MAINE SUPREME JUDICIAL COURT                                                   Reporter of Decisions
Decision: 2020 ME 81
Docket:   BCD-18-524
Argued:   October 8, 2019
Decided:  June 4, 2020

Panel:       MEAD, GORMAN, JABAR, and HUMPHREY, JJ, and HJELM, A.R.J.*



                                    STATE TAX ASSESSOR

                                                 v.

                             KRAFT FOODS GROUP, INC., et al.


HUMPHREY, J.

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

summary judgment entered in the Business and Consumer Docket (Murphy, J.)

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

consolidated—petitions for review of two tax abatement decisions. 36 M.R.S.

§ 151(2)(F), (G) (2020); M.R. Civ. P. 80C. Kraft argues that the court erred in



   *  Justice Hjelm sat at oral argument and participated in the initial conference while he was an
Associate Justice and, on order of the Senior Associate Justice, was authorized to continue his
participation in his capacity as an Active Retired Justice. Chief Justice Saufley sat at oral argument
and participated in the initial conference but resigned before this opinion was certified.
Justice Alexander sat at oral argument and participated in the initial conference but retired before
this opinion was certified.
   1 The taxpayers in this case who have a connection to Maine are Kraft Foods Group, Inc., Kraft
Foods Global, Inc., Kraft Pizza Company, and Cadbury Adams USA LLC. For convenience, we refer
throughout this opinion to the collective taxpayers as “Kraft,” but will specify which entity we are
referring to when it is necessary to do so.
2

determining that it was not entitled to an alternative apportionment 2 of part of

its 2010 taxable income, that it was not entitled to a full abatement of certain

penalties levied by the Assessor as part of the “First Assessment,” and that the

“Second Assessment” was not barred by the applicable statute of limitations.

The Assessor argues that the court erred in partially abating the substantial

understatement penalty levied as part of the First Assessment. We vacate the

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

remaining aspects of the judgment.

                     I. BACKGROUND AND PROCEDURAL HISTORY

        [¶2] The parties stipulated to the following facts. During the relevant

time period, Kraft manufactured and sold various food and beverage products

in Maine and throughout the United States under a wide assortment of brand

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


    2 The default method of apportioning a business’s taxable income to Maine is based on a “sales
factor” formula, which “includes sales of the taxpayer and of any member of an affiliated group with
which the taxpayer conducts a unitary business.” See 36 M.R.S. § 5211(1), (8), (14) (2020) (emphasis
added). Essentially, the sales factor formula “calculates the local tax base by first defining the scope
of the ‘unitary business’ of which the taxed enterprise’s activities in the taxing jurisdiction form one
part, and then apportion[s] the total income of that ‘unitary business’ between the taxing jurisdiction
and the rest of the world on the basis of a formula taking into account objective measures of the
corporation’s activities within and without the jurisdiction.” Container Corp. of Am. v. Franchise Tax
Bd., 463 U.S. 159, 165 (1983). Once the sales factor is calculated, the taxpayer’s income is
“apportioned to [Maine] by multiplying the income by the sales factor.” 36 M.R.S. § 5211(8).

      When the sales factor formula does not fairly represent the extent of the business’s activities in
Maine, the Assessor may use an alternative formula to apportion the business’s taxable income. See
id. § 5211(17).
                                                                                                 3

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 acquired a license to manufacture, sell, and distribute

a line of frozen pizzas under the California Pizza Kitchen brand name. All of

these brands were 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

$3,692,835,676.3 On its 2010 federal consolidated corporate income tax return,

Kraft reported taxable income on the sale in the amount of $3,349,462,365. The

federal taxable income from the sale reported by members of the Kraft family

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

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

$1,321,300,000 in federal taxable income.

       [¶4] In October 2011, Kraft filed its 2010 Maine corporate income tax

return, which included KPC as a member of the affiliated group with which it


   3 The assets sold, used to manufacture and market frozen pizza, included trademarks, licenses,

patents, property and manufacturing facilities, fixtures, equipment, supplier agreements and other
contracts, leases, inventory, and goodwill. The sale price was paid as follows: $2,358,056,241 was
paid to KPC; $1,321,300,000 was paid to Kraft Foods Global Brands, Inc.; $340,000 was paid to Kraft
Foods Global, Inc.; and $13,139,435 was paid to Kraft Canada Inc.
4

conducted a unitary business, and, applying the sales factor method, reported

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

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

based on its assertion that this income was not taxable by Maine under either

the Maine Constitution or the United States Constitution.

        [¶5] The effect of this subtraction was to exclude from Kraft’s Maine

taxable income nearly all of the gain realized from the sale, thereby reducing

Kraft’s Maine tax liability for 2010. In total, on its 2010 Maine corporate tax

return, Kraft reported $3,179,725,852 in federal taxable income, $502,197,939

in Maine taxable income, a Maine apportionment factor of 0.008193, and Maine

corporate income tax due of $367,402. Kraft did not include any of the roughly

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

apportionment factor.

        [¶6] In August 2013, Maine Revenue Services (MRS) audited Kraft for tax

years 2010 and 2011. MRS adjusted Kraft’s 2010 Maine corporate income tax



   4 Although Kraft later argued to the Board of Tax Appeals that KPC was not part of Kraft’s unitary

business for purposes of apportioning Kraft’s taxable income, Kraft has abandoned this argument on
appeal.
    5 KPC subtracted $1,989,777,098 from its Maine taxable income; and Kraft Foods Global Brands,
Inc., subtracted $1,014,570,516 from its Maine taxable income. The combined subtracted amount of
$3,004,347,614 was part of Kraft’s federal taxable income.
                                                                              5

return and disallowed Kraft’s subtraction of $3,004,347,614 in income derived

from the sale. MRS determined that this income was 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

understating its tax liability.

      [¶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

calculate Kraft’s Maine taxable income for the 2010 tax year: one to apportion

the income from the sale, and another to apportion the remainder of Kraft’s

2010 unitary business income. The Board used the following formulas:

      Kraft’s unitary business income, excluding the gain [from the sale],
      shall be apportioned using a sales factor calculated by dividing
      Kraft’s sales in Maine by Kraft’s sales everywhere; Kraft’s gain from
      sale of the Pizza Assets shall be apportioned using a sales factor
      calculated by dividing KPC’s sales in Maine by KPC’s sales
      everywhere. Neither of the above-referenced sales factors shall
      include the amount of Kraft’s sale of the Pizza Assets in either the
      numerator or denominator.

The Board also fully abated the $458,179.25 penalty imposed against Kraft for

substantially understating its tax liability on the ground that there was
6

“substantial authority” for Kraft’s filing position. See 36 M.R.S. § 187-B(4-A)

(2020). The Assessor filed a petition in Superior Court (Kennebec County) for

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

Civ. P. 80C, and the case was then transferred to the Business and Consumer

Docket.

      [¶8] On May 3, 2017, the Assessor issued another notice of assessment

(the Second Assessment), adjusting Kraft’s 2010 Maine corporate income tax

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

claimed. The Second Assessment imposed an additional $192,448 in income

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

penalties.

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

36 M.R.S. § 151(1), arguing that it was barred by the statute of limitations. The

Assessor upheld the Second Assessment in full. Kraft filed a petition for judicial

review in Superior Court without first appealing to the Board of Tax Appeals,

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

transferred to the Business and Consumer Docket, where it was consolidated

with the Assessor’s petition for judicial review of the First Assessment.
                                                                                               7

       [¶10] The parties filed motions for summary judgment on both the First

and Second Assessments based on a partially stipulated record. As to the First

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 income under 36 M.R.S.

§ 5211(17) (2020). The court also determined that Kraft was entitled to only a

partial abatement of the substantial underpayment penalty, reversing the

Board’s determination that Kraft was entitled to a full abatement. As to the

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

judgment based on its conclusion that the Second Assessment was not barred

by the statute of limitations.

       [¶11] Kraft filed a timely notice of appeal from the court’s judgment, 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 the parties raise on appeal.6 First,

Kraft argues that the court erred in concluding that, in the First Assessment, it


  6    We have considered Kraft’s remaining argument that alternative apportionment is
constitutionally required pursuant to the Due Process and Commerce Clauses of the United States
Constitution, and we conclude that it is not persuasive because the Supreme Court has “repeatedly
8

was not entitled to an alternative apportionment of the income from the sale

for determining its Maine tax liability. Second, Kraft argues that the court erred

in determining that it was not entitled to a full abatement of the penalties levied

as part of the First Assessment for substantially understating its tax liability.

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

erred in awarding Kraft even a partial abatement of the substantial

understatement penalties on the First Assessment. Finally, Kraft argues that

the court erred in concluding that the Second Assessment was not barred by

the statute of limitations. We address each argument in turn.

       [¶13] As to each issue, the parties do not argue that there is any genuine

issue of material fact; they contest only the court’s legal conclusions. “When



held that a single-factor formula is presumptively valid.” Moorman Mfg. Co. v. Bair, 437 U.S. 267, 273
(1978); see also Underwood Typewriter Co. v. Chamberlain, 254 U.S. 113, 121 (1920). Kraft’s business
is food product sales. Kraft reported $159,395,586 in gross receipts from Maine sales in 2010. The
application of a single-factor formula to Kraft does not result in the attribution of “a percentage of
income out of all appropriate proportion to the business transacted,” Hans Rees’ Sons, Inc. v. North
Carolina ex rel. Maxwell, 283 U.S. 123, 135 (1931), because the factor used is the sales factor (i.e.,
Kraft’s Maine sales compared to Kraft’s sales everywhere), and Kraft’s business is sales-driven. The
sales factor, as applied to Kraft, is not improper because it “reflect[s] a reasonable sense of how
income is generated.” Container Corp., 463 U.S. at 169.

    The Court’s holding in Hans Rees’ Sons, Inc., does not change our analysis. There, the Court held
that a single-factor apportionment formula based entirely on ownership of tangible property within
the taxing state violated the Constitution as applied to a business engaged in the business of tanning,
manufacturing, and selling belting and other heavy leathers because the formula unreasonably and
arbitrarily “attribut[ed] to North Carolina a percentage of income out of all appropriate proportion
to the business transacted . . . in that State.” Id. at 126, 135. That is not the case here.
                                                                                 9

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.”

Remmes v. Mark Travel Corp., 2015 ME 63, ¶ 19, 116 A.3d 466. When reviewing

a decision of the Board of Tax Appeals, “the Superior Court is authorized to rule

on legal matters de novo, [and] we review the court’s interpretation of the law

directly and do not defer to the interpretive ruling of the Assessor or the Board.”

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

omitted); see also 36 M.R.S. § 151(2)(F), (G); Metcalf v. State Tax Assessor, 2013

ME 62, ¶ 15, 70 A.3d 261.

A.    Alternative Apportionment of the Sale Income

      [¶14] As mentioned above, see supra n.2, in Maine the default method of

apportioning a corporate taxpayer’s income is based on a “sales factor” formula.

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

numerator of which is the total sales of the taxpayer in [Maine] 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(14); see also E.I. Du Pont

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

purposes of calculating the sales factor, ‘total sales of the taxpayer’ includes
10

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).

           [¶15] Sometimes, however, an “alternative” apportionment method may

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]he employment of any other method to effectuate an equitable

apportionment of the taxpayer’s income.” 36 M.R.S. § 5211(17); see, e.g., E.I. Du

Pont de Nemours & Co., 675 A.2d at 89-90. This provision was enacted to allow

the tax assessor to depart from the statutorily prescribed apportionment

method in “exceptional circumstances.” See E.I. Du Pont de Nemours & Co., 675

A.2d at 89; see also Twentieth Century-Fox Film Corp. v. Dep’t of Revenue, 700

P.2d 1035, 1039 (Or. 1985).

           [¶16] Kraft argues that it is entitled to alternative apportionment of the

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

formula implemented by the Board.7 We decline to do so for the reasons that

follow.


     7   See supra ¶ 7.
                                                                                                     11

       1.      Kraft’s Business Activity in Maine

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

substantial business in Maine in 2010.8 Kraft reported $159,395,586 in gross

receipts from Maine sales that year, of which $1,109,108 was attributable to

KPC.9 MRS determined that Kraft’s Maine sales factor for 2010 was 0.007026

(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

change significantly during those years. Although Kraft’s total taxable income

in 2010 was substantially larger than in previous years because of the sale, the

sales factor, which represents Kraft’s business activity in Maine relative to its

total business activity, remained consistent with the sales factors from other

tax years. The fact that Kraft’s net income in 2010 was much greater than in

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




   8 Kraft has conceded that KPC was, in fact, a member of the “affiliated group with which the
taxpayer conducts a unitary business,” 36 M.R.S. § 5211(14), in 2010.
   9  Because the sale closed on March 1, 2010, the reported figures of KPC’s gross sales in Maine do
not adequately represent a typical full year of Maine sales for KPC. Kraft’s filings from previous years
are illuminating on this point. In 2009, KPC reported $4,350,242 in gross receipts from Maine sales,
and in 2008, KPC reported $3,875,177 in gross receipts from Maine sales.
12

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

[Maine].” 36 M.R.S. § 5211(17).

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

income pursuant to the formula used by the Board is appropriate because the

sale income was primarily generated by KPC’s frozen pizza sales rather than by

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

Maine relative to other Kraft products.” We reject this argument because it is

inconsistent with one of the core principles justifying the use of a sales factor

formula to apportion the income of a unitary business for tax purposes.

      [¶19] Unitary businesses like Kraft often realize “income resulting from

functional integration, centralization of management, and economies of scale”

that relate to the operation of the business as a whole, so it can be “misleading

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

‘source.’” Container Corp. of Am. v. Franchise Tax Bd., 463 U.S. 159, 181 (1983)

(quoting Mobil Oil Corp. v. Comm’r of Taxes, 445 U.S. 425, 438 (1980)); see also

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

precise territorial allocations of value is often an elusive goal both in theory and

in practice”) (quotation marks omitted); Tesoro Corp. v. State Dep’t of Revenue,

312 P.3d 830, 849 (Alaska 2013) (declining to assume “that it is possible to
                                                                              13

determine where the income of a unitary business is ‘unquestionably

generated’”). Here, KPC’s frozen pizza sales cannot be set apart as the main

source of the value of the assets sold to Nestle because any attempt to do so

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

operation of the business as a whole.” Mobil Oil Corp., 445 U.S. at 438.

      [¶20] We also reject Kraft’s contention that using the sales factor formula

is unfair because KPC’s Maine sales were lower than the Maine sales of other

Kraft affiliates and lower than KPC’s sales in other states. The record shows

that Kraft grossed more from the sale of frozen pizzas in Maine than from

several other product lines, a fact that undermines Kraft’s attempt to downplay

the significance of KPC’s Maine sales. A more fundamental problem with Kraft’s

argument is that the Legislature has expressed a clear preference that all of a

unitary business’s taxable income should be apportioned according to the sales

factor. See 36 M.R.S. § 5211(8). Given this clearly-stated preference, we are

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

apportioning the business’s income accordingly. See id. § 5211(14).
14

      [¶21] Taken to its logical conclusion, Kraft’s argument is that when there

are variations in the level of sales activity among component parts of a unitary

business within Maine, or variations in the level of sales activity conducted in

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

factor formula cannot be fairly representative of the affiliated group’s business

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

alternative apportionment provision is not meant to allow an “end-run” around

the statutory requirement that a unitary business be taxed as a single group.

See Tesoro Corp., 312 P.3d at 848 (observing that “the United States Supreme

Court has rejected the argument that disparate profits across subsidiaries are

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

particular member of a unitary business has higher or lower sales activity in

Maine compared to other states; if it were, every national and multinational

corporation would be entitled to alternative apportionment on that basis.

      2.      The Nature of the Sale

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

extraordinary Pizza Gain cannot be fairly represented by a single-sales factor

formula determined in principal part by gross receipts from Kraft’s day-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

whether the sales factor fairly represents the extent of Kraft’s business activity

in Maine. See 36 M.R.S. § 5211(17).

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

within and without the jurisdiction.” Tesoro Corp., 312 P.3d at 848 (quotation

marks omitted). “[T]he sales factor is designed to attribute a taxpayer’s income

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

business’s in-state activities are properly measured by in-state purchases and

sales of goods or services, whether or not the business turns a profit on those

transactions. See id. (rejecting the “flawed premise that a business’s in-state

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

activities”).

      [¶24] In Maine, the Legislature has made clear that the sales factor is to

be calculated using total sales (i.e., gross receipts) rather than net income (i.e.,

profit). See 36 M.R.S. § 5211(14); id. § 5210(5) (2020) (defining “sales” as

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

apportioning Kraft’s unitary business income, including the income from the

sale, using “a single-sales factor formula determined in principal part by gross
16

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

Legislature intended. See 36 M.R.S. § 5211(8), (14).

      [¶25] Even assuming for the sake of argument that the income from the

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., 675 A.2d at 90, that still would not mean that the sales factor

does not fairly represent Kraft’s unitary business activity within Maine. See

Container Corp., 463 U.S. at 181. Applying the sales factor to the income from

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

§ 5211(8), (14), and is not unfair to Kraft. Maine is entitled to tax its fair share

of the income from the sale, calculated using the sales factor.

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

“extraordinary” or “unusual”—even though there is evidence in the stipulated

record to suggest that it was not—that would not support the conclusion that

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

Maine. As previously noted, Kraft’s sales factor in 2010 was calculated the same

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

factors calculated by the Assessor in previous years. The only difference is that

in 2010 Kraft had more taxable income to be apportioned because of the sale.
                                                                               17

The trial court summarized the situation aptly: “Kraft was fortunate to realize

an enormous profit when it sold an entire line of business to a competitor. That

line of business, like many of Kraft’s other product lines, was active in Maine as

it was in other states; Maine only seeks to tax a small percentage of the profit

realized, calculated by reference to Kraft’s business activity in Maine.”

        3.    Kraft’s Remaining Arguments in Support of an Alternative
              Apportionment of the Sale Income

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

Corp. v. Franchise Tax Bd., 139 P.3d 1169 (Cal. 2006) and General Mills, Inc. v.

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

because each case dealt with a unique “paradigm” distinct from the situation

here.

        [¶28] In General Mills, the Court of Appeal of California was concerned

with a practice called “hedging,” a risk management strategy involving “sales

activity that is not conducted for its own profit.” 146 Cal. Rptr. 3d at 489. In

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

successfully, conducted for profit.

        [¶29] In Microsoft, the Supreme Court of California dealt with Microsoft’s

treatment of income derived from its corporate treasury department’s

investment of excess operating cash in short-term marketable securities.
18

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

unitary business and generated excess operating cash. 139 P.3d at 1171-73.

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

which the treasury department was located—and the investment activity

generated little income but significant receipts. Id. at 1181. Under those unique

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

investment activity and receipts from its other business activity in the same

calculation distorted the default formula’s attribution of income to each state,

and would have reduced by half the income attributed to every state other the

one in which the treasury department was located. Id. This problem was due,

at least in part, to “an implicit assumption [in the sales factor formula] that a

corporation’s margins will not vary inordinately from state to state.” Id. at

1179. However, “in the absence of huge variations in state-to-state margins,”

the sales factor formula does not run into the problems just described. Id.

      [¶30] The Microsoft court was faced with a different problem than the

one presented here because, there, declining to permit alternative

apportionment “would create a significant loophole exploitable through subtle

changes in investment strategy.” Id. at 1181. Under the standard formula, on

the facts presented in Microsoft, a unitary group could reduce its state tax
                                                                               19

liability, possibly to near zero, by shifting investments to shorter and shorter

maturities. Id.

      [¶31] We are not presented with the issue addressed in Microsoft. There,

inclusion of the gross receipts resulting from the short-term investment activity

distorted the income apportioned to California because the gross receipts from

that activity were attributable to only one state and generated negligible

amounts of income. The inclusion of those gross receipts in the denominator

of the sales factor calculation in every other state would disproportionately

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

minimal income the investment activity generated. Id. at 1179-80.

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

receipts, and Kraft admits that the income was mostly profit. Because the sale

was conducted for profit, unlike the investment activity in Microsoft, inclusion

of the income from the sale in the sales factor denominator does not result in

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

“present[s] the reverse of the factual situation[s]” addressed in Microsoft and

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

situation here is fairly straightforward. The sales factor, which includes Kraft’s

Maine sales in the numerator and Kraft’s total sales everywhere (including the
20

gross receipts from the sale) in the denominator, fairly represents the extent of

Kraft’s business activity in Maine. See 36 M.R.S. § 5211(17).

      [¶33] In sum, this case does not present the “exceptional circumstances”

necessary to justify a departure from the statutorily prescribed apportionment

method of calculating Kraft’s tax liability. See E.I. Du Pont de Nemours & Co., 675

A.2d at 89. Therefore, the court did not err in determining that the Board erred

by concluding that Kraft was entitled to alternative apportionment.

B.    Substantial Understatement Penalty (First Assessment)

      [¶34] Both parties take issue with the court’s determination that Kraft is

entitled to a partial abatement of the substantial understatement penalty

imposed as part of the First Assessment. The Assessor argues that Kraft is not

entitled to any abatement of the substantial understatement penalty, and Kraft

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—since abandoned—that KPC was not part of Kraft’s unitary business

and, for purposes of allocating income from the sale, that Kraft Foods Global

Brands, Inc., was not part of Kraft’s unitary business.

      [¶35] Title 36 M.R.S. § 187-B(4-A) provides that “[t]here is a substantial

understatement of tax if the amount of the understatement on the return or
                                                                                  21

returns for the period covered by the assessment exceeds 10% of the total tax

required to be shown on the return or returns for that period.” In the event of

such an understatement, the taxpayer is subject to a penalty of up to $25 or

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

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

taxable income must be abated, however, “if grounds constituting reasonable

cause are established by the taxpayer.”           36 M.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, federal tax regulations define the “substantial authority” standard as

      an objective standard involving an analysis of the law and
      application of the law to relevant facts. The substantial authority
      standard is less stringent than the ‘more likely than not’ standard
      . . . but more stringent than the reasonable basis standard . . . . There
      is substantial authority for the tax treatment of an item only if the
      weight of authorities supporting the treatment is substantial in
      relation to the weight of authorities supporting contrary treatment.

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

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

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

may be relied upon “for purposes of determining whether there is substantial
22

authority for the tax treatment of an item.” Tres. Reg. § 1.6662-4(d)(3)(iii) (as

amended in 2003). Examples include “provisions of the Internal Revenue Code

and other statutory provisions; proposed, temporary and final regulations

construing such statutes; [and] revenue rulings and revenue procedures.” Id.

We need not determine the weight to be given to those kinds of authority in

cases involving Maine tax liability in this case because Kraft does not rely on

any of those authorities.

      [¶37] The federal regulations also recognize, however, that even in the

“absence of certain types of authority,” a taxpayer still may have substantial

authority for the tax treatment of an item when its position “is supported only

by a well-reasoned construction of the applicable statutory provision.” Treas.

Reg. § 1.6662-4(d)(3)(ii) (as amended in 2003); see also Cohen v. United States,

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 raised by the taxpayers’ treatment of an item on their tax

return”). The regulations provide little guidance on how to determine whether

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

authority standard is “more stringent than the reasonable basis standard as

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 “is not satisfied by a return position that is merely arguable or

that is merely a colorable claim.” Treas. Reg. § 1.6662-3(b)(3) (as amended in

2003). “A position that is arguable, but fairly unlikely to prevail in court, does

not satisfy the substantial authority standard.” Little v. C.I.R., 106 F.3d 1445,

1451 (9th Cir. 1997).

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

construction of the statutory definition of “unitary business.” See 36 M.R.S.

§ 5102(10-A) (2020). Section 5102 defines a unitary business as “a business

activity which is characterized by unity of ownership, functional integration,

centralization of management and economies of scale.” Kraft argues that the

terms used to define a unitary business are vague and that the unitary business

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

calculation of its 2010 tax liability. Kraft asserts, with respect to KPC, that when

section 5102’s definition of “unitary business” is applied to the stipulated facts,

a reasonable person is entitled to find that KPC was not part of Kraft’s unitary

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

argument differently. Kraft argues that because there was substantial authority
24

for treating the income from the sale as income outside of the unitary business

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

substantial authority to support Kraft’s position that the portion of the income

from the sale that was paid to Kraft Foods Global Brands, Inc., was not taxable

in Maine.

      [¶39] According to Kraft, “[t]he facts concerning substantial authority

relate to the underlying pizza business,” and it is “irrelevant to the analysis”

which members of Kraft’s unitary group received income from the sale. Kraft

then contends that each entity that received income from the sale should be

treated the same for purposes of the substantial authority analysis because

they are each members of Kraft’s unitary group “and are therefore treated as a

single business enterprise for Maine income tax purposes.” Kraft’s argument

jumps among assertions that there is substantial authority supporting a

determination that (1) the individual corporate entities, KPC and Kraft Foods

Global Brands, Inc., were not members 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

construction of section 5102’s definition of a unitary business sufficient to meet

its burden of coming forward with substantial authority to support its position.
                                                                             25

For the reasons discussed below, we disagree and conclude that Kraft is not

entitled to any abatement of the penalty.

      [¶40] The trial court determined that, “[o]n balance, there are more facts

to support a conclusion that KPC is unitary with Kraft.” The court found “that

there is unity of ownership between Kraft and KPC and . . . that KPC benefitted

from the economies of scale provided by its affiliation with Kraft.” The court

also determined that KPC was presumptively part of Kraft’s unitary business

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 are nonetheless

some factors to support an objective determination that KPC’s business lacked

the functional integration and centralization of management characteristic of a

unitary business.” The court based this determination on its finding that “KPC

provided important functions internally, such as manufacturing, marketing,

and sales, KPC had separate manufacturing facilities, in-house marketing and

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

found that KPC “had its own consumer insights and new product development

team, human resources department, executive management group, 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

concluded that Kraft had met the “modest standard of proof . . . required for

providing substantial authority for the proposition that KPC was not a member

corporation of Kraft’s affiliated group.” The court noted, in effect, that this was

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

existence of such authority by even a preponderance of the facts in the record.

The court further concluded that Kraft did not provide substantial authority

justifying its failure to include the portion of the income from the sale paid to

Kraft Foods Global Brands, Inc.

           [¶42] To reiterate, a unitary business is defined as “a business activity

which is characterized by unity of ownership, functional integration,

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




     10   The relevant Maine Revenue Services rule states:

           The activities of a taxpayer will be deemed to constitute a single business if those
           activities are integrated with, dependent upon and contributive to each other and to
           the operations of the taxpayer as a whole. The presence of any of the following factors
           creates a presumption that the activities of the taxpayer constitute a single trade or
           business: (1) All activities are in the same general line or type of business; [or] . . .
           (3) the taxpayer is characterized by strong centralized management including
           centralized departments for such functions as financing, purchasing, advertising and
           research.

18-125 C.M.R. ch. 801, § .02 (2015).
                                                                             27

§ 5102(10-A); see also MeadWestvaco Corp. v. Ill. Dep’t of Revenue, 553 U.S. 16,

30 (2008). We have recognized that, under the unitary business approach, if

activities within and without the State “constitute one single integrated

business enterprise, such that both in-state and out-of-state activities operate

as a unit in the ultimate production of income, it is fair to include the income

from out-of-state activities in apportionable income.” Gannett Co. v. State Tax

Assessor, 2008 ME 171, ¶ 12, 959 A.2d 741. In determining whether a business

is truly unitary, we must “distinguish between entities that have significant

operational connections and truly function as one business enterprise and

those that have some connections but do not function as a unitary business.”

Id. ¶ 17 (citations omitted).

      1.    Unity of Ownership & Economies of Scale

      [¶43] As the trial court concluded, the stipulated record plainly reflects

unity of ownership. At the relevant time, both KPC and Kraft Foods Global

Brands, Inc. were wholly owned by Kraft Foods Global, Inc., which itself was

wholly owned by Kraft Foods Inc.

      [¶44] The trial court also correctly determined that KPC benefitted from

economies of scale. “Economies of scale result when integrated businesses gain

advantages from an umbrella of centralized management and controlled
28

interaction.” Gannett Co., 2008 ME 171, ¶ 18, 959 A.2d 741 (quotation marks

omitted). Here, for example, Kraft used a “cash sweep” system, whereby excess

cash held by KPC and every other Kraft affiliate was swept into a consolidated

bank account. The money in this account was available to each Kraft affiliate.

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

functional integration” and results in a flow of value). As we discuss in greater

detail below, Kraft Foods Global, Inc. provided extensive centralized services to

both KPC and Kraft Foods Global Brands, Inc., as well as other Kraft entities. See

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

economies of scale”). Therefore, these two elements of a unitary business are

present.11 See 36 M.R.S. § 5102(10-A). Kraft has not provided any substantial

authority supporting the position that there was no unity of ownership or that

it did not benefit from economies of scale.

          2.    Functional Integration & Centralization of Management

          [¶45] With respect to the next factor, the court erred by determining that

there is sufficient evidence in the stipulated record to “support an objective




     As the trial court also found, the facts trigger the regulatory presumption that Kraft’s operations
     11

relevant here were unitary. See id.; see supra n.10.
                                                                              29

determination that KPC’s business lacked the functional integration and

centralization of management characteristic of a unitary business.”

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

among, business segments that significantly affect the business operations of

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

Woolworth Co. v. Taxation & Revenue Dep’t, 458 U.S. 354, 364-66 (1982) and

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

interlocking directors and officers is evidence of a unitary business because of

the centralized management and functional integration that results.” Gannett

Co., 2008 ME 171, ¶ 25, 959 A.2d 741.

      [¶47] Although not noted by the trial court, the joint stipulation of facts

reveals a significant degree of overlap among the directors and officers of Kraft

Foods Global, Inc., Kraft Foods Global Brands, Inc., and KPC. For example, in

2010, the same three individuals comprised the boards of directors of both KPC

and Kraft Foods Global Brands, Inc. These three individuals were also officers

of KPC and Kraft Foods Global, Inc., and two of them were officers of Kraft Foods

Global Brands, Inc. Two of those individuals also held high-level management

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., and Kraft Foods Global, Inc., and four of those seven served in

high-level management positions within Kraft Foods Inc.

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

independent business would ordinarily perform for itself, such as accounting,

insurance, legal, tax, and financing, is a form of centralized management.” 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., provided centralized services to both KPC and Kraft Foods Global

Brands, Inc., including but not limited to manufacturing strategy and oversight,

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

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

services were provided at cost, and the cost allocations were set by Kraft Foods

Global, Inc., without negotiation. See Container Corp., 463 U.S. at 180 n.19.

      [¶49] In determining that there were “some factors” supporting a finding

that KPC lacked functional integration or centralization of management, 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

human resources, executive management, operations, and finance; and (3) KPC

had a unique distribution model. The court distinguished KPC from Kraft’s

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

Foods Global, Inc. for these functions.”

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

these facts does not constitute a well-reasoned construction sufficient to satisfy

the substantial authority standard. The stipulated record shows that KPC relied

on Kraft Foods Global, Inc., to provide several of the same services it provided

in-house. For example, although manufacturing was one of the functions KPC

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

“provided company-wide manufacturing strategy and oversight to KPC,” and

that KPC similarly relied on Kraft Foods Global, Inc., for other services that were

provided internally, such as marketing, research, product development, and

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

division during the relevant time and was not entirely unique to KPC. And,

contrary to Kraft’s contention that “KPC was unique among the Kraft affiliates

in terms of its independence,” the joint stipulation of facts reveals that several

other entities related to Kraft, including Capri Sun, Inc., Churny Company, Inc.,

and Kraft Foods Ingredients Corp., operated at least as independently as KPC,
32

providing some services in-house while also relying on Kraft Foods Global, Inc.

for centralized services, some of which overlapped with those provided

in-house. The evidence in the stipulated record contradicts Kraft’s claim that

KPC “provided its own independent day-to-day management, relying on Kraft’s

management solely for administrative functions.” And, even if KPC provided its

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

constitute substantial authority that there was not “functional integration.” See

Container Corp., 463 U.S. at 180 n.19.

      [¶51] In addition, Kraft Foods Global, Inc., negotiated with third parties

for the purchase of ingredients that KPC used to make its frozen pizza products

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

products. Kraft Foods Global, Inc., also negotiated and entered into leases for

trucks used by KPC to deliver its frozen pizzas. KPC shared certain facilities,

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

distribution centers, with Kraft Foods Inc. and its affiliates.

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

independence, the facts in the stipulated record are insufficient “to support an

objective determination that KPC’s business lacked the functional integration

and centralization of management characteristic of a unitary business,” given
                                                                               33

the nature and breadth of the centralized services provided to both KPC and

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

integration between these entities. Moreover, to the extent that Kraft asserts

that the terms used in the definition of “unitary business” are vague, Kraft fails

to discuss the Supreme Court’s case law or our case law interpreting, clarifying,

and applying those terms. See, e.g., Container Corp., 463 U.S. at 180 n.19; F.W.

Woolworth Co., 458 U.S. at 364-72; Exxon Corp., 447 U.S. at 224-25; Gannett Co.,

2008 ME 171, ¶¶ 11-27, 959 A.2d 741.

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

acknowledges that that entity is, in fact, a member of the unitary group, but

asserts that there is substantial authority for the position that the income from

the sale was “nonunitary income.” This argument is unavailing. Kraft points to

no authority or well-reasoned statutory construction for its proposition that

the income from the sale could properly be considered nonunitary income. In

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

nonbusiness income; however, Maine has not recognized any such distinction

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

(repealing subsection 3 of 36 M.R.S. § 5211, which provided for allocation of

certain nonbusiness income). Moreover, we cannot accept Kraft’s assertion,
34

made without citation to authority, that the income from the sale would have

been treated as nonbusiness income in states that do recognize the distinction.

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

therefore, the income it received from the sale was business income chargeable

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.”

(emphasis added)).

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

authority supporting the position that KPC and Kraft Foods Global Brands, Inc.,

were not members of the unitary business with the rest of Kraft. The authority

that Kraft has offered, in the form of a strained construction of the relevant

statute, is far from “substantial,” Treas. Reg. § 1.6662-4(d)(3)(i), in light of the

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

understatement penalty levied as part of the First Assessment, and we vacate

the portion of the court’s judgment that concludes otherwise.
                                                                                 35

C.    The Second Assessment

      [¶55] Kraft’s final argument is that the Second Assessment, imposed on

May 3, 2017, approximately five and a half years after Kraft filed its 2010

corporate income tax return, is barred by the statute of limitations. 36 M.R.S.

§ 141(1) (2020).

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

subsection 2, an assessment may not be made after 3 years from the date the

return was filed or 3 years from the date the return was required to be filed,

whichever is later.” Title 36 M.R.S. § 141(2)(A) (2020) states, “An assessment

may be made within 6 years from the date the return was filed if the tax liability

shown on the return . . . is less than ½ of the tax liability determined by the

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

assessor may not consider any portion of the understated tax liability for which

the taxpayer has substantial authority supporting its position.”

      [¶57] The Second Assessment was timely. Kraft’s claimed tax liability on

its 2010 return was $367,402. The parties agree that Kraft’s tax liability as

determined by the Assessor was $2,392,567. Kraft failed to provide substantial

authority justifying its exclusion of the income from the sale, so the tax liability

generated by that income is included in calculating whether the fifty percent
36

threshold was satisfied. See id. The tax liability shown on Kraft’s 2010 return

is less than half of the tax liability determined by the Assessor. Therefore, the

six-year statute of limitations applied, and the Second Assessment levied prior

to the expiration of that six-year period was not time-barred.

D.    Conclusion

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

conclusion that Kraft was not entitled to an alternative apportionment of the

income from the sale. See 36 M.R.S. § 5211(17). We vacate the court’s partial

abatement of the substantial underpayment penalty because Kraft is not

entitled to any abatement. On remand, we instruct the court to affirm the full

substantial understatement penalty levied by the Assessor. As to the Second

Assessment, we affirm the court’s determination that it was not barred by the

statute of limitations.

      The entry is:

                   The partial abatement of the substantial
                   underpayment penalty on the First Assessment
                   is vacated. The matter is remanded to the
                   Business and Consumer Docket to affirm the full
                   penalty imposed by the Assessor. The judgment
                   is affirmed in all other respects.
                                                                               37

Jonathan A. Block, Esq. (orally), Pierce Atwood LLP, Portland, for appellants
Kraft Foods Group, Inc., Kraft Foods Global, Inc., Kraft Pizza Company, and
Cadbury Adams USA LLC

Aaron M. Frey, Attorney General, and Thomas A. Knowlton, Asst. Atty. Gen.
(orally), Office of the Attorney General, Augusta, for appellee State Tax Assessor


Business and Consumer Docket docket numbers AP-2016-02 and AP-2017-09
FOR CLERK REFERENCE ONLY
