By Lynnley Browning
Nov 29 (Reuters) - Kroger Co said Thursday it won a tax
battle with the U.S. Internal Revenue Service, which has dropped
an effort to collect $567 million in disputed deductions from
the grocery giant.
The U.S. Ninth Circuit Court of Appeals earlier this month
dismissed the government's claims against Kroger, the
Cincinnati-based company disclosed in a securities filing.
The dismissal by a three-judge panel came several weeks
following a government move to drop its claims, after pursuing
Kroger for nearly a decade, court papers showed.
An IRS spokesman declined to comment. A spokesman for Kroger
did not immediately return calls requesting comment.
The Justice Department's tax division had appealed an IRS
loss last July of two Kroger-related cases in U.S. Tax Court
centered on the tax consequences of a transaction involving two
grocery chains later acquired by Kroger.
In a securities filing in August, Kroger said that losing
the cases would have required it to make an immediate cash
payment of up to $567 million to the IRS.
The dispute between Kroger and the IRS centered on a deal
involving two Kroger units: Ralphs Grocery Co. and Fred Meyer
Inc. Kroger acquired Fred Meyer, a competitor that owned Ralphs,
for $13 billion in 1999.
Prior to being bought by Kroger, Ralphs was owned by the
Federated Group of Stores. As part of a Chapter 11 bankruptcy
reorganization that involved other Federated units, Ralphs was
transferred in 1992 to a group of creditors. In that
transaction, the value of Ralphs for tax purposes rose.
Federated had large net losses at the time. As a result, the
transfer to creditors generated generous tax deductions, in the
form of depreciation, for Ralphs. But over the mid-1990s, the
IRS disagreed with the tax consequences of the transfer.
The agency said it was actually a tax-free reorganization
that did not allow Ralphs to take the depreciation deductions.
Kroger inherited the IRS dispute through the Fred Meyer
acquisition, said Roger Jones of McDermott Will & Emery, the law
firm that represented Kroger in the just-dismissed case. He
declined to speculate on why the government had dropped its
case, saying only that it "spent a long time pursuing it."
Kroger challenged the IRS position in Tax Court in 2006. In
2011, the IRS lost the case and filed an appeal.
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