3d 837
• Parties: STATE TAX ASSESSOR v. KRAFT FOODS GROUP, INC., et al.
• Court: Maine Supreme Court

235 A.3d 837

STATE TAX ASSESSOR

v.KRAFT FOODS GROUP, INC., et al.

Docket: BCD-18-524

Supreme Judicial Court of Maine.

Argued: October 8, 2019

Decided: June 4, 2020

Jonathan A. Block, Esq. (orally), Pierce Atwood LLP, Portland, for appellants Kraft Foods Group, Inc., Kraft Foods Global, Inc., Kraft Pizza Company, and Cadbury Adams USA LLC

Aaron M. Frey, Attorney General, and Thomas A. Knowlton, Asst. Atty. Gen. (orally), Office of the Attorney General, Augusta, for appellee State Tax Assessor

Panel: MEAD, GORMAN, JABAR, and HUMPHREY, JJ, and HJELM, A.R.J.^*

HUMPHREY, J.

[¶1] Kraft¹ appeals, and the State Tax Assessor cross-appeals, from a summary judgment entered in the Business and Consumer Docket (Murphy, J. ) that adjudicated all claims on the parties' separate—but judicially consolidated—petitions for review of two tax abatement decisions. 36 M.R.S. § 151(2)(F), (G) (2020) ; M.R. Civ. P. 80C. Kraft argues that the court erred in determining that it was not entitled to an alternative apportionment² of part of its 2010 taxable income, that it was not entitled to a full abatement of certain penalties levied by the Assessor as part of the "First Assessment," and that the "Second Assessment" was not barred by the applicable statute of limitations. The Assessor argues that the court erred in partially abating the substantial understatement penalty levied as part of the First Assessment. We vacate the portion of the judgment that abated a portion of the penalty and affirm the remaining aspects of the judgment.

I. BACKGROUND AND PROCEDURAL HISTORY

[¶2] The parties stipulated to the following facts. During the relevant time period, Kraft manufactured and sold various food and beverage products in Maine and throughout the United States under a wide assortment of brand names. In the 1980s and 1990s, Kraft purchased two companies that manufactured and sold frozen pizzas (Tombstone Pizza Company and Jack's Frozen Pizza), developed its own frozen pizza product (marketed as DiGiorno in the United States), and acquired a license to manufacture, sell, and distribute a line of frozen pizzas under the California Pizza Kitchen brand name. All of these brands were produced, sold, and distributed by Kraft Pizza Company (KPC).

[¶3] On March 1, 2010, Kraft sold its entire frozen pizza business, including both tangible and intangible assets, to Nestle USA, Inc. for $3,692,835,676.³ On its 2010 federal consolidated corporate income tax return, Kraft reported taxable income on the sale in the amount of $3,349,462,365. The federal taxable income from the sale reported by members of the Kraft family of companies was broken down as follows: KPC reported $2,028,162,365 in federal taxable income, and Kraft Foods Global Brands, Inc., reported $1,321,300,000 in federal taxable income.

[¶4] In October 2011, Kraft filed its 2010 Maine corporate income tax return, which included KPC as a member of the affiliated group with which it conducted a unitary business, and, applying the sales factor method, reported KPC's income from the sale as part of its apportionable Maine net income.⁴ However, Kraft subtracted $3,004,347,614⁵ from its Maine taxable income, based on its assertion that this income was not taxable by Maine under either the Maine Constitution or the United States Constitution.

[¶5] The effect of this subtraction was to exclude from Kraft's Maine taxable income nearly all of the gain realized from the sale, thereby reducing Kraft's Maine tax liability for 2010. In total, on its 2010 Maine corporate tax return, Kraft reported $3,179,725,852 in federal taxable income, $502,197,939 in Maine taxable income, a Maine apportionment factor of 0.008193, and Maine corporate income tax due of $367,402. Kraft did not include any of the roughly $3.6 billion in gross receipts from the sale when calculating its 2010 Maine apportionment factor.

[¶6] In August 2013, Maine Revenue Services (MRS) audited Kraft for tax years 2010 and 2011. MRS adjusted Kraft's 2010 Maine corporate income tax return and disallowed Kraft's subtraction of $3,004,347,614 in income derived from the sale. MRS determined that this income was part of Kraft's Maine taxable income, and issued a notice of assessment (the First Assessment) against Kraft in May 2014 for $1,832,717 in Maine corporate income tax, $466,363.47 in interest, and $458,179.25 in penalties for substantially understating its tax liability.

[¶7] In June 2014, Kraft requested reconsideration of the First Assessment. See 36 M.R.S. § 151(1) (2020). After MRS upheld the First Assessment in full, Kraft appealed to the Board of Tax Appeals. The Board determined that two different apportionment factors should be applied to calculate Kraft's Maine taxable income for the 2010 tax year: one to apportion the income from the sale, and another to apportion the remainder of Kraft's 2010 unitary business income. The Board used the following formulas:

Kraft's unitary business income, excluding the gain [from the sale], shall be apportioned using a sales factor calculated by dividing Kraft's sales in Maine by Kraft's sales everywhere; Kraft's gain from sale of the Pizza Assets shall be apportioned using a sales factor calculated by dividing KPC's sales in Maine by KPC's sales everywhere. Neither of the above-referenced sales factors shall include the amount of Kraft's sale of the Pizza Assets in either the numerator or denominator.

The Board also fully abated the $458,179.25 penalty imposed against Kraft for substantially understating its tax liability on the ground that there was "substantial authority" for Kraft's filing position. See 36 M.R.S. § 187-B(4-A) (2020). The Assessor filed a petition in Superior Court (Kennebec County) for judicial review of the Board's decision, see 36 M.R.S. § 151(2)(F), (G) ; M.R. Civ. P. 80C, and the case was then transferred to the Business and Consumer Docket.

[¶8] On May 3, 2017, the Assessor issued another notice of assessment (the Second Assessment), adjusting Kraft's 2010 Maine corporate income tax return to disallow a $306,729,484 capital loss carryforward that Kraft had claimed. The Second Assessment imposed an additional $192,448 in income tax, $105,168.21 in interest, and $48,112 in substantial understatement penalties.

[¶9] Kraft requested reconsideration of the Second Assessment, see 36 M.R.S. § 151(1), arguing that it was barred by the statute of limitations. The Assessor upheld the Second Assessment in full. Kraft filed a petition for judicial review in Superior Court without first appealing to the Board of Tax Appeals, see 36 M.R.S. § 151(2)(F), (G) ; M.R. Civ. P. 80C, and that petition was also transferred to the Business and Consumer Docket, where it was consolidated with the Assessor's petition for judicial review of the First Assessment.

[¶10] The parties filed motions for summary judgment on both the First and Second Assessments based on a partially stipulated record. As to the First Assessment, the court granted partial summary judgment in favor of the Assessor, reversing the Board's decision and concluding that Kraft was not entitled to an alternative apportionment of the sale income under 36 M.R.S. § 5211(17) (2020). The court also determined that Kraft was entitled to only a partial abatement of the substantial underpayment penalty, reversing the Board's determination that Kraft was entitled to a full abatement. As to the Second Assessment, the court granted the Assessor's motion for summary judgment based on its conclusion that the Second Assessment was not barred by the statute of limitations.

[¶11] Kraft filed a timely notice of appeal from the court's judgment, M.R. App. P. 2B(c)(1), and the Assessor filed a timely cross-appeal. M.R. App. P. 2C(a)(2).

II. DISCUSSION

[¶12] We address four issues that the parties raise on appeal.⁶ First, Kraft argues that the court erred in concluding that, in the First Assessment, it was not entitled to an alternative apportionment of the income from the sale for determining its Maine tax liability. Second, Kraft argues that the court erred in determining that it was not entitled to a full abatement of the penalties levied as part of the First Assessment for substantially understating its tax liability. Third, and relatedly, the Assessor, on its cross-appeal, argues that the court erred in awarding Kraft even a partial abatement of the substantial understatement penalties on the First Assessment. Finally, Kraft argues that the court erred in concluding that the Second Assessment was not barred by the statute of limitations. We address each argument in turn.

[¶13] As to each issue, the parties do not argue that there is any genuine issue of material fact; they contest only the court's legal conclusions. "When the material facts are not in dispute, we review de novo the trial court's interpretation and application of the relevant statutes and legal concepts." Remmes v. Mark Travel Corp. , 2015 ME 63, ¶ 19, 116 A.3d 466. When reviewing a decision of the Board of Tax Appeals, "the Superior Court is authorized to rule on legal matters de novo, [and] we review the court's interpretation of the law directly and do not defer to the interpretive ruling of the Assessor or the Board." Warnquist v. State Tax Assessor , 2019 ME 19, ¶ 12, 201 A.3d 602 (citations omitted); see also 36 M.R.S. § 151(2)(F), (G) ; Metcalf v. State Tax Assessor , 2013 ME 62, ¶ 15, 70 A.3d 261.

A. Alternative Apportionment of the Sale Income

[¶14] As mentioned above, see supra n.2, in Maine the default method of apportioning a corporate taxpayer's income is based on a "sales factor" formula. 36 M.R.S. § 5211(1), (8), (14) (2020). "The sales factor is a fraction, the numerator of which is the total sales of the taxpayer in [Maine] during the tax period, and the denominator of which is the total sales of the taxpayer everywhere during the tax period." 36 M.R.S. § 5211(14) ; see also E.I. Du Pont de Nemours & Co. v. State Tax Assessor , 675 A.2d 82, 83 (Me. 1996). "For purposes of...