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In re Appeal of Kroger Co.11/3/2000
Appeal from the Board of Tax Appeals.
Affirmed.
Multistate taxpayer appeals the Board of Tax Appeals' (BOTA) order disallowing as an apportionable business expense an interest expense incurred to fight a hostile takeover. BOTA classified the expense as a nonbusiness expense, which was allocated to the taxpayer's state of commercial domicile. Taxpayer appealed, claiming its interest expense was a business expense, apportionable to Kansas.
The taxpayer, The Kroger Co. (Kroger), and the Department of Revenue (KDR) stipulated that late in 1988, Kroger, an Ohio corporation operating retail food and grocery stores in Kansas and numerous other states, was the target of hostile takeover attempts by two separate groups. In response to these threats, Kroger's board of directors determined it was in the best interest of the company and its shareholders to defend against the hostile takeover. To avoid the takeover, Kroger declared a special dividend to its shareholders. To finance the special dividend, Kroger borrowed $4.1 billion. The borrowing of $4.1 billion required Kroger to pay large amounts of interest for the tax years ending December 30, 1989, through January 2, 1993 (the audit period). The interest expenses were declared by Kroger pursuant to the Internal Revenue Code, 26 U.S.C. ยง162 (1994), as ordinary and necessary business expenses and deducted by Kroger on its federal income tax return.
KDR determined that Kroger's interest cost associated with the 1998 restructuring was a nonbusiness expense and not apportionable to Kansas. As a result, KDR assessed Kroger additional Kansas income tax of $5,145,161, with interest of $4,095,734 and a penalty of $1,286,294, for a total assessment of $10,527,189. KDR's assessment was based on its determination that Kroger's claimed interest expense resulting from borrowing to deter a hostile takeover was not an apportionable business expense arising from an activity in the regular course of Kroger's business.
The Kansas Income Tax Act, K.S.A. 79-3201 et seq., provides that the Act shall be administered by the Secretary of Revenue or the Secretary's designee for the purpose of ascertaining the correctness of any return. See K.S.A. 79-3233. Kroger protested KDR's assessment by filing a request for hearing with the Secretary of KDR. The Secretary issued a written determination, finding that Kroger's interest expense associated with defending against the hostile takeover bid was not a business expense incurred in the regular course of Kroger's operations; therefore, the interest expense of Kroger's $4.1 billion debt was a nonbusiness expense.
Kroger appealed the Secretary's determination to BOTA. BOTA found that the regular course of Kroger's business is the retail sale of groceries and that fending off a hostile takeover was not an activity associated with the selling of groceries. By a 4 to 1 majority, BOTA concluded that the interest expense was nonbusiness in nature and should be allocated to Kroger's state of domicile. BOTA later denied Kroger's request for reconsideration. Kroger appealed to the Court of Appeals, and its motion for transfer to the Supreme Court was subsequently granted. Our jurisdiction is pursuant to K.S.A. 20-3017.
Kroger seeks review under the Kansas Act for Judicial Review and Civil Enforcement of Agency Actions (KJRA), K.S.A. 77-601 et seq., claiming BOTA erroneously interpreted the Kansas Income Tax Act or misapplied the law. See K.S.A. 77-621(c)(4). The KJRA provides that the party challenging BOTA's action has the burden to prove that the action by BOTA was erroneous. K.S.A. 77-621(a). See In re Tax Appeal of Scholastic Book Clubs, Inc., 260 Kan. 528, 536, 920 P.2
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