International law firm McDermott Will & Emery LLP achieved a complete victory for Firm client The Kroger Co. in the United States Court of Appeals for the Ninth Circuit this month when the court dismissed the government’s appeals inFred Meyer, Inc. v. Commissioner, No. 12-72368 (Nov. 14, 2012), and Ralphs Grocery Co. v. Commissioner, No. 12-72369 (Nov. 14, 2012). According to the company’s SEC filings, as of August 11, 2012, an adverse decision would have required a cash payment of up to approximately $567 million, including interest.
The McDermott tax controversy team of partners Roger J. Jones and Andrew R. Roberson had previously secured judgments in favor of the company in these related cases in the United States Tax Court, and the IRS appealed those decisions to the Ninth Circuit on July 24, 2012. Just one week before its opening brief was due, the government conceded in full, and the parties moved for dismissal with prejudice.
The tax dispute involved a 1992 transaction that occurred during the bankruptcy of Federal Stores, Inc., Federated Department Stores, Inc., and Allied Department Stores, Inc. in which Ralphs Holding Company acquired the stock of Ralphs Grocery Company and made an election under Code Section 338(h)(10). The IRS determined that the acquisition of the stock was not a purchase under Code Section 338(h)(3) and that the acquisition therefore did not qualify for the election, resulting in the disallowance of tens of millions of dollars in claimed deductions per year.
The parties submitted the issue on cross-motions for partial summary judgment, consisting of thousands of pages of stipulations and exhibits and several rounds of briefs. On January 27, 2011, the Tax Court issued a 100-page opinion upholding the company’s position that the acquisition of the stock qualified as a purchase, generating substantial attention and discussion in the media and among practitioners. The dismissal with prejudice by the Ninth Circuit effectively ends the decades-long litigation and upholds the company’s initial tax reporting position.
Founded in 1883 when Barney Kroger invested his life savings of $372 to open a grocery store, The Kroger Co. has grown into one of the world’s largest grocery retailers. Kroger’s Family of Stores spans many states with store formats that include grocery and multi-department stores, discount and convenience stores, and jewelry stores.
McDermott Will & Emery lawyers represent clients on all aspects of federal tax controversy matters, including Internal Revenue Service audits and appeals, competent authority matters and trial and appellate litigation. We also are experienced with the numerous alternative dispute resolution options available to taxpayers during the audit and appeals process. On November 1, 2012, U.S. News & World Report – Best Lawyers named McDermott “Law Firm of the Year” for tax law. The 2012 edition of Chambers USA: Leading Lawyers for Business nationally ranked McDermott’s Tax Controversy practice. The 2012 edition of The Legal 500 – United States recognized McDermott as a leading firm in the tax controversy area.
