Grocery giant Kroger wins $567 million tax fight

(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.

A can of Kroger brand mushrooms is displayed in Golden, Colorado September 15, 2009. REUTERS/Rick Wilking

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.

Reporting by Lynnley Browning; Editing by Kevin Drawbaugh and Leslie Adler