Umb Bank, Na. v. City of Kansas City

• Decision Date: 20 November 2007
• Docket Number: No. WD 67485.,WD 67485.
• Citation: 238 S.W.3d 228
• Parties: UMB BANK, NA., Respondent, v. CITY OF KANSAS CITY, Missouri, Appellant.
• Court: Missouri Court of Appeals

238 S.W.3d 228

UMB BANK, NA., Respondent, v. CITY OF KANSAS CITY, Missouri, Appellant.

No. WD 67485.

Missouri Court of Appeals, Western District.

November 20, 2007.

Kathy K. Adams, Stephen D. Walsh, Co-Counsel, Kansas City, MO, for appellant.

Richard E. Lenza, Mark A. Olthoff, Co-Counsel, Kansas City, MO, for respondent.

Before PATRICIA BRECKENRIDGE¹ Presiding Judge, JOSEPH M. ELLIS, Judge and THOMAS H. NEWTON, Judge.

JOSEPH M. ELLIS, Judge.

The City of Kansas City ("the City") appeals from a judgment entered in the Circuit Court of Jackson County in favor of UMB Bank, N.A. ("UMB") in UMB's suit to recover a refund of earnings taxes paid to the City. Specifically, the City challenges the trial court's determination that UMB was entitled to deduct from its gross earnings certain interest expenses related to nontaxable investments in government securities.

UMB is a for-profit, banking corporation headquartered in Kansas City, Missouri. As such, UMB was subject to the Earnings and Profits Tax Ordinance of Kansas City, Missouri. On its city earnings tax returns in 1995, 1996, and 1997, UMB claimed deductions for interest expenses paid to depositors. On March 16, 2000, the Commissioner of Revenue for the City issued an earnings tax assessment against UMB for those years, having found that a percentage of the interest expense deductions claimed by UMB were used to make tax-exempt investments and should, therefore, not be allowed.² Specifically, the City disallowed claimed interest expenses of $22,521,516.00 for 1995, $19,650,958.00 for 1996, and $16,611,382.00 for 1997. On January 22, 2001, UMB paid, under protest, an additional $561,971.31 in City earnings tax, penalties, and interest, and provided the City with a written statement setting forth the grounds for its protest.³

After the City denied UMB's protest, UMB filed a petition in the circuit court against the City pursuant to § 139.031(2),⁴ seeking reimbursement of the taxes paid under protest. After the circuit court granted summary judgment in favor of UMB, the City appealed. On appeal, this Court reversed the circuit court's judgment, holding that, while the City did not have the authority to preclude a taxpayer from deducting necessary expenses of operations from its gross profits or earnings in calculating "net profits or earnings" as allowed by § 92.240,⁵ a genuine issue of material fact remained regarding whether or not the disallowed interest expense deductions were "necessary expenses of operation." United Missouri Bank, N.A. v. City of Kansas City, 121 S.W.3d 320, 323 (Mo.App. W.D.2003).

On August 28, 2006, the case was heard by the trial court on remand. That same day, the trial court issued its judgment finding that UMB had met its burden of proving that all of the claimed interest expenses were "necessary expenses of operation." The court concluded that UMB was entitled to a full refund of the taxes erroneously assessed by the City and paid under protest by UMB, along with prejudgment interest. The City brings two points on appeal from that judgment.

As in any court-tried case, our review is governed by the standard set forth in Murphy v. Carron, 536 S.W.2d 30, 32 (Mo. banc 1976). Golden Delta Enters. v. City of Arnold, 151 S.W.3d 119, 121 (Mo.App. E.D.2004). Accordingly, "[t]he judgment of the trial court will be affirmed unless there is no substantial evidence to support it, it is against the weight of the evidence or it erroneously declares or applies the law." Id. In making those assessments, we view the evidence and all reasonable inferences drawn therefrom in the light most favorable to the judgment and disregard all evidence and inferences to the contrary. Hart v. Hart, 210 S.W.3d 480, 484 (Mo.App. W.D.2007).

In its first point, the City contends that the trial court erred in excluding from evidence testimony from the City's audit manager, John Smith, opining that UMB's interest expenses were not necessary expenses of operation. The City claims Smith's testimony was relevant and material to the central issue in the case. Smith offered the following testimony at trial:

Q: And what are operating expenses?

A: In the terms when you calculate gross profits, operating expenses are everything that are linked to the gross revenue but are expenses like salary, depreciation, utilities, and items like that.

Q: So what—for a bank, what would be the expenses that would be excluded from the operating expenses?

A: Interest expense.

Q: Have you seen a UMB financial summary?

A: Yes.

Q: Do they separate out the operating expenses from the total expenses?

A: Yes. But they call it noninterest expense and includes items like salaries, depreciation, items like that.

Q: Should necessary expenses of operation include interest expense?

A: No, it should not because—

At that point, UMB objected to Smith's testimony on relevance and foundational grounds, and the Court sustained UMB's objection. The City then presented the following offer of proof:

Q: Should necessary expenses of operation include interest expense?

A: No.

* * *

Q: And why?

A: Because whenever gross profits and the—gross profits and operating expenses are used in connection with each other, operating expenses does not include the expenses that could be linked to the gross receipts.

Q: So for a bank, are there any expenses that you would exclude from necessary expenses of operation?

A: Yes. Interest expense is cost of capital and it could be associated with a gross receipts and should be used in the determination of gross profits.

Q: Okay. And what items would you be looking at for necessary expenses of operation?

A: It's any items that can't be linked to gross receipts. So it would be items like salaries, the depreciation of buildings, rent utilities, and basically fixed costs.

Appellant argues that the foregoing testimony should have been admitted by the trial court because it was relevant and material to the issues before the court.

"[T]he admission or exclusion of expert opinion testimony is a matter within the discretion of the trial court, and this Court will not interfere with that discretion unless it plainly appears that it has been abused." Eltiste v. Ford Motor Co., 167 S.W.3d 742, 750-51 (Mo.App. E.D. 2005) (internal quotation omitted). "Where evidence has been excluded, the issue is not whether the evidence was admissible, but rather whether the trial court abused its discretion in excluding it." Grab ex rel. Grab v. Dillon, 103 S.W.3d 228, 238 (Mo.App. E.D.2003). "A trial court abuses its discretion, as to the admissibility of evidence, when its ruling is clearly against the logic of the circumstances then before the court and so arbitrary and unreasonable as to shock the sense of justice and indicate a lack of careful consideration." Scott v. Blue Springs Ford Sales, Inc., 215 S.W.3d 145, 164 (Mo.App. W.D.2006). Furthermore, "[e]ven if the exclusion of testimony is erroneous, we will not reverse the judgment absent a finding that the error materially affected the merits of the action." Eagan v. Duello, 173 S.W.3d 341, 349 (Mo. App. W.D.2005) (internal quotation omitted).

"To be admissible, evidence must be logically and legally relevant." Whelan v. Missouri Pub. Serv., Energy One, 163 S.W.3d 459, 462 (Mo.App. W.D.2005). "Evidence is logically relevant if it tends to prove or disprove a fact in issue or corroborates other evidence." Id. "`Legal relevance involves a process through which the probative value of the evidence (its usefulness) is weighed against the dangers of unfair prejudice, confusion of the issues, misleading the jury, undue delay, waste of time or needless presentation of cumulative evidence (the cost of evidence).'" Id. (quoting Guess v. Escobar, 26 S.W.3d 235, 242 (Mo.App. W.D.2000)). "Logically, relevant evidence should not be excluded unless it pertains to collateral matters, which would result in confusion of the issues or would cause prejudice wholly disproportionate to the value and usefulness of the offered evidence." Payne v. Cornhusker Motor Lines, Inc., 177 S.W.3d 820, 836 (Mo.App. E.D.2005).

Smith's testimony could not have been much more logically or legally relevant to the issue before the trial court, as prescribed by this Court's previous opinion: "whether or not the disallowed [interest expense] deductions were `necessary expenses of operation.'" United Missouri Bank, N.A., 121 S.W.3d at 323. It was essential for the trial court to make that determination because § 92.240 permits the deduction of ...