State Tax Assessor v. Kraft Foods Grp., Inc.
| Decision Date | 04 December 2018 |
| Docket Number | BUSINESS & COUNSUMER DOCKET NO. BCD-AP-16-02 |
| Parties | STATE TAX ASSESSOR, Petitioner, v. KRAFT FOODS GROUP, INC., et al., Respondents. |
| Court | Maine Superior Court |
CUMBERLAND, ss.
Pending before the Court are two cross-motions for summary judgment in two complex consolidated appeals of tax assessments levied against Kraft Foods Group, Inc., et al. for the 2010 tax year. Oral argument was held on August 9, 2018. Jonathan A. Block., Esq. represented Kraft Foods Group, Inc., et al. and Thomas A. Knowlton, Esq., represented the State Tax Assessor.
This consolidated case deals with two appeals stemming from an audit of a corporate taxpayer's 2010 corporate income tax return. The first appeal is brought by the taxpayer and the second is brought by the State Tax Assessor (the "Assessor"). In State Tax Assessor v. Kraft Foods Group, Inc., No. BCD-AP-16-02, the Assessor appeals from a decision of the Maine Board of Tax Appeals (the "Board") which ruled substantially in favor of Kraft Foods Group, Inc. and the affiliated group of taxable corporations with which it derives income from a unitary business1 (collectively "Kraft") on its appeal to the Board of an assessment of corporate income tax, interest,and penalties made by the Assessor in August 2013 pursuant to an audit of Kraft's 2010 corporate income tax return (the "First Assessment"). In the consolidated appeal of Kraft Foods Global, Inc. v. State Tax Assessor, No. BCD-AP-17-09, Kraft appeals from a decision on reconsideration issued by the Assessor on October 27, 2017, upholding an assessment disallowing a $306,729,484 capital loss carryforward that Kraft claimed on its 2010 Maine corporate income tax return (the "Second Assessment").
Kraft was, at all relevant times, engaged in the business of manufacturing and selling a variety of food products in Maine and across the country. (Stip. ¶ 150.) Throughout 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 obtained a license to distribute a line of frozen pizzas under the California Pizza Kitchen brand name. Through these actions over the years Kraft added frozen pizzas to its diverse product line. (Stip. ¶¶ 2-3, 7-8, 10-13.) Collectively, this frozen pizza business (the intangible and tangible assets, i.e. machinery, patents, trademarks, and goodwill used to manufacture and market frozen pizza) is referred to as the "Pizza Assets" in this Order.
On March 1, 2010, Kraft sold these Pizza Assets to Nestle USA, Inc. ("Nestle") for $3,681,000,000, resulting in $3,349,462,365 in federal taxable income. (Stip. ¶¶ 173, 176-177.) Nestle paid the sale price to two members of Kraft's affiliated group: Kraft Pizza Corporation2 ("KPC"), Kraft Foods Global Brands, Inc. (Stip. ¶ 177.) Kraft subsequently filed a timely 2010 Maine corporate income tax return that included KPC in its Maine unitary group and included asunitary business income KPC's income from sales of pizza products prior to the time of Nestle's purchase of the Pizza Assets. (Stip. ¶ 183.) However, in computing its Maine net income, Kraft subtracted almost the entire gain from the sale of the Pizza Assets (the "Pizza Gain")—$3,004,347,614—from its taxable income, contending that it was "income not taxable under the Constitution of Maine or the U.S." (Stip. ¶ 184; Jt. Ex. 3.) The subtraction modification claimed by Kraft effectively excluded the Pizza Gain from Kraft's taxable income. (Stip. ¶ 184.)
In August 2013, Maine Revenue Services ("MRS") conducted an audit of Kraft for the years 2010 and 2011. (Stip. ¶ 200.) MRS adjusted Kraft's 2010 Maine corporate income tax return and disallowed the $3,004,347,614 deduction that Kraft had claimed with respect to the Pizza Gain. (Stip. ¶ 201.) MRS asserted that the Pizza Gain was part of Kraft's apportionable Maine net income, and issued an assessment—the First Assessment—against Kraft in the amount of $1,832,717 in Maine corporate income tax, plus interest and a substantial understatement penalty. (Stip. ¶¶ 201-203.)
On June 16, 2014, Kraft requested reconsideration of the First Assessment. (Stip. ¶ 206.) See 36 M.R.S. § 151(1). On reconsideration, MRS upheld the First Assessment in full. (Stip. ¶ 208.) Kraft thereafter appealed to the Board. (Stip. ¶ 209.) In its written decision (the "Board Decision"), the Board held that two separate apportionment factors should be used: one factor to apportion the Pizza Gain, and another factor to apportion the rest of Kraft's 2010 unitary business income. (Stip. ¶ 211.) Furthermore, the Board abated the substantial understatement penalty imposed by the Assessor in full on the grounds that Kraft had shown reasonable cause for its filing position. See 36 M.R.S. § 187-B(4-A). (Jt. Ex. 56 at 11.) The Assessor appealed the Board Decision on December 22, 2015, and the appeal was subsequently transferred to this Court.
On May 3, 2017, the Assessor issued its Second Assessment, which disallowed a $306,729,484 capital loss carryforward that Kraft claimed on its 2010 Maine corporate income tax return. (Stip. ¶ 213.) On June 1, 2017, Kraft likewise requested reconsideration of the Second Assessment on the grounds it was barred by the statute of limitations; on reconsideration, the Assessor likewise upheld the Second Assessment in full in its "Decision on Reconsideration" dated October 27, 2017 (the "Reconsideration Decision"). (Stip. ¶¶ 216, 218.) Kraft appealed that decision directly to the superior court. See M.R. Civ. P. 80C, see also 5 M.R.S. § 11002; 36 M.R.S. § 151. That appeal was also subsequently transferred to this Court; the Assessor's appeal of the Board Decision on the First Assessment and Kraft's appeal of the Reconsideration Decision on the Second Assessment were thereafter consolidated on December 21, 2017.
Both parties move for summary judgment in their favor on each appeal and, needless to say, oppose their adversary's motion for summary judgment.
I. The First Assessment
The first issue presented to this Court on the motion is whether an alternative apportionment methodology should be used for Kraft's 2010 corporate income tax assessment.3 In essence, Kraft urges this Court to adopt the findings and conclusions of the Board Decision, which held that two different apportionment factors should be used to calculate Kraft's corporate income tax liability for 2010; the Pizza Factor (to apportion the Pizza Gain) and the Kraft Factor (toapportion the rest of the income from Kraft's unitary business). The Assessor responds that the Board erred in this conclusion because Kraft failed to carry its burden to establish its entitlement to alternative apportionment.
Maine imposes an annual tax on the Maine net income of "each taxable corporation and on each group of corporations that derives income from a unitary business carried on by 2 or more members of an affiliated group." 36 M.R.S. § 5200(1). "For purposes of [determining income], with respect to taxable corporations that derive income from a unitary business carried on by 2 or more members of an affiliated group with business activity that is taxable both within and without this State, 'income' means the net income of the entire group." 36 M.R.S. § 5200(4). "The tax amount computed [with respect to the group's net income] must then be apportioned under the provisions of [36 M.R.S. §§ 5210-5212] for the entire group to determine the amount of tax imposed on the taxable corporations." 36 M.R.S. § 5200(4).
Sections 5211 through 5212 of Title 36 of the Maine Revised Statutes, titled "Apportionment of Income," describe the process by which taxable corporations and affiliated groups of corporations that "hav[e] income from business activity which is taxable both within and without this State . . . shall apportion [their] net income" for purposes of determining the "portion" of the net income subject to Maine corporate income tax. 36 M.R.S. § 5211(1). Section 5211 includes three formulas for calculating the apportionment factor to be utilized to apportion a corporation's income to Maine depending on the source of the income: property, payroll, and sales. 36 M.R.S. §§ 5211(9),(12),(14); see E. I. Du Pont de Nemours & Co. v. State Tax Assessor, 675 A.2d 82, 91 (Me. 1996) (citing Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 165 (1983)) ("the three-factor apportionment formula has been approved for use by the states").
The only apportionment factor relevant to this appeal is the sales factor. 36 M.R.S § 5211(14). "The sales factor is a fraction, the numerator of which is the total sales of the taxpayer in this State 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(4). "Sales" is defined as "all gross receipts of the taxpayer." 36 M.R.S. § 5210(5). "For purposes of calculating the sales factor, 'total sales of the taxpayer' includes sales of the taxpayer and of any member of an affiliated group with which the taxpayer conducts a unitary business." 36 M.R.S. § 5211(14).
Where the apportionment of taxable income under section 5211 does not "fairly represent the extent of the taxpayer's business activity in this State," the taxpayer may request, or the tax assessor may require, "[t]he employment of any other method to effectuate an equitable apportionment of the taxpayer's income" with respect to all or any part of the taxpayer's business activity. 36 M.R.S. § 5211(17)(D). Where, as here, it is the taxpayer that requests alternative apportionment, the taxpayer bears the burden of proof. 36 M.R.S. § 151; see also Gannett Co. v. State Tax Assessor, 2008 ME 171, ¶ 34, 959 A.2d 741; E. I. Du Pont de Nemours & Co. v. State Tax Assessor, ...
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