NC appeals court rules against Food Lion parent in tax suit

dbracken@newsobserver.comAugust 21, 2012 

DELHAIZE CUTS

A man heads toward the entrance of a Delhaize Group SA Food Lion supermarket in Charlotte, North Carolina, U.S., on Thursday, Jan. 12, 2012. Delhaize Group SA, the owner of Food Lion supermarkets, plans to cut about 5,000 positions and expects a 2.4 percent drop in revenue as it closes stores in the U.S. and Europe. Photographer: Davis Turner/Bloomberg

DAVIS TURNER — Bloomberg

The North Carolina Court of Appeals has upheld the right of the state to tax companies based on the combined earnings of their affiliated businesses.

In a unanimous ruling issued Tuesday, a three-judge panel said that Salisbury-based Delhaize America, the parent company of grocery chain Food Lion, owes the state about $10 million in back taxes and penalties for improperly lowering its tax bill.

The ruling is the latest twist in a case that dates back more than five years. Early last year, a North Carolina Business Court judge upheld the Department of Revenue’s assessment of extra taxes and interest but rejected as unconstitutional the $1.2 million penalty the state levied against Delhaize.

The three-judge panel on Tuesday reversed the judge’s decision on the penalty, saying the state was within its constitutional rights to assess it.

Delhaize America and Food Lion said in a statement that they respect the court’s decision but were disappointed in the result.

“We are currently reviewing the Court’s opinion and considering our options,” the statement said.

Delhaize, owned by Belgium-based Delhaize Group, operates 1,127 stores in the United States, including 507 in North Carolina.

The case stems from the state’s argument that Delhaize improperly lowered its tax bill by establishing “abusive tax shelters.” That enabled Delhaize to hide its “true earnings” in North Carolina by arbitrarily shifting profits to an out-of-state affiliate, the state argued.

Delhaize paid the $6.9 million in tax, interest and penalties assessed by the state for the 2000 tax year, then sued for a refund.

Delhaize launched its original lawsuit in 2008. The company argued that the revenue department combined its 2000 tax return with a tax return from its Florida affiliate, which had filed a separate return. Combining the returns resulted in Delhaize being assessed nearly $7 million in additional taxes, penalties and interest, the company said.

Delhaize later filed an amended complaint against the Department of Revenue saying it had found new evidence indicating the revenue department illegally forced more than 230 companies to pay more than $330 million in additional corporate income taxes.

But in 2009, the state Court of Appeals unanimously ruled against Wal-Mart in a similar, but much larger, tax shelter case. In that case, the court rejected Wal-Mart’s efforts to obtain a $30 million income tax refund.

Tuesday’s ruling was written by Judge Cressie H. Thigpen Jr., with Judges Donna Stroud and J. Douglas McCullough concurring. Stroud wrote the Wal-Mart ruling, which Thigpen cited.

He noted that the appeals court had upheld the Department of Revenue’s assessment of penalties against Wal-Mart under similar circumstances. Thigpen’s ruling also said the concept of combining the returns of affiliated businesses for the purpose of taxation dates back decades in North Carolina.

The Department of Revenue, he said, has required combined reporting since at least 1973.

Bracken: 919-829-4548

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