The Maine Supreme Judicial Court recently held that a taxpayer was not entitled to alternative apportionment for approximately $3 billion in gains earned from the sale of a business unit.
The taxpayer was a food and beverage manufacturer that sold its frozen pizza division in 2010 for $3.6 billion. The taxpayer took the position on its 2010 returns that gains from the division’s sale were not taxable by Maine and accordingly excluded $3 billion of the sale proceeds when calculating its taxable income under Maine’s single sales factor formula. On audit, Maine Revenue Services disallowed the taxpayer’s exclusion of income derived from the sale of the frozen pizza division and assessed an additional $1.8 million in tax plus interest and penalties.
The taxpayer appealed the assessment to the Board of Tax Appeals, where it argued that an alternative apportionment formula was required because Maine’s standard formula did not fairly reflect the extent of the taxpayer’s business activities in Maine in 2010. Finding in favor the taxpayer, the Board determined that the use of an alternative apportionment formula consisting of two different sales factors was warranted.
- The taxpayer’s unitary business income, excluding gain from the pizza division sale, would be calculated by dividing the taxpayer’s Maine sales by its sales everywhere. Resulting in a sales factor of 0.7026%.
- Meanwhile, the gain from the sale of the pizza division would be apportioned using a sales factor, calculated by dividing the taxpayer’s pizza sales in Maine by its pizza sales everywhere. Resulting in a sales factor of 0.3322%.
The Board also fully abated the substantial understatement penalty on the ground that there was “substantial authority” for the taxpayer’s original filing position.
The Superior Court subsequently reversed the Board of Tax Appeals, holding that the taxpayer was not entitled to alternative apportionment and only entitled to a partial penalty abatement. The Supreme Judicial Court affirmed the Superior Court’s decision on the grounds that pizza division was part of the taxpayer’s unitary business and the taxpayer’s unitary sales factor (0.8193%) fairly represented the extent of the taxpayer’s business activity in Maine. This was despite the taxpayer’s showing, among other arguments, that (1) the sale of the frozen business division was an extraordinary event (the gain generating 94% of the taxpayer’s federal taxable income); and (2) the application of its general unitary combined group’s sales factor to the gain from the frozen pizza would increase the amount of that gain attributed to Maine by at least 247% or as much as 630%. In rejecting the taxpayer’s arguments, the court focused on the consistency of the taxpayer’s sales factor for the year of the sale with previous years, and the sale’s increase of the taxpayer’s overall income was insufficient to justify alternative apportionment.
Finally, the court held that the taxpayer was not entitled to an abatement of the underpayment penalty because it had insufficient authority for excluding the gain from the pizza division altogether on its original returns given the unitary nature of the business.
The Supreme Judicial Court’s decision also dealt with a secondary issue regarding whether a second assessment, for the same tax period at issue in the substantive decision, issued to the taxpayer was barred by the statute of limitations. The second assessment being issued approximately five and a half years after the taxpayer filed its 2010 Maine corporate income tax return. Upholding the Superior Court’s decision that the assessment was not barred, the Supreme Judicial Court laid out Maine’s statute of limitations rule in 36 M.R.S. § 141(2)(A), which extends the statute of limitations for assessments from the standard 3 years to 6 years from the date the return was filed when the tax liability shown is less than half of the tax liability determined by the assessor—Maine Revenue Services. Because the taxpayer had excluded the $3 billion of income from the sale of its pizza division, filing its 2010 return reflecting income equal to one-sixth of the excluded amount, the court held that the second assessment had been issued within the extended 6-year statute of limitations.