STATE TAX ASSESSOR v. KRAFT FOODS GROUP, INC., et al. … · 2020-06-23 · KRAFT FOODS GROUP, INC., et al. HUMPHREY, J. [¶1] Kraft1 appeals, and the State Tax Assessor cross-appeals,

MAINESUPREMEJUDICIALCOURT ReporterofDecisionsDecision: 2020ME81Docket: BCD-18-524Argued: October8,2019 Decided: June4,2020Panel: MEAD,GORMAN,JABAR,andHUMPHREY,JJ,andHJELM,A.R.J.*

STATETAXASSESSORv.

KRAFTFOODSGROUP,INC.,etal.HUMPHREY,J.

[¶1] Kraft1 appeals, and the State TaxAssessor cross-appeals, from a

summaryjudgmententeredintheBusinessandConsumerDocket(Murphy,J.)

that adjudicated all claims on the parties’ separate—but judicially

consolidated—petitionsforreviewoftwotaxabatementdecisions.36M.R.S.

§151(2)(F),(G)(2020);M.R.Civ.P.80C.Kraftarguesthatthecourterredin

* JusticeHjelmsatatoralargumentandparticipatedintheinitialconferencewhilehewasan

Associate Justice and, on order of the Senior Associate Justice, was authorized to continue hisparticipationinhiscapacityasanActiveRetiredJustice.ChiefJusticeSaufleysatatoralargumentand participated in the initial conference but resigned before this opinion was certified.JusticeAlexandersatatoralargumentandparticipatedintheinitialconferencebutretiredbeforethisopinionwascertified.

1ThetaxpayersinthiscasewhohaveaconnectiontoMaineareKraftFoodsGroup,Inc.,KraftFoodsGlobal,Inc.,KraftPizzaCompany,andCadburyAdamsUSALLC. Forconvenience,wereferthroughoutthisopiniontothecollectivetaxpayersas“Kraft,”butwillspecifywhichentitywearereferringtowhenitisnecessarytodoso.

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determiningthatitwasnotentitledtoanalternativeapportionment2ofpartof

its2010taxableincome,thatitwasnotentitledtoafullabatementofcertain

penaltiesleviedbytheAssessoraspartofthe“FirstAssessment,”andthatthe

“SecondAssessment”wasnotbarredbytheapplicablestatuteof limitations.

TheAssessor argues that the court erred inpartially abating the substantial

understatementpenaltyleviedaspartoftheFirstAssessment.Wevacatethe

portion of the judgment that abated a portion of the penalty and affirm the

remainingaspectsofthejudgment.

I.BACKGROUNDANDPROCEDURALHISTORY

[¶2] Thepartiesstipulatedtothefollowingfacts. Duringtherelevant

timeperiod,Kraftmanufacturedandsoldvariousfoodandbeverageproducts

inMaineandthroughouttheUnitedStatesunderawideassortmentofbrand

names. In the 1980s and 1990s, Kraft purchased two companies that

2Thedefaultmethodofapportioningabusiness’staxableincometoMaineisbasedona“sales

factor”formula,which“includessalesofthetaxpayerandofanymemberofanaffiliatedgroupwithwhichthetaxpayerconductsaunitarybusiness.”See36M.R.S.§5211(1),(8),(14)(2020)(emphasisadded).Essentially,thesalesfactorformula“calculatesthelocaltaxbasebyfirstdefiningthescopeofthe‘unitarybusiness’ofwhichthetaxedenterprise’sactivitiesinthetaxingjurisdictionformonepart,andthenapportion[s]thetotalincomeofthat‘unitarybusiness’betweenthetaxingjurisdictionandtherestoftheworldonthebasisofa formula takingintoaccountobjectivemeasuresof thecorporation’sactivitieswithinandwithoutthejurisdiction.”ContainerCorp.ofAm.v.FranchiseTaxBd., 463 U.S. 159, 165 (1983). Once the sales factor is calculated, the taxpayer’s income is“apportionedto[Maine]bymultiplyingtheincomebythesalesfactor.”36M.R.S.§5211(8).

Whenthesalesfactorformuladoesnotfairlyrepresenttheextentofthebusiness’sactivitiesinMaine,theAssessormayuseanalternativeformulatoapportionthebusiness’staxableincome.Seeid.§5211(17).

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manufacturedand sold frozenpizzas (TombstonePizzaCompanyand Jack’s

FrozenPizza),developeditsownfrozenpizzaproduct(marketedasDiGiorno

intheUnitedStates),andacquiredalicensetomanufacture,sell,anddistribute

a lineof frozenpizzasundertheCaliforniaPizzaKitchenbrandname. Allof

these brandswere 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

$3,692,835,676.3Onits2010federalconsolidatedcorporateincometaxreturn,

Kraftreportedtaxableincomeonthesaleintheamountof$3,349,462,365.The

federaltaxableincomefromthesalereportedbymembersoftheKraftfamily

of companieswas broken down as follows: KPC reported $2,028,162,365 in

federal taxable income, and Kraft Foods Global Brands, Inc., reported

$1,321,300,000infederaltaxableincome.

[¶4] InOctober2011,Kraft filed its2010Mainecorporateincometax

return,whichincludedKPCasamemberoftheaffiliatedgroupwithwhichit

3Theassetssold,usedtomanufactureandmarketfrozenpizza,includedtrademarks,licenses,

patents,propertyandmanufacturingfacilities,fixtures,equipment,supplieragreementsandothercontracts,leases,inventory,andgoodwill.Thesalepricewaspaidasfollows:$2,358,056,241waspaidtoKPC;$1,321,300,000waspaidtoKraftFoodsGlobalBrands,Inc.;$340,000waspaidtoKraftFoodsGlobal,Inc.;and$13,139,435waspaidtoKraftCanadaInc.

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conductedaunitarybusiness,and,applyingthesalesfactormethod,reported

KPC’s income from the sale as part of its apportionableMaine net income.4

However, Kraft subtracted $3,004,347,6145 from its Maine taxable income,

basedonitsassertionthatthisincomewasnottaxablebyMaineundereither

theMaineConstitutionortheUnitedStatesConstitution.

[¶5] The effect of this subtractionwas to exclude fromKraft’sMaine

taxableincomenearlyallofthegainrealizedfromthesale,therebyreducing

Kraft’sMainetaxliabilityfor2010. Intotal,onits2010Mainecorporatetax

return,Kraftreported$3,179,725,852infederaltaxableincome,$502,197,939

inMainetaxableincome,aMaineapportionmentfactorof0.008193,andMaine

corporateincometaxdueof$367,402.Kraftdidnotincludeanyoftheroughly

$3.6 billion in gross receipts from the salewhen calculating its 2010Maine

apportionmentfactor.

[¶6]InAugust2013,MaineRevenueServices(MRS)auditedKraftfortax

years2010and2011.MRSadjustedKraft’s2010Mainecorporateincometax

4AlthoughKraftlaterarguedtotheBoardofTaxAppealsthatKPCwasnotpartofKraft’sunitary

businessforpurposesofapportioningKraft’staxableincome,Krafthasabandonedthisargumentonappeal.

5KPCsubtracted$1,989,777,098fromitsMainetaxableincome;andKraftFoodsGlobalBrands,Inc.,subtracted$1,014,570,516fromitsMainetaxableincome.Thecombinedsubtractedamountof$3,004,347,614waspartofKraft’sfederaltaxableincome.

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returnanddisallowedKraft’ssubtractionof$3,004,347,614inincomederived

from the sale. MRS determined that this incomewas 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

understatingitstaxliability.

[¶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

calculateKraft’sMainetaxableincomeforthe2010taxyear:onetoapportion

the income fromthesale, andanother toapportion theremainderofKraft’s

2010unitarybusinessincome.TheBoardusedthefollowingformulas:

Kraft’sunitarybusinessincome,excludingthegain[fromthesale],shall be apportioned using a sales factor calculated by dividingKraft’ssalesinMainebyKraft’ssaleseverywhere;Kraft’sgainfromsaleof thePizzaAssets shall be apportionedusinga sales factorcalculated by dividing KPC’s sales in Maine by KPC’s saleseverywhere. Neither of the above-referenced sales factors shallincludetheamountofKraft’ssaleofthePizzaAssetsineitherthenumeratorordenominator.

TheBoardalsofullyabatedthe$458,179.25penaltyimposedagainstKraftfor

substantially understating its tax liability on the ground that there was

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“substantial authority” forKraft’s filingposition. See36M.R.S.§187-B(4-A)

(2020).TheAssessorfiledapetitioninSuperiorCourt(KennebecCounty)for

judicial review of the Board’s decision, see 36 M.R.S. §151(2)(F), (G); M.R.

Civ.P.80C,andthecasewasthentransferredtotheBusinessandConsumer

Docket.

[¶8]OnMay3,2017,theAssessorissuedanothernoticeofassessment

(theSecondAssessment),adjustingKraft’s2010Mainecorporateincometax

return to disallow a $306,729,484 capital loss carryforward that Kraft had

claimed. TheSecondAssessmentimposedanadditional$192,448inincome

tax, $105,168.21 in interest, and $48,112 in substantial understatement

penalties.

[¶9] Kraft requested reconsideration of the Second Assessment, see

36M.R.S.§151(1),arguingthatitwasbarredbythestatuteoflimitations.The

AssessorupheldtheSecondAssessmentinfull.Kraftfiledapetitionforjudicial

reviewinSuperiorCourtwithoutfirstappealingtotheBoardofTaxAppeals,

see 36 M.R.S. §151(2)(F), (G); M.R. Civ. P. 80C, and that petition was also

transferredtotheBusinessandConsumerDocket,whereitwasconsolidated

withtheAssessor’spetitionforjudicialreviewoftheFirstAssessment.

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[¶10]ThepartiesfiledmotionsforsummaryjudgmentonboththeFirst

andSecondAssessmentsbasedonapartiallystipulatedrecord.AstotheFirst

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 incomeunder 36M.R.S.

§5211(17)(2020).ThecourtalsodeterminedthatKraftwasentitledtoonlya

partial abatement of the substantial underpayment penalty, reversing the

Board’sdetermination thatKraftwasentitled to a full abatement. As to the

Second Assessment, the court granted the Assessor’s motion for summary

judgmentbasedonitsconclusionthattheSecondAssessmentwasnotbarred

bythestatuteoflimitations.

[¶11]Kraftfiledatimelynoticeofappealfromthecourt’sjudgment,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 theparties raiseonappeal.6 First,

Kraftarguesthatthecourterredinconcludingthat,intheFirstAssessment,it

6 We have considered Kraft’s remaining argument that alternative apportionment is

constitutionallyrequiredpursuanttotheDueProcessandCommerceClausesoftheUnitedStatesConstitution,andweconcludethatitisnotpersuasivebecausetheSupremeCourthas“repeatedly

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wasnotentitledtoanalternativeapportionmentoftheincomefromthesale

fordeterminingitsMainetaxliability.Second,Kraftarguesthatthecourterred

indeterminingthatitwasnotentitledtoafullabatementofthepenaltieslevied

aspartoftheFirstAssessmentforsubstantiallyunderstatingitstax liability.

Third, and relatedly, theAssessor, on its cross-appeal, argues that the court

erred in awarding Kraft even a partial abatement of the substantial

understatementpenaltiesontheFirstAssessment. Finally,Kraftarguesthat

thecourterredinconcludingthattheSecondAssessmentwasnotbarredby

thestatuteoflimitations.Weaddresseachargumentinturn.

[¶13]Astoeachissue,thepartiesdonotarguethatthereisanygenuine

issueofmaterial fact;theycontestonly thecourt’s legalconclusions. “When

heldthatasingle-factorformulaispresumptivelyvalid.”MoormanMfg.Co.v.Bair,437U.S.267,273(1978);seealsoUnderwoodTypewriterCo.v.Chamberlain,254U.S.113,121(1920).Kraft’sbusinessisfoodproductsales.Kraftreported$159,395,586ingrossreceiptsfromMainesalesin2010.Theapplicationofasingle-factorformulatoKraftdoesnotresultintheattributionof“apercentageofincomeoutofallappropriateproportiontothebusinesstransacted,”HansRees’Sons,Inc.v.NorthCarolinaexrel.Maxwell,283U.S.123,135(1931),becausethefactorusedisthesalesfactor(i.e.,Kraft’sMainesalescomparedtoKraft’ssaleseverywhere),andKraft’sbusinessissales-driven.Thesales factor, as applied toKraft, isnot improperbecause it “reflect[s] a reasonable senseof howincomeisgenerated.”ContainerCorp.,463U.S.at169.

TheCourt’sholdinginHansRees’Sons,Inc.,doesnotchangeouranalysis.There,theCourtheldthatasingle-factorapportionmentformulabasedentirelyonownershipoftangiblepropertywithinthetaxingstateviolatedtheConstitutionasappliedtoabusinessengagedinthebusinessoftanning,manufacturing,andsellingbeltingandotherheavyleathersbecausetheformulaunreasonablyandarbitrarily“attribut[ed]toNorthCarolinaapercentageofincomeoutofallappropriateproportiontothebusinesstransacted...inthatState.”Id.at126,135.Thatisnotthecasehere.

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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.”

Remmesv.MarkTravelCorp.,2015ME63,¶19,116A.3d466.Whenreviewing

adecisionoftheBoardofTaxAppeals,“theSuperiorCourtisauthorizedtorule

onlegalmattersdenovo,[and]wereviewthecourt’sinterpretationofthelaw

directlyanddonotdefertotheinterpretiverulingoftheAssessorortheBoard.”

Warnquist v. State Tax Assessor, 2019ME 19, ¶ 12, 201 A.3d 602 (citations

omitted);seealso36M.R.S.§151(2)(F),(G);Metcalfv.StateTaxAssessor,2013

ME62,¶15,70A.3d261.

A. AlternativeApportionmentoftheSaleIncome

[¶14]Asmentionedabove,seesupran.2,inMainethedefaultmethodof

apportioningacorporatetaxpayer’sincomeisbasedona“salesfactor”formula.

36 M.R.S. § 5211(1), (8), (14) (2020). “The sales factor is a fraction, the

numeratorofwhichisthetotalsalesofthetaxpayerin[Maine]duringthetax

period, and the denominator of which is the total sales of the taxpayer

everywhereduringthetaxperiod.”36M.R.S.§5211(14);seealsoE.I.DuPont

de Nemours & Co. v. State Tax Assessor, 675 A.2d 82, 83 (Me. 1996). “For

purposesof calculating the sales factor, ‘total salesof the taxpayer’ includes

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salesofthetaxpayerandofanymemberofanaffiliatedgroupwithwhichthe

taxpayerconductsaunitarybusiness.”36M.R.S.§5211(14).

[¶15]Sometimes,however,an“alternative”apportionmentmethodmay

be appropriate and statutorily available. If application of the sales factor

formula would “not fairly represent the extent of the taxpayer’s business

activity in [Maine], the taxpayer may petition for, or the tax assessor may

require, in respect to all or any part of the taxpayer’s business activity, if

reasonable...[t]heemploymentofanyothermethodtoeffectuateanequitable

apportionmentofthetaxpayer’sincome.”36M.R.S.§5211(17);see,e.g.,E.I.Du

PontdeNemours&Co.,675A.2dat89-90.Thisprovisionwasenactedtoallow

the tax assessor to depart from the statutorily prescribed apportionment

methodin“exceptionalcircumstances.”SeeE.I.DuPontdeNemours&Co.,675

A.2dat89;seealsoTwentiethCentury-FoxFilmCorp.v.Dep’tofRevenue,700

P.2d1035,1039(Or.1985).

[¶16]Kraftarguesthatitisentitledtoalternativeapportionmentofthe

income from the sale, and urges us to adopt the alternative apportionment

formulaimplementedbytheBoard.7Wedeclinetodosoforthereasonsthat

follow.

7Seesupra¶7.

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1. Kraft’sBusinessActivityinMaine

[¶17] We begin by observing that Kraft, and KPC specifically, did

substantialbusinessinMainein2010.8Kraftreported$159,395,586ingross

receipts fromMainesales thatyear,ofwhich$1,109,108wasattributable to

KPC.9MRSdeterminedthatKraft’sMainesalesfactorfor2010was0.007026

(0.7026%), which falls right between its 2008 and 2009 sales factors—

0.006971 (0.6971%) and 0.007370 (0.7370%), respectively. This

demonstrates that the extent of Kraft’s business activities in Maine did not

changesignificantlyduringthoseyears.AlthoughKraft’stotaltaxableincome

in2010wassubstantiallylargerthaninpreviousyearsbecauseofthesale,the

salesfactor,whichrepresentsKraft’sbusinessactivityinMainerelativetoits

totalbusinessactivity,remainedconsistentwiththesalesfactorsfromother

taxyears.ThefactthatKraft’snetincomein2010wasmuchgreaterthanin

previous years does not support the conclusion that the sales factor itself

8 Kraft has concededthatKPCwas, in fact, amemberof the “affiliated groupwithwhich the

taxpayerconductsaunitarybusiness,”36M.R.S.§5211(14),in2010.

9BecausethesaleclosedonMarch1,2010,thereportedfiguresofKPC’sgrosssalesinMainedonotadequatelyrepresentatypicalfullyearofMainesalesforKPC.Kraft’sfilingsfrompreviousyearsareilluminatingonthispoint.In2009,KPCreported$4,350,242ingrossreceiptsfromMainesales,andin2008,KPCreported$3,875,177ingrossreceiptsfromMainesales.

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“do[es] not fairly represent the extent of the taxpayer’s business activity in

[Maine].”36M.R.S.§5211(17).

[¶18] Kraft also argues that an alternative apportionment of the sale

incomepursuanttotheformulausedbytheBoardisappropriatebecausethe

saleincomewasprimarilygeneratedbyKPC’sfrozenpizzasalesratherthanby

Kraft’s overall food product sales, and “pizzawas simply not a big seller in

MainerelativetootherKraftproducts.”Werejectthisargumentbecauseitis

inconsistentwithoneofthecoreprinciplesjustifyingtheuseofasalesfactor

formulatoapportiontheincomeofaunitarybusinessfortaxpurposes.

[¶19]UnitarybusinesseslikeKraftoftenrealize“incomeresultingfrom

functionalintegration,centralizationofmanagement,andeconomiesofscale”

thatrelatetotheoperationofthebusinessasawhole,soitcanbe“misleading

to characterize the income of the business as having a single identifiable

‘source.’”ContainerCorp.ofAm.v.FranchiseTaxBd.,463U.S.159,181(1983)

(quotingMobilOilCorp.v.Comm’rofTaxes,445U.S.425,438(1980));seealso

E.I.Du Pont deNemours& Co., 675A.2d at 90 (recognizing that “arriving at

preciseterritorialallocationsofvalueisoftenanelusivegoalbothintheoryand

inpractice”)(quotationmarksomitted);TesoroCorp.v.StateDep’tofRevenue,

312P.3d830,849 (Alaska2013) (declining to assume “that it ispossible to

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determine where the income of a unitary business is ‘unquestionably

generated’”). Here,KPC’s frozenpizzasalescannotbeset apartas themain

sourceofthevalueoftheassetssoldtoNestlebecauseanyattempttodoso

would fail to account for those “factors of profitability [that] arise from the

operationofthebusinessasawhole.”MobilOilCorp.,445U.S.at438.

[¶20]WealsorejectKraft’scontentionthatusingthesalesfactorformula

isunfairbecauseKPC’sMainesaleswerelowerthantheMainesalesofother

KraftaffiliatesandlowerthanKPC’ssalesinotherstates. Therecordshows

that Kraft grossedmore from the sale of frozen pizzas in Maine than from

severalotherproductlines,afactthatunderminesKraft’sattempttodownplay

thesignificanceofKPC’sMainesales.AmorefundamentalproblemwithKraft’s

argumentisthattheLegislaturehasexpressedaclearpreferencethatallofa

unitarybusiness’staxableincomeshouldbeapportionedaccordingtothesales

factor. See36M.R.S.§5211(8). Given thisclearly-statedpreference,weare

unpersuaded by Kraft’s arguments. The sales factor calculation adequately

addresses state-to-state variations in business activity by requiring a

comparison of the business’s Maine sales to its total sales everywhere and

apportioningthebusiness’sincomeaccordingly.Seeid.§5211(14).

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[¶21]Takentoitslogicalconclusion,Kraft’sargumentisthatwhenthere

arevariationsinthelevelofsalesactivityamongcomponentpartsofaunitary

businesswithinMaine,orvariationsinthelevelofsalesactivityconductedin

multiple states, apportioning the unitary business’s income using the sales

factorformulacannotbefairlyrepresentativeoftheaffiliatedgroup’sbusiness

activity within the State. But, as the trial court astutely observed, the

alternativeapportionmentprovisionisnotmeanttoallowan“end-run”around

thestatutoryrequirementthataunitarybusinessbetaxedasasinglegroup.

SeeTesoroCorp.,312P.3dat848(observingthat“theUnitedStatesSupreme

Courthasrejectedtheargumentthatdisparateprofitsacrosssubsidiariesare

indicative of unfair taxation”). The relevant inquiry is not whether any

particularmemberofaunitarybusinesshashigheror lowersalesactivity in

Maine compared toother states; if itwere, everynational andmultinational

corporationwouldbeentitledtoalternativeapportionmentonthatbasis.

2. TheNatureoftheSale

[¶22] Kraft also argues that the “unusual, non-recurring, and

extraordinaryPizzaGaincannotbefairlyrepresentedbyasingle-salesfactor

formuladeterminedinprincipalpartbygrossreceiptsfromKraft’sday-to-day

food product sales.” This argument misses the mark. The question is not

15

whether the sales factor fairly represents the sale income; the question is

whetherthesalesfactorfairlyrepresentstheextentofKraft’sbusinessactivity

inMaine.See36M.R.S.§5211(17).

[¶23] Apportionment formulas “measure the corporation’s activities

withinandwithoutthejurisdiction.”TesoroCorp.,312P.3dat848(quotation

marksomitted).“[T]hesalesfactorisdesignedtoattributeataxpayer’sincome

to the jurisdictions in which its goods and services are consumed.” Id. A

business’sin-stateactivitiesareproperlymeasuredbyin-statepurchasesand

salesofgoodsorservices,whetherornotthebusinessturnsaprofitonthose

transactions. Seeid.(rejectingthe“flawedpremisethatabusiness’s in-state

activities are only as great as the profits it generates from its in-state

activities”).

[¶24]InMaine,theLegislaturehasmadeclearthatthesalesfactoristo

becalculatedusingtotalsales(i.e.,grossreceipts)ratherthannetincome(i.e.,

profit). See36M.R.S. § 5211(14); id. § 5210(5) (2020) (defining “sales” as

“gross receipts of the taxpayer.”). Thus, contrary to Kraft’s argument,

apportioningKraft’sunitarybusiness income, including the income fromthe

sale,using“asingle-salesfactorformuladeterminedinprincipalpartbygross

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receipts from Kraft’s day-to-day food product sales” is precisely what the

Legislatureintended.See36M.R.S.§5211(8),(14).

[¶25]Evenassumingforthesakeofargumentthattheincomefromthe

sale was generated primarily by unitary business activity that took place

outside of Maine, and assuming Kraft could prove that, see E.I. Du Pont de

Nemours&Co.,675A.2dat90,thatstillwouldnotmeanthatthesalesfactor

doesnot fairly representKraft’sunitarybusiness activitywithinMaine. See

ContainerCorp.,463U.S.at181.Applyingthesalesfactortotheincomefrom

the sale is consistent with the Legislature’s stated preference, 36 M.R.S.

§5211(8),(14),andisnotunfairtoKraft.Maineisentitledtotaxitsfairshare

oftheincomefromthesale,calculatedusingthesalesfactor.

[¶26] Further, even if we were to assume that the sale was

“extraordinary”or“unusual”—eventhoughthereisevidenceinthestipulated

recordtosuggestthatitwasnot—thatwouldnotsupporttheconclusionthat

the sales factor does not fairly representKraft’s unitary business activity in

Maine.Aspreviouslynoted,Kraft’ssalesfactorin2010wascalculatedthesame

way it was calculated in previous years and was consistent with the sales

factorscalculatedbytheAssessorinpreviousyears.Theonlydifferenceisthat

in2010Krafthadmoretaxableincometobeapportionedbecauseofthesale.

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Thetrialcourtsummarizedthesituationaptly:“Kraftwasfortunatetorealize

anenormousprofitwhenitsoldanentirelineofbusinesstoacompetitor.That

lineofbusiness,likemanyofKraft’sotherproductlines,wasactiveinMaineas

itwasinotherstates;Maineonlyseekstotaxasmallpercentageoftheprofit

realized,calculatedbyreferencetoKraft’sbusinessactivityinMaine.”

3. Kraft’s Remaining Arguments in Support of an AlternativeApportionmentoftheSaleIncome

[¶27] Finally, Kraft’s reliance on two cases from California,Microsoft

Corp.v.FranchiseTaxBd.,139P.3d1169(Cal.2006)andGeneralMills,Inc.v.

Franchise Tax Bd., 146 Cal. Rptr. 3d 475 (Cal. Ct. App. 2012), is misplaced

becauseeachcasedealtwithaunique“paradigm”distinctfromthesituation

here.

[¶28]InGeneralMills,theCourtofAppealofCaliforniawasconcerned

withapracticecalled“hedging,”ariskmanagementstrategyinvolving“sales

activitythat isnotconductedfor itsownprofit.” 146Cal.Rptr.3dat489.In

stark contrast, the business activity here—the sale—was plainly, and quite

successfully,conductedforprofit.

[¶29]InMicrosoft,theSupremeCourtofCaliforniadealtwithMicrosoft’s

treatment of income derived from its corporate treasury department’s

investment of excess operating cash in short-term marketable securities.

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Microsoft had multi-state and worldwide subsidiaries that operated as a

unitarybusinessandgeneratedexcessoperatingcash. 139P.3dat1171-73.

The company’s investment activity occurred in only one state—the state in

which the treasury department was located—and the investment activity

generatedlittleincomebutsignificantreceipts.Id.at1181.Underthoseunique

circumstances, Microsoft’s inclusion of total receipts from its short-term

investmentactivity andreceipts from itsotherbusinessactivity in thesame

calculationdistortedthedefaultformula’sattributionofincometoeachstate,

andwouldhavereducedbyhalftheincomeattributedtoeverystateotherthe

oneinwhichthetreasurydepartmentwaslocated.Id.Thisproblemwasdue,

atleastinpart,to“animplicitassumption[inthesalesfactorformula]thata

corporation’smarginswill not vary inordinately from state to state.” Id. at

1179.However,“intheabsenceofhugevariationsinstate-to-statemargins,”

thesalesfactorformuladoesnotrunintotheproblemsjustdescribed.Id.

[¶30]TheMicrosoftcourtwasfacedwithadifferentproblemthanthe

one presented here because, there, declining to permit alternative

apportionment“wouldcreateasignificantloopholeexploitablethroughsubtle

changesininvestmentstrategy.”Id.at1181.Underthestandardformula,on

the facts presented inMicrosoft, a unitary group could reduce its state tax

19

liability,possiblytonearzero,byshiftinginvestmentstoshorterandshorter

maturities.Id.

[¶31]WearenotpresentedwiththeissueaddressedinMicrosoft.There,

inclusionofthegrossreceiptsresultingfromtheshort-terminvestmentactivity

distortedtheincomeapportionedtoCaliforniabecausethegrossreceiptsfrom

that activity were attributable to only one state and generated negligible

amountsofincome.Theinclusionofthosegrossreceiptsinthedenominator

of the sales factor calculation in every other statewould disproportionately

reduce the sales factor and therefore Microsoft’s tax liability relative to the

minimalincometheinvestmentactivitygenerated.Id.at1179-80.

[¶32] Here, the sale generated significant income relative to gross

receipts,andKraftadmitsthattheincomewasmostlyprofit.Becausethesale

wasconductedforprofit,unliketheinvestmentactivityinMicrosoft,inclusion

oftheincomefromthesaleinthesalesfactordenominatordoesnotresultin

the kind of distortion seen there. Kraft itself acknowledges that this case

“present[s]thereverseofthefactualsituation[s]”addressedinMicrosoftand

General Mills. Its attempt to analogize those cases notwithstanding, the

situationhereisfairlystraightforward.Thesalesfactor,whichincludesKraft’s

MainesalesinthenumeratorandKraft’stotalsaleseverywhere(includingthe

20

grossreceiptsfromthesale)inthedenominator,fairlyrepresentstheextentof

Kraft’sbusinessactivityinMaine.See36M.R.S.§5211(17).

[¶33]Insum,thiscasedoesnotpresentthe“exceptionalcircumstances”

necessarytojustifyadeparturefromthestatutorilyprescribedapportionment

methodofcalculatingKraft’staxliability.SeeE.I.DuPontdeNemours&Co.,675

A.2dat89.Therefore,thecourtdidnoterrindeterminingthattheBoarderred

byconcludingthatKraftwasentitledtoalternativeapportionment.

B. SubstantialUnderstatementPenalty(FirstAssessment)

[¶34]Bothpartiestakeissuewiththecourt’sdeterminationthatKraftis

entitled to a partial abatement of the substantial understatement penalty

imposedaspartoftheFirstAssessment.TheAssessorarguesthatKraftisnot

entitledtoanyabatementofthesubstantialunderstatementpenalty,andKraft

argues that it is entitled to the full abatement awarded by the Board. The

parties’ dispute turns on the extent of any legal support for Kraft’s earlier

position—sinceabandoned—thatKPCwasnotpartofKraft’sunitarybusiness

and, forpurposesofallocatingincomefromthesale, thatKraftFoodsGlobal

Brands,Inc.,wasnotpartofKraft’sunitarybusiness.

[¶35]Title36M.R.S.§187-B(4-A)providesthat“[t]hereisasubstantial

understatementof tax if theamountof theunderstatementon thereturnor

21

returnsfortheperiodcoveredbytheassessmentexceeds10%ofthetotaltax

requiredtobeshownonthereturnorreturnsforthatperiod.”Intheeventof

suchanunderstatement, the taxpayer issubject toapenaltyofup to$25or

twenty-five percent of the understatement, whichever is greater. 36M.R.S.

§187-B(4-A). Any penalty resulting from a substantial understatement of

taxableincomemustbeabated,however,“ifgroundsconstitutingreasonable

cause are established by the taxpayer.” 36M.R.S. § 187-B(7) (2020).

Reasonable cause may be established where “[t]he taxpayer has supplied

substantial authority justifying the failure to file or pay.” 36 M.R.S.

§187-B(7)(F). Although “substantial authority” is not defined in Maine

statutes,federaltaxregulationsdefinethe“substantialauthority”standardas

an objective standard involving an analysis of the law andapplicationofthelawtorelevantfacts.Thesubstantialauthoritystandardislessstringentthanthe‘morelikelythannot’standard...butmorestringentthanthereasonablebasisstandard....Thereissubstantialauthorityforthetaxtreatmentofanitemonlyiftheweight of authorities supporting the treatment is substantial inrelationtotheweightofauthoritiessupportingcontrarytreatment.

John SwensonGranite, Inc. v. State Tax Assessor, 685A.2d 425, 429 n.3 (Me.

1996)(quotingTreas.Reg.§1.6662-4(d)(2),(3)(1996)).

[¶36] Pursuant to federal regulations, only certain types of authority

maybereliedupon“forpurposesofdeterminingwhetherthereissubstantial

22

authorityforthetaxtreatmentofanitem.”Tres.Reg.§1.6662-4(d)(3)(iii)(as

amendedin2003).Examplesinclude“provisionsoftheInternalRevenueCode

and other statutory provisions; proposed, temporary and final regulations

construingsuchstatutes;[and]revenuerulingsandrevenueprocedures.”Id.

Weneednotdeterminetheweighttobegiventothosekindsofauthority in

casesinvolvingMainetaxliability inthiscasebecauseKraftdoesnotrelyon

anyofthoseauthorities.

[¶37]Thefederalregulationsalsorecognize,however,thateveninthe

“absenceofcertain typesofauthority,” a taxpayerstillmayhavesubstantial

authorityforthetaxtreatmentofanitemwhenitsposition“issupportedonly

byawell-reasonedconstructionoftheapplicablestatutoryprovision.”Treas.

Reg.§1.6662-4(d)(3)(ii)(asamendedin2003);seealsoCohenv.UnitedStates,

999 F. Supp. 2d 650, 676 (S.D.N.Y. 2014) (observing that this provision

“contemplate[s] a situation where there are no authorities that specifically

address the issue raisedby the taxpayers’ treatmentof an itemon their tax

return”).Theregulationsprovidelittleguidanceonhowtodeterminewhether

a proposed construction is sufficiently well-reasoned, but the substantial

authority standard is “more stringent than the reasonablebasis standardas

defined in [Treas. Reg.] § 1.6662-3(b)(3).” Treas. Reg. § 1.6662-4(d)(2) (as

23

amended in 2003). “Reasonable basis is a relatively high standard of tax

reporting” that is “significantly higher than not frivolous or not patently

improper,”and“isnotsatisfiedbyareturnpositionthatismerelyarguableor

thatismerelyacolorableclaim.”Treas.Reg.§1.6662-3(b)(3)(asamendedin

2003).“Apositionthatisarguable,butfairlyunlikelytoprevailincourt,does

notsatisfythesubstantialauthoritystandard.” Littlev.C.I.R.,106F.3d1445,

1451(9thCir.1997).

[¶38] Kraft asserts that its position is supported by a well-reasoned

construction of the statutory definition of “unitary business.” See36M.R.S.

§5102(10-A)(2020).Section5102definesaunitarybusinessas“abusiness

activitywhich ischaracterizedbyunityofownership, functional integration,

centralizationofmanagementandeconomiesofscale.”Kraftarguesthatthe

termsusedtodefineaunitarybusinessarevagueandthattheunitarybusiness

analysis is inherently subjective and difficult to apply, thereby justifying its

calculationofits2010taxliability.Kraftasserts,withrespecttoKPC,thatwhen

section5102’sdefinitionof“unitarybusiness”isappliedtothestipulatedfacts,

areasonablepersonisentitledtofindthatKPCwasnotpartofKraft’sunitary

business. With respect to Kraft Foods Global Brands, Inc., Kraft frames its

argumentdifferently.Kraftarguesthatbecausetherewassubstantialauthority

24

fortreatingtheincomefromthesaleasincomeoutsideoftheunitarybusiness

that was being taxed, the court erred in concluding that there was no

substantialauthoritytosupportKraft’spositionthattheportionoftheincome

fromthesalethatwaspaidtoKraftFoodsGlobalBrands,Inc.,wasnottaxable

inMaine.

[¶39] According toKraft, “[t]he factsconcerningsubstantial authority

relate to theunderlyingpizzabusiness,”and it is “irrelevant to theanalysis”

whichmembersofKraft’sunitarygroupreceivedincomefromthesale.Kraft

thencontends thateachentity thatreceived income fromthesaleshouldbe

treated the same for purposes of the substantial authority analysis because

theyareeachmembersofKraft’sunitarygroup“andarethereforetreatedasa

singlebusinessenterpriseforMaineincometaxpurposes.”Kraft’sargument

jumps among assertions that there is substantial authority supporting a

determinationthat(1)theindividualcorporateentities,KPCandKraftFoods

Global Brands, Inc.,were notmembers of a unitary business; (2) the “pizza

business” was not part of a unitary business; and (3) the sale income was

“non-unitary income.” Kraft argues that this constitutes a well-reasoned

constructionofsection5102’sdefinitionofaunitarybusinesssufficienttomeet

itsburdenofcomingforwardwithsubstantialauthoritytosupportitsposition.

25

For thereasonsdiscussedbelow,wedisagreeandconclude thatKraft isnot

entitledtoanyabatementofthepenalty.

[¶40]Thetrialcourtdeterminedthat,“[o]nbalance,therearemorefacts

tosupportaconclusionthatKPCisunitarywithKraft.”Thecourtfound“that

thereisunityofownershipbetweenKraftandKPCand...thatKPCbenefitted

fromtheeconomiesofscaleprovidedbyitsaffiliationwithKraft.”Thecourt

alsodeterminedthatKPCwaspresumptivelypartofKraft’sunitarybusiness

because “KPC and the rest of Kraft’s affiliated corporations are in the same

general line or type of business: the prepared foods business.” See 18-125

C.M.R.ch.801,§.02(2015).

[¶41] However, the trial court also found that “there arenonetheless

somefactorstosupportanobjectivedeterminationthatKPC’sbusinesslacked

thefunctionalintegrationandcentralizationofmanagementcharacteristicofa

unitarybusiness.”Thecourtbasedthisdeterminationonitsfindingthat“KPC

provided important functions internally, such as manufacturing, marketing,

andsales,KPChadseparatemanufacturingfacilities, in-housemarketingand

sales teams, and a unique distribution and deliverymodel.” The court also

foundthatKPC“haditsownconsumerinsightsandnewproductdevelopment

team,humanresourcesdepartment,executivemanagementgroup,operations

26

team, and finance team.” Finally, the court found that other Kraft affiliates

primarily relied on Kraft Foods Global, Inc., for these functions. The court

concludedthatKrafthadmetthe“modeststandardofproof . . .requiredfor

providingsubstantialauthorityforthepropositionthatKPCwasnotamember

corporationofKraft’saffiliatedgroup.”Thecourtnoted,ineffect,thatthiswas

a close call, however, given that it could not find that Kraft could show the

existenceofsuchauthoritybyevenapreponderanceofthefactsintherecord.

The court further concluded thatKraftdidnot provide substantial authority

justifyingitsfailuretoincludetheportionoftheincomefromthesalepaidto

KraftFoodsGlobalBrands,Inc.

[¶42]Toreiterate,aunitarybusinessisdefinedas“abusinessactivity

which is characterized by unity of ownership, functional integration,

centralization of management and economies of scale.”10 36 M.R.S.

10TherelevantMaineRevenueServicesrulestates:

Theactivitiesofa taxpayerwillbedeemedtoconstituteasinglebusinessif thoseactivitiesareintegratedwith,dependentuponandcontributivetoeachotherandtotheoperationsofthetaxpayerasawhole.Thepresenceofanyofthefollowingfactorscreatesapresumptionthattheactivitiesofthetaxpayerconstituteasingletradeorbusiness:(1)Allactivitiesareinthesamegenerallineortypeofbusiness;[or] . . .(3)the taxpayer is characterized by strong centralized management includingcentralizeddepartmentsforsuchfunctionsasfinancing,purchasing,advertisingandresearch.

18-125C.M.R.ch.801,§.02(2015).

27

§5102(10-A);seealsoMeadWestvacoCorp.v.Ill.Dep’tofRevenue,553U.S.16,

30(2008).Wehaverecognizedthat,undertheunitarybusinessapproach,if

activities within and without the State “constitute one single integrated

businessenterprise,suchthatbothin-stateandout-of-stateactivitiesoperate

asaunitintheultimateproductionofincome,itisfairtoincludetheincome

fromout-of-stateactivitiesinapportionableincome.”GannettCo.v.StateTax

Assessor,2008ME171,¶12,959A.2d741.Indeterminingwhetherabusiness

is truly unitary, wemust “distinguish between entities that have significant

operational connections and truly function as one business enterprise and

thosethathavesomeconnectionsbutdonotfunctionasaunitarybusiness.”

Id.¶17(citationsomitted).

1. UnityofOwnership&EconomiesofScale

[¶43]Asthetrialcourtconcluded,thestipulatedrecordplainlyreflects

unity of ownership. At the relevant time, bothKPC andKraft FoodsGlobal

Brands, Inc.werewhollyownedbyKraftFoodsGlobal, Inc.,which itselfwas

whollyownedbyKraftFoodsInc.

[¶44]ThetrialcourtalsocorrectlydeterminedthatKPCbenefittedfrom

economiesofscale.“Economiesofscaleresultwhenintegratedbusinessesgain

advantages from an umbrella of centralized management and controlled

28

interaction.”GannettCo.,2008ME171,¶18,959A.2d741(quotationmarks

omitted).Here,forexample,Kraftuseda“cashsweep”system,wherebyexcess

cashheldbyKPCandeveryotherKraftaffiliatewassweptintoaconsolidated

bankaccount.ThemoneyinthisaccountwasavailabletoeachKraftaffiliate.

See id.¶ 26 (observing that “such a system creates economies of scale and

functionalintegration”andresultsinaflowofvalue).Aswediscussingreater

detailbelow,KraftFoodsGlobal,Inc.providedextensivecentralizedservicesto

bothKPCandKraftFoodsGlobalBrands,Inc.,aswellasotherKraftentities.See

id. ¶¶20-21 (noting that “the provision of . . . centralized services creates

economiesofscale”).Therefore,thesetwoelementsofaunitarybusinessare

present.11See36M.R.S.§5102(10-A).Krafthasnotprovidedanysubstantial

authoritysupportingthepositionthattherewasnounityofownershiporthat

itdidnotbenefitfromeconomiesofscale.

2. FunctionalIntegration&CentralizationofManagement

[¶45]Withrespecttothenextfactor,thecourterredbydeterminingthat

there is sufficient evidence in the stipulated record to “support anobjective

11Asthetrialcourtalsofound,thefactstriggertheregulatorypresumptionthatKraft’soperations

relevantherewereunitary.Seeid.;seesupran.10.

29

determination that KPC’s business lacked the functional integration and

centralizationofmanagementcharacteristicofaunitarybusiness.”

[¶46] “Functional integration refers to transfers between, or pooling

among,businesssegmentsthatsignificantlyaffectthebusinessoperationsof

the segments.” Gannett Co., 2008ME 171, ¶ 18, 959 A.2d 741 (citing F.W.

WoolworthCo.v.Taxation&RevenueDep’t,458U.S.354,364-66(1982)and

Exxon Corp. v.Dep’t ofRevenue, 447U.S. 207,224-25 (1980)). “A systemof

interlockingdirectorsandofficersisevidenceofaunitarybusinessbecauseof

thecentralizedmanagementandfunctionalintegrationthatresults.”Gannett

Co.,2008ME171,¶25,959A.2d741.

[¶47]Althoughnotnotedbythetrialcourt,thejointstipulationoffacts

revealsasignificantdegreeofoverlapamongthedirectorsandofficersofKraft

FoodsGlobal, Inc.,KraftFoodsGlobalBrands,Inc.,andKPC. Forexample, in

2010,thesamethreeindividualscomprisedtheboardsofdirectorsofbothKPC

andKraftFoodsGlobalBrands,Inc.Thesethreeindividualswerealsoofficers

ofKPCandKraftFoodsGlobal,Inc.,andtwoofthemwereofficersofKraftFoods

GlobalBrands,Inc.Twoofthoseindividualsalsoheldhigh-levelmanagement

positions—Senior Vice President and Treasurer, and Senior Vice President,

Legal and Corporate Affairs—in Kraft Foods Inc. At least seven other

30

individuals simultaneously served as officers of KPC, Kraft Foods Global

Brands, Inc., andKraft FoodsGlobal, Inc., and four of those seven served in

high-levelmanagementpositionswithinKraftFoodsInc.

[¶48] Further, “the provision of intercompany services that an

independentbusinesswouldordinarilyperformforitself,suchasaccounting,

insurance,legal,tax,andfinancing,isaformofcentralizedmanagement.”Id.

¶21. The value resulting from these services is also evidence of functional

integration. Id. Here, the joint stipulation of facts reveals that Kraft Foods

Global,Inc.,providedcentralizedservicestobothKPCandKraftFoodsGlobal

Brands,Inc.,includingbutnotlimitedtomanufacturingstrategyandoversight,

human resources, accounting, insurance, legal, tax, treasury, internal audit,

payroll, and research and development services. Cf. Id. ¶¶ 20-21. These

serviceswereprovidedatcost,andthecostallocationsweresetbyKraftFoods

Global,Inc.,withoutnegotiation.SeeContainerCorp.,463U.S.at180n.19.

[¶49]Indeterminingthattherewere“somefactors”supportingafinding

that KPC lacked functional integration or centralization ofmanagement, the

trial court relied on the following stipulated facts: (1) KPC had separate

manufacturing facilities; (2) KPC had in-house teams and departments

providing some services, such as marketing, sales, product development,

31

humanresources,executivemanagement,operations,andfinance;and(3)KPC

had a unique distributionmodel. The court distinguished KPC fromKraft’s

other affiliates, finding that “many of Kraft’s other affiliates relied on Kraft

FoodsGlobal,Inc.forthesefunctions.”

[¶50] Application of the statutory definition of “unitary business” to

thesefactsdoesnotconstituteawell-reasonedconstructionsufficienttosatisfy

thesubstantialauthoritystandard.ThestipulatedrecordshowsthatKPCrelied

onKraftFoodsGlobal,Inc.,toprovideseveralofthesameservicesitprovided

in-house.Forexample,althoughmanufacturingwasoneofthefunctionsKPC

provided internally, the stipulated facts show that Kraft Foods Global, Inc.,

“providedcompany-widemanufacturingstrategyandoversight toKPC,”and

thatKPCsimilarlyreliedonKraftFoodsGlobal,Inc.,forotherservicesthatwere

provided internally, such asmarketing, research, product development, and

human resources. KPC’s distribution model was also used by the Nabisco

divisionduring the relevant time andwasnot entirelyunique toKPC. And,

contrarytoKraft’scontentionthat“KPCwasuniqueamongtheKraftaffiliates

intermsofitsindependence,”thejointstipulationoffactsrevealsthatseveral

otherentitiesrelatedtoKraft,includingCapriSun,Inc.,ChurnyCompany,Inc.,

andKraftFoodsIngredientsCorp.,operatedatleastasindependentlyasKPC,

32

providingsomeservicesin-housewhilealsorelyingonKraftFoodsGlobal,Inc.

for centralized services, some of which overlapped with those provided

in-house.TheevidenceinthestipulatedrecordcontradictsKraft’sclaimthat

KPC“provideditsownindependentday-to-daymanagement,relyingonKraft’s

managementsolelyforadministrativefunctions.”And,evenifKPCprovidedits

own independent day-to-day management, that would not, on its own,

constitutesubstantialauthoritythattherewasnot“functionalintegration.”See

ContainerCorp.,463U.S.at180n.19.

[¶51]Inaddition,KraftFoodsGlobal,Inc.,negotiatedwiththirdparties

forthepurchaseofingredientsthatKPCusedtomakeitsfrozenpizzaproducts

and for the purchase of packaging materials that KPC used to package its

products.KraftFoodsGlobal,Inc.,alsonegotiatedandenteredintoleasesfor

trucksusedbyKPCtodeliver its frozenpizzas. KPCsharedcertainfacilities,

including management center offices, depot warehouses, sales offices, and

distributioncenters,withKraftFoodsInc.anditsaffiliates.

[¶52] Therefore, although KPC certainly maintained some degree of

independence,thefactsinthestipulatedrecordareinsufficient“tosupportan

objectivedeterminationthatKPC’sbusinesslackedthefunctionalintegration

andcentralizationofmanagementcharacteristicofaunitarybusiness,”given

33

thenatureandbreadthofthecentralizedservicesprovidedtobothKPCand

Kraft Foods Global Brands, Inc., by Kraft Foods Global, Inc., and the clear

integrationbetweentheseentities. Moreover,totheextentthatKraftasserts

thatthetermsusedinthedefinitionof“unitarybusiness”arevague,Kraftfails

todiscusstheSupremeCourt’scaselaworourcaselawinterpreting,clarifying,

andapplyingthoseterms.See,e.g.,ContainerCorp.,463U.S.at180n.19;F.W.

WoolworthCo.,458U.S.at364-72;ExxonCorp.,447U.S.at224-25;GannettCo.,

2008ME171,¶¶11-27,959A.2d741.

[¶53] With respect to Kraft Foods Global Brands, Inc., Kraft

acknowledges that thatentity is, in fact,amemberof theunitarygroup,but

assertsthatthereissubstantialauthorityforthepositionthattheincomefrom

thesalewas“nonunitaryincome.”Thisargumentisunavailing.Kraftpointsto

noauthorityorwell-reasonedstatutoryconstruction for itsproposition that

theincomefromthesalecouldproperlybeconsiderednonunitaryincome.In

a footnote, Kraft attempts to draw a distinction between business and

nonbusinessincome;however,Mainehasnotrecognizedanysuchdistinction

for over thirty years, see P.L. 1987, ch. 841, § 11 (effective Aug.4, 1988)

(repealingsubsection3of36M.R.S.§5211,whichprovidedforallocationof

certain nonbusiness income). Moreover,we cannot acceptKraft’s assertion,

34

madewithoutcitationtoauthority,thattheincomefromthesalewouldhave

beentreatedasnonbusinessincomeinstatesthatdorecognizethedistinction.

Kraft Foods Global Brands, Inc., like KPC, was part of the unitary business;

therefore,theincomeitreceivedfromthesalewasbusinessincomechargeable

to the unitary business. See 36 M.R.S. § 5211(8) (“All income shall be

apportioned to this State by multiplying the income by the sales factor.”

(emphasisadded)).

[¶54] In sum, Kraft has not demonstrated that there is substantial

authoritysupportingthepositionthatKPCandKraftFoodsGlobalBrands,Inc.,

werenotmembersoftheunitarybusinesswiththerestofKraft.Theauthority

thatKrafthasoffered, in the formof a strained constructionof the relevant

statute,isfarfrom“substantial,”Treas.Reg.§1.6662-4(d)(3)(i),inlightofthe

overwhelming authority, and evidence in the stipulated record, contrary to

Kraft’s position. See John Swenson Granite, Inc., 685 A.2d at 429 n.3. We

conclude that Kraft is not entitled to any abatement of the substantial

understatementpenaltyleviedaspartoftheFirstAssessment,andwevacate

theportionofthecourt’sjudgmentthatconcludesotherwise.

35

C. TheSecondAssessment

[¶55]Kraft’sfinalargumentisthattheSecondAssessment,imposedon

May3, 2017, approximately five and a half years after Kraft filed its 2010

corporateincometaxreturn,isbarredbythestatuteoflimitations.36M.R.S.

§141(1)(2020).

[¶56] Pursuant to 36 M.R.S. § 141(1), “[e]xcept as provided in

subsection2,anassessmentmaynotbemadeafter3yearsfromthedatethe

returnwasfiledor3yearsfromthedatethereturnwasrequiredtobefiled,

whicheverislater.”Title36M.R.S.§141(2)(A)(2020)states,“Anassessment

maybemadewithin6yearsfromthedatethereturnwasfiledifthetaxliability

shownon thereturn . . . is less than½of the tax liabilitydeterminedby the

assessor. In determining whether the 50% threshold . . . is satisfied, the

assessormaynotconsideranyportionoftheunderstatedtaxliabilityforwhich

thetaxpayerhassubstantialauthoritysupportingitsposition.”

[¶57]TheSecondAssessmentwastimely.Kraft’sclaimedtaxliabilityon

its2010 returnwas $367,402. The parties agree thatKraft’s tax liability as

determinedbytheAssessorwas$2,392,567.Kraftfailedtoprovidesubstantial

authorityjustifyingitsexclusionoftheincomefromthesale,sothetaxliability

generatedbythat incomeis included incalculatingwhetherthefiftypercent

36

thresholdwassatisfied.Seeid.ThetaxliabilityshownonKraft’s2010return

islessthanhalfofthetaxliabilitydeterminedbytheAssessor.Therefore,the

six-yearstatuteoflimitationsapplied,andtheSecondAssessmentleviedprior

totheexpirationofthatsix-yearperiodwasnottime-barred.

D. Conclusion

[¶58] To sum up, as to the First Assessment, we affirm the court’s

conclusionthatKraftwasnotentitledtoanalternativeapportionmentofthe

incomefromthesale.See36M.R.S.§5211(17).Wevacatethecourt’spartial

abatement of the substantial underpayment penalty because Kraft is not

entitledtoanyabatement.Onremand,weinstructthecourttoaffirmthefull

substantialunderstatementpenalty leviedbytheAssessor. AstotheSecond

Assessment,weaffirmthecourt’sdeterminationthatitwasnotbarredbythe

statuteoflimitations.

Theentryis:

The partial abatement of the substantialunderpaymentpenaltyontheFirstAssessmentis vacated. The matter is remanded to theBusinessandConsumerDockettoaffirmthefullpenaltyimposedbytheAssessor.Thejudgmentisaffirmedinallotherrespects.

37

JonathanA. Block, Esq. (orally), Pierce Atwood LLP, Portland, for appellantsKraft Foods Group, Inc., Kraft Foods Global, Inc., Kraft Pizza Company, andCadburyAdamsUSALLCAaronM. Frey, Attorney General, and Thomas A. Knowlton, Asst. Atty. Gen.(orally),OfficeoftheAttorneyGeneral,Augusta,forappelleeStateTaxAssessorBusinessandConsumerDocketdocketnumbersAP-2016-02andAP-2017-09FORCLERKREFERENCEONLY